Monday, May 04, 2015

Supreme Court To Review Demand-Response

The Supreme Court has granted cert to review a challenge over FERC's efforts encourage "demand-response" policies. As incredibly dry as that sounds, this is a significant deal in energy/environmental area. The NYT article linked above actually gives a pretty decent summary of the issue, but I'll give my own quick take.

"Demand-response" refers to policies which give consumers price breaks when they consume electricity at off-peak times (as opposed to those times when energy usage is highest, like mid-day). In of itself, this doesn't "save" energy -- it just shifts usage around -- but it matters from an environmental standpoint because of the way power dispatched. Electricity supply and demand must be matched perfectly and instantaneously -- we produce exactly the amount of power that we need to consume. Functionally, that means that certain base generators are (more or less) always on, and then as demand rises additional generators come online to meet peak demand. Typically, these peak generators are older, more expensive, and dirtier than the base load generators -- hence the environmental benefits of demand-response. It also comes with reliability benefits -- reducing the peak electricity spikes means lessening the chance that the system will be overloaded. The losers, of course, are the operators of the expensive and dirtier peak-load plants.

The legal challenge here has to do with how the regulatory authority over electricity is allocated between the federal government (FERC) and the states. The Federal Power Ac, the main federal statute on the matter, grants FERC the authority to regulate wholesale (sale-for-resale) power transactions while preserving retail regulation to the states. Demand-response intuitively is more retail than wholesale -- it relates to when end-use consumers use their power -- but FERC attempted to structure its regulation in such a way that it created a wholesale-based demand-response framework. The D.C. Circuit didn't bite, ruling 2-1 that the program was actually impermissible retail regulation, and that is the decision under review by the Supreme Court.

Hence, as a legal matter this is less an "environmentalism: yay or nay" case than it is a "federalism/administrative law" case. Still, ideologically speaking the Court often has a left-right breakdown regarding the extent of federal power and the degree to which the judiciary ought defer to federal agencies. On that note, one encouraging sign for FERC is that Justice Samuel Alito is recusing himself from the case.


EW said...

This is encouraging; I hadn’t heard this yet. Thanks.

A few quibbles:

1. “Demand response” encompasses both load-shifting (waiting to run your dryer until the evening) and conservation (putting your laundry on a line in lieu of putting it in a dryer).

2. Yes, the market for electricity differs from many other markets due to the challenge of storing electricity. This often gets phrased as “Electricity supply and demand must be matched perfectly and instantaneously,” although I understand this isn’t quite accurate.

For example, the grid includes capacitors and inductors that operate as mini-batteries, actin as shock absorbers to the system.

Also, systems can compensate for mismatches of supply and demand by deforming the wave form, resulting in electricity that differs from 60 cycles/second. There is dispute about how much we should spend in the effort to maintain a perfect wave form; apparently it’s quite costly and most devices don’t require that level of precision. But some high-tech systems do. So the choice to incur great cost to maintain a perfect wave form can look like a subsidy for the rich at the expense of everyone else.

3. I am not aware that peaking generators are generally older or more expensive (in construction cost) than base-load generators. Indeed, among dispatchable (not intermittent) generators, peakers tend to have the lowest cost/MW capacity. As a consequence, utilities are more willing to build peakers than other types of dispatchable generators – which may keep the average age of peakers relatively low.

What distinguishes peakers is their high operating cost – including high fuel consumption per kWh. In this sense, they are “dirty.”

(Ok, to be fair, there are systemic reasons that old generators also tend to be used as peakers. As generators age they become less efficient – requiring more fuel and maintenance. If you had a fleet of trucks, you might expect the oldest one to require the most fuel and maintenance. And you’d avoid putting that clunker on the road until the need for trucks was so great that all your other trucks were already being used and you had no other choice. In effect, this clunker would be your “peaker” – not because it was designed to be such, but by default.)

4. What’s up with Alito?

When I fantasize about being on the Supreme Ct, I confront the fact that my preferences for interpreting the law often lead to conclusions that conflict with my policy preferences. I could imagine Alito thinking, “Damn – a want to vindicate states’ rights, but the economic efficiencies embedded in FERC’s order are simply too obvious to ignore. Rather than pick between these preferences, I’ll just take a pass.”

David Schraub said...

All valid quibbles which I skated past for simplicity's sake (though I'll note that since intermittent sources tend to be cleaner than dispatchables, pushing more of the load onto dispatchables is nearly always going to be "dirtier").

EW said...

"2. Yes, the market for electricity differs from many other markets due to the challenge of storing electricity. This often gets phrased as 'Electricity supply and demand must be matched perfectly and instantaneously....'"

It was suggested to me that it's not unusual to have a market for things that must be consumed when produced. These things are called "services."

Rather, what makes electricity so unusual is the fact that if supply and demand get out of kilter by a sufficiently large degree, even momentarily, it will CRASH THE SYSTEM. Thus, if the supply of manicurists is insufficient to meet demand, big deal; I'll just come back in an hour. But if the supply of electricity is insufficient to meet demand, it's black-out time -- and who knows when the power will be back up?