This report examines why demand response participation remains limited in wholesale markets and proposes actionable solutions to unlock its full potential. As the electricity grid transitions to accommodate more renewable energy and electrification, demand response can play a vital role in ensuring grid reliability and dampening price volatility in wholesale electricity markets. However, despite its recognized potential to help manage electricity demand, particularly during peak load periods when generation may be scarce, the actual deployment of demand response in wholesale electricity markets has stagnated or even declined in recent years.
The analysis draws from extensive interviews with industry stakeholders, including system operators, regulators, aggregators, and consumers, to identify five critical gaps that must be bridged to accelerate demand response deployment and targeted solutions to address each gap.
Gap 1. There is a lack of experience and knowledge about demand response technology and programs among system operators, state regulators, and consumers.
- Regulators and system operators can identify dedicated subject-matter experts and establish working groups responsible for managing market design and demand response programs.
- Load-serving entities can invest in simplified enrollment processes and easy-to-use platforms that provide customers with clear information about their energy use and potential benefits.
Gap 2. The demand response markets are limited by fragmentation and inconsistent rules.
- Independent system operators need to work closely with their load-serving entities to clearly and transparently quantify and segment participation in wholesale and retail demand response programs by customer class and end use.
- Market designers can continue cooperative rulemaking that develops fair, stable, and competitive market structures.
Gap 3. Communication and metering requirements can be onerous. Individual load resources do not need the granularity required of large-scale generation.
- Embedded measurement devices, such as inverters, can be used as end-use meters.
- Independent system operators can implement statistical sampling approaches for aggregated resources rather than requiring direct measurement of each end-use load.
Gap 4: System operators lack detailed, publicly available information on demand response performance during emergency events, leading to inaccurate accreditation and eroding confidence in the resource.
- Independent system operators can conduct detailed forensic reporting after every emergency event, analyzing how demand response resources performed relative to their accredited capacity, and make these reports publicly available.
Gap 5: There are weak financial incentives, and even disincentives, for demand response at the wholesale market, load-serving entity, and consumer levels.
- Incentives can be created for load-serving entities to enter into long-term contracts for demand response.
- Rate structures should enable value stacking, allowing demand response to provide multiple services across the grid.
- Regulators can consider allowing demand response to participate as transmission and distribution assets, enabling access to long-term rate recovery mechanisms similar to transmission infrastructure.
