Policy & Politics

Published on February 10th, 2016 | by U.S. Energy Information Administration


During Times Of High Demand, Demand Response Saves Electricity

February 10th, 2016 by  

Originally published on EIA.

Demand response in the electricity market involves the targeted reduction of electricity use during times of high demand. In response, customers receive incentives for these reductions. A recent Supreme Court ruling is expected to result in faster growth in demand response in the wholesale electricity markets that cover about 60% of U.S. power supply.


Source: U.S. Energy Information Administration, Electric power sales, revenue, and energy efficiency Form EIA-861

Demand response is one element of demand-side management, which includes increased adoption of energy efficient equipment at residential, commercial, and industrial customer locations. Some programs allow electric power system operators to directly reduce customers’ load by temporarily turning off cooling equipment or industrial processes, for instance. In other programs, customers retain control and can choose to participate in announced demand-response events. Equipment such as advanced metering systems and appliances that can be remotely cycled by grid operators (for example, air conditioners and water heaters) is a component of demand-response programs.

Based on data collected in EIA’s annual survey of electric power sales, revenue, and energy efficiency (Form EIA-861), about 9.3 million customers in the United States participated in demand response programs in 2014. Most of these customers (93%) were in the residential sector, with the average residential customer saving about 100 kilowatthours annually and in turn receiving about $40.

Commercial and industrial customers make up a small share of the number of demand-response customers (7% and less than 1%, respectively), but they provide larger shares of the energy savings and receive much larger incentives. Industrial customers delivered more than half of all actual peak demand savings from demand response in 2014. The average annual commercial customer incentive was almost $600, while the average industrial incentive was more than $9,000. California is the most active state in demand-response markets: the state contains 12% of the nation’s population but has 20% of the total demand-response customers and contributes 20% of the total peak demand savings.


Source: U.S. Energy Information Administration, Electric power sales, revenue, and energy efficiency Form EIA-861

Because demand-response actions often occur during times of peak electricity demand, demand response provides value to the electric system in several ways. Lower demand means that less efficient, and often more expensive, forms of electricity generation do not need to come online during times of high demand. Reducing the amount of demand often results in lower wholesale electricity prices. Less demand means less stress on transmission and distribution systems, making them less likely to fail.

On January 15, the Supreme Court overturned a lower court’s ruling concerning the way demand response could participate in wholesale electricity markets. In wholesale markets, grid administrators accept bids from electricity generators to continuously match supply with demand. Bids are ordered from lowest to highest, and they are accepted until the supply sufficiently meets demand. All bidders are then compensated at the rate of the highest-accepted bid, known as the locational marginal price (LMP).

The court’s decision focused on Order 745 from the Federal Energy Regulatory Commission (FERC), which stated that demand-response providers could be compensated based on the LMP, as if they were generators. A lower court had vacated Order 745, but the Supreme Court overturned the lower court’s ruling, providing assurance that demand response will continue to play a role in wholesale electricity markets. The ruling may increase the market for demand response in the near term, especially as more advanced electric meters and appliances and equipment that can be cycled by grid operators continue to be adopted.

Reprinted with permission.

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-- the EIA collects, analyzes, and disseminates independent and impartial energy information to promote sound policymaking, efficient markets, and public understanding of energy and its interaction with the economy and the environment.

  • Matt

    My head is twisting on these graphics:
    Residential saves 61% of MWh, 25% of MWs, got 29% of incentives.
    Industry saves 6% of MWh, 54% of MWs, got 54% of incentives.
    I think this means residential is ask sooner and longer to make small cuts, then industry is ask to make a short big cut. Corp (office buildings) fall in the middle.
    Is that what it is trying to say?
    Of course real time TOU (say 15 min periods, instead of 12 hour) would a much deeper behavior shift. Like thermal time shifting, think AC making ice at night for day time use, freezer chiller to lower temp at night so they run less during day. And yes the pricing is more complex since it should vary at least by month.

  • newnodm

    I get that they bought peak electricity at $.85/kWh doing demand response. Someone else do the math and see what you get

    • eveee

      I read customers got $40 for backing off 100kwhr on average. That comes to $0.25/kwhr. Sounds like peak retail pricing.

      • newnodm

        I did the math on the number in the article above. What I’m getting at is whether DR economically beats batteries.

        I also question whether these trials of probably self selected households are applicable to the general population when applied to HVAC.

        • eveee

          Why all the skepticism? I am interested in seeing your math.

          I am pretty sure its cheaper to avoid peak demand than to buy batteries to store in another time and discharge them whenever you want.

          But maybe I don’t understand your scenario.

          A thermostat or timer that sets your fan or washer to run on off peak hours costs less than 50. Even more sophisticated equipment like smart meters and appliances, or WiFi controlled plugs are more cost effective.
          Reducing peak demand with DR is only beaten by efficiency in terms of bang for buck.
          DR isn’t the only low hanging fruit. Energy Imbalance Markets allow better and more up to date energy trading over wider areas.
          On the whole, almost all other modes used to increase renewables integration are cheaper than battery storage. Even among storage techniques, battery storage is more expensive. There is plenty of cheap, pumped hydro potential at many existing hydro.
          But battery storage has its place. As EVs gain traction, they will provide large amounts of storage as well.

          While residential is important, we need to look at the bigger picture.
          At higher levels, we need to look at all those tools at our disposal, not just battery storage. Residential is not the biggest market for battery storage.

          • newnodm

            They paid 1.2 billion to save 1.2 million mwh at peak. The question I’m asking is whether that is optimal use of the funds.

            The presumption is that demand response is inexpensive relative to other choices. I’m examining that presumption.

          • Ronald Brakels

            Batteries that are used everyday, or twice a day, can have a reasonably low cost per kilowatt-hour, but if they are only used once every few days, or once a month, then they can be quite expensive per kilowatt-hour.

            Australia has an electricity market and wholesale electricity prices can get quite high at times. For example they can easily go over $10 a kilowatt-hour during a heatwave. This year they briefly went up to $63 US a kilowatt-hour in Victoria. So demand management can definitely pay for itself. What is interesting is our demand management is all mostly industrial and large commercial. Residential is almost non-existent. But here costs are easily passed onto consumers (I pay 27.5 US cents per kilowatt-hour) so I guess they haven’t seen as much need for it.

          • eveee

            Do you have any links?

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