Any American who pays electricity bills has good reason to care that earlier this week the U.S. Supreme Court voted in support of a federal rule to compensate customers who conserve energy during peak periods. The practice can reduce the chance for blackouts and lower electricity prices for everyone by easing loads on the power grid as well as promote energy conservation, experts say.
The main legal issue was whether the Federal Energy Regulatory Commission (FERC) has the authority to regulate such programs, known as demand response. FERC authority technically covers wholesale electricity markets that buy and sell electricity across state lines. Wholesale electricity prices fluctuate based on supply and demand. But homes and businesses do not typically respond to wholesale market price changes because they pay fixed prices on their monthly utility bills.
Demand-response programs help bridge that gap: Wholesale market operators pay customers on the retail market level to stop using electricity at times when high demand has driven up wholesale market prices. The Supreme Court decision effectively upheld FERC's authority to regulate the wholesale market through demand response—even if the regulations pose consequences for retail market sales. "The general impact is we’re a little less likely to have blackouts and brownouts, and more likely to have lower electricity bills than higher bills," says Tom Mullooly, an energy lawyer with the firm Foley & Lardner, LLP, who did not participate in the case. "In the large sense, just about everybody wins."
In 2011 FERC issued Order No. 745 (pdf): a demand-response rule requiring wholesale market operators to pay the same price for every unit of electricity customers do not use as the price paid to power generation companies. That means large customers or groups of customers would get paid the same price for not using a megawatt of power—in this case sometimes called a "negawatt"—as the price a company gets for producing a megawatt of power from a power plant. "If you have demand-response capability, you don’t need to bring in a new power plant to meet the load," says Kevin Lucas, director of research for the Alliance to Save Energy, a nonprofit coalition that promotes energy efficiency. "It's a lower-cost solution in the long term." It can also benefit the environment by reducing the need to meet high demand with less-efficient power sources that give off more greenhouse gas emissions, such as old coal power plant.
But nine months after the FERC order, the Electric Power Supply Association, a coalition of power generation companies, challenged FERC in a lawsuit. First, the suit argued that the FERC rule oversteps federal authority because of its impact on retail markets. Second, it argued that the rule unfairly pays customers twice: once for committing to lower power usage and a second time because customers save money by not buying power they would have otherwise purchased. The companies favor a different formula that subtracts the customer savings from the demand-response payment.
The U.S. Court of Appeals for the District of Columbia Circuit (pdf) had agreed with the power generation companies and ruled against FERC in 2014. But such arguments did not sway the Supreme Court justices who in a 6–2 ruling confirmed FERC's authority to uphold demand-response rules for the wholesale markets that indirectly affect retail markets. They also confirmed that FERC's process for deciding the demand-response payment formula was reasonable, even if they withheld judgment on which formula makes the most economic sense.
Some economists remain dissatisfied with the rule. William Hogan, professor of global energy policy at Harvard University, co-authored a legal brief (pdf) in favor of the lawsuit and the alternative payment formula that subtracts customer savings. He describes the FERC decision as a "mistake that will come back to haunt them in ways that are counterproductive." In some scenarios, for example, overpaying for demand response may encourage electricity customers to unnecessarily reduce power usage in a way that hurts economic productivity, says Charles Kolstad, an environmental economist at Stanford University. Like Hogan, he thinks that the payment formula should ideally subtract consumer savings.
Kolstad, however, filed a legal brief (pdf) to support FERC. He believed that defending demand-response programs in this case, even as imperfect economic tools, was more important than fine-tuning the payment formula for maximum economic efficiency. He also points out how FERC's rule includes a "net benefits test" to ensure demand-response payments only kick in when they save money for electricity customers. It's not perfect but for Kolstad it's just about good enough. "Demand response done carefully can be a very valuable tool that can benefit everybody," he says.
Such benefits go beyond cheaper electricity prices by helping shape the future power grid. Demand response can balance the unpredictability of renewable power sources such as wind turbines or solar farms, says Jaden Crawford, an independent advisor and consultant on electricity markets. That allows the power grid to remain reliable even as it adds cleaner power sources.
The Supreme Court ruling's biggest impact may come from easing uncertainty about the role of demand response in electricity markets, experts say. As a result, they envision much more innovation in smart meters and advanced building control systems over the next decade or two. Many more homes and businesses could someday monitor their power usage and automatically turn down the air conditioning or switch off lights when needed—a truly powerful form of demand response.