Energy information and technology has reached a point where the operator of a twenty-first-century grid can balance supply and demand based on value, not cost. Better data, more distributed and dynamic resources, and improvements in supporting infrastructure represent an opportunity for an electric system to operate more reliably with less environmental impact and through competitive markets that yield economically efficient rates. The twentieth-century framework for regulating grid operations advanced last year, when the Supreme Court upheld Federal Energy Regulatory Commission Order 745 and the Commission’s authority to pay demand response as much as generation for comparable benefits to the grid. However, the Court also upheld Order 745’s net benefits test, which says that demand response is only comparable to generation when it lowers wholesale rates.
This Note argues that the net benefits test is a flawed indicator of when demand response is comparably valuable to generation. Moreover, it contravenes the rationale for the Commission’s market-based rates authority by focusing on whether rates are low, rather than efficient. This matters because it could unnecessarily limit competition in wholesale markets between traditional generation and non-conventional, demand-side and storage resources, and disproportionately prioritize the interests of market buyers. As an alternative, this Note proposes that the Commission leverage grid-edge data and technology to better define and differentiate between demand resources, and take steps to address externalities. This would promote more efficient market operations, facilitate a just and reasonable balance among the modern electric system’s diverse interests, and ensure that demand response receives equal compensation when it maximizes societal value, rather than minimizes cost.
