FERC Issues Landmark Rule on Demand Response

The Federal Energy Regulatory Commission (FERC) on Tuesday established a landmark ruling that will boost the demand response industry in the US.

The ruling requires wholesale electricity market operators to pay demand response providers the same price that electricty generators are paid–referred to as the locational marginal price (LMP)–when those resources have the capability to balance supply and demand as an alternative to a generation resource and when dispatch of those resources is cost-effective.

Demand response refers to the ability of customers to adjust their electricity use by responding to price signals, reliability concerns or signals from the grid operator. Demand response providers, are companies like EnerNOC (Nasdaq: ENOC) and Schneider Electric (SND.DE), that facilitate energy consumers in reducing their power usage based on those signals.

In its ruling, FERC stated, "This approach for compensating demand response resources helps to ensure the competitiveness of organized wholesale energy markets and remove barriers to the participation of demand response resources, thus ensuring just and reasonable wholesale rates."

Organized wholesale market operators will be required to make compliance filings by July 22, 2011, that include conforming tariff provisions and identify price thresholds to estimate where customer net benefits would occur, and thus above which it would be cost-effective to dispatch and pay demand response resources the market price for energy.

By September 21, 2012, each market operator must undertake a study examining the requirements for and effects of directly determining the cost-effective dispatch of demand response resources in both the day-ahead and real-time energy markets, and to file the results of the study with FERC.

The demand response (DR) industry is expected to begin a period of dramatic growth in 2013, according to a recent Pike Research report, which forecasts market growth from $1.4 billion in 2010 to $8.2 billion in 2020.

This should lead to significant upside for demand response firms EnerNOC (ENOC) and Comverge (COMV). Each demand response provider will receive the higher market-based price which will increase revenues. 

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