Freeman Spogli Institute for International Studies Program on Energy and Sustainable Development Stanford University


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When It Comes to Demand Response, Is the Federal Energy Regulatory Commission its Own Worst Enemy?

Journal Article

James Bushnell - Associate Professor and Cargill Chair in Energy Economics at Iowa State University
Benjamin F. Hobbs - Theodore K. and Kay W. Schad Professor of Environmental Management at Johns Hopkins University
Frank Wolak - Holbrook Working Professor of Commodity Price Studies in the Department of Economics and the Director of the Program on Energy and Sustainable Development at Stanford University

Published by
The Electricity Journal, Vol. 22 no. 8, page(s) 9-18
October 2009

The traditional approach to demand response of paying for a customer's electricity consumption reductions relative to an administratively set baseline is currently being advocated by the Federal Energy Regulatory Commission (FERC) as a way to foster the participation of final consumers in formal wholesale markets. Although these efforts may lead to greater participation of final consumers in traditional demand response programs, they are likely to work against the ultimate goal of increasing the benefits that electricity consumers realize from formal wholesale electricity markets, because traditional demand response programs are likely to provide a less reliable product than generation resources. The moral hazard and adverse selection problems that reduce the reliability of the product provided by traditional demand response resources can be addressed by treating consumers and producers of electricity symmetrically in the wholesale market. Several suggestions are made for how this would be accomplished in both the energy and ancillary services markets. A specific application of this general approach to the California wholesale electricity market is also provided.