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Demand response resources play a pivotal role in energy markets like MISO and ERCOT, offering flexibility and reliability. But can they set the price? The answer lies in understanding how demand response participates in energy and ancillary service markets in these regions, the conditions under which they can influence prices, and how they compare to traditional generation resources.
In this blog post, we’ll explore the mechanics of demand response in MISO and ERCOT, focusing on their ability to set prices. We’ll also dive into the unique ways these resources participate in energy and ancillary service markets, and how their pricing power stacks up against other market players.
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How demand response participates in energy and ancillary service markets
Demand response resources in both MISO and ERCOT are designed to reduce electricity consumption during peak demand or emergencies, providing a cost-effective alternative to traditional generation. These resources can participate in energy markets by offering load reductions, and in ancillary service markets by providing services like regulation, spinning reserves, and contingency reserves.
In MISO: Demand response resources are categorized as Demand Response Resources (DRRs) or Load Modifying Resources (LMRs). DRRs can participate on the supply side, offering energy reductions or ancillary services like regulating reserves and contingency reserves. They’re compensated based on Locational Marginal Prices (LMPs) for the energy they provide, and they can also set prices under specific conditions. For instance, if a DRR’s offer clears the market and it’s dispatched, it can set the LMP if it’s the marginal resource. This is particularly relevant during tight supply conditions or emergencies when demand response becomes critical to maintaining grid stability.
In ERCOT: Demand response resources, often referred to as Load Resources, can participate in both energy and ancillary service markets. They’re eligible to provide services like Responsive Reserve Service (RRS) and Regulation Service. In ERCOT, Load Resources can set prices in the energy market if they’re dispatched and their offer is at the marginal price. This typically happens during scarcity conditions when demand response is essential to balancing supply and demand. ERCOT’s market design, which includes scarcity pricing mechanisms, ensures that demand response resources are adequately compensated and can influence market prices when they’re the marginal resource.
When demand response can set prices
Demand response resources can set prices in both MISO and ERCOT, but only under specific conditions. In both markets, the key factor is whether the demand response resource is the marginal resource—the one that sets the market clearing price.
In MISO: A DRR can set the LMP if it’s dispatched and its offer is the highest accepted bid in the market. This often occurs during periods of high demand or system stress, where demand response becomes a cost-effective alternative to more expensive generation resources. For example, during a North American Electric Reliability Corporation (NERC) Energy Emergency Alert (EEA) event, demand response resources may be called upon to reduce load, and their offers can set the price if they’re the marginal resource.
In ERCOT: Load Resources can set prices in the energy market when they’re dispatched and their offer is at the marginal price. ERCOT’s scarcity pricing mechanism, which includes the Operating Reserve Demand Curve (ORDC), often elevates prices during tight supply conditions, giving demand response resources a significant role in price formation. For instance, during extreme weather events, Load Resources may be dispatched to provide critical grid support, and their offers can set the market price.
How demand response compares to other resources
Demand response resources differ from traditional generation in several ways, but they’re increasingly competitive in terms of price-setting capabilities. Unlike generators, which produce electricity, demand response resources reduce consumption, effectively “creating” supply by lowering demand. This unique characteristic allows them to compete with generators in energy and ancillary service markets.
Key differences include:
Flexibility: Demand response resources can quickly adjust their load reductions, making them ideal for responding to sudden changes in grid conditions.
Cost-effectiveness: By reducing demand rather than increasing supply, demand response often provides a more economical solution during peak periods or emergencies.
Environmental benefits: Unlike fossil fuel generators, demand response doesn’t produce emissions, contributing to cleaner grid operations.
Despite these advantages, demand response resources face challenges, such as the need for advanced metering and communication technologies, and regulatory hurdles that can limit their participation in some markets.
The growing role of demand response in price formation
Demand response resources are becoming increasingly important in energy markets like MISO and ERCOT, not just for their ability to provide grid reliability but also for their role in price formation. By participating in energy and ancillary service markets, these resources offer a flexible, cost-effective alternative to traditional generation. And under the right conditions, they can set market prices, demonstrating their value as a critical component of modern grid operations.
As demand response continues to evolve, its role in shaping market dynamics will only grow, offering new opportunities for market participants and grid operators alike.
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