Integrating demand into the U.S. electric power system : technical, economic, and regulatory frameworks for responsive load

Abstract

The electric power system in the US developed with the assumption of exogenous, inelastic demand. The resulting evolution of the power system reinforced this assumption as nearly all controls, monitors, and feedbacks were implemented on the supply side. Time invariant, averaged retail pricing was a natural extension of the assumption of exogenous demand and also reinforced this condition. As a result, the market designs and physical control of the system exclude active participation by consumers. Advances in information and communications technologies enable cost effective integration of demand response. Integrating demand into the US electricity system will allow the development of a more complete market and has the potential for large efficiency gains. Without feedbacks between supply and demand, attempts to develop competitive markets for electricity will suffer from a greater potential for market power and system failure. This thesis provides an analysis of the technical, regulatory, and market issues to determine a system structure that provides incentives for demand response. An integrated, dynamic simulation model is utilized to demonstrate the effects of large scale adoption of demand response technologies. The model includes distributed decision making by both consumers and investors in generation capacity, the effects of their decisions on market prices, and the feedbacks between them. Large scale adoption of demand response technology is simulated to quantify the potential benefits of responsive demand. The effects of technology improvement via learning, long term demand elasticity, and policies to promote adoption are considered.

(cont.) The simulations show that diminishing returns for adopters and free rider effects limit the attractiveness of individual adoption. A subsidy to alleviate the costs to adopters can be justified by the significant system level savings from widespread participation. Several pernicious effects can emerge from large scale demand response, however, including increased price volatility due to reductions in generation capacity reserve margin, increases in long term demand, and increased emissions from the substitution of peak generation capacity, such as natural gas and renewables by intermediate capacity. Significant rent transfers will also occur, and stakeholder analysis is conducted to determine interests and distributional effects of large scale demand response.