There is an oft-repeated dictum by one of the Professors in the Applied Legal Studies Program that “money makes the blind see.” It is my neophytic contention that nearly every innovation which permeates the industrial world is arrived at because of a need of or desire for more money; their presence also serves to save money, as well.
The Federal Emergency Regulatory Commission(FERC) defines demand response as “changes in electric usage by demand-side resources from their normal consumption patterns in response to changes in the price of electricity over time, or to incentive payments designed to induce lower electricity use at times of high wholesale market prices or when system reliability is jeopardized.”
Because of the 1970s energy crises where OPEC, who were at the time (and still is) the major supplier of oil to all industrialized economies, especially the Unites States, flexed their muscle and quadrupled the price of oil, the world was forced to rethink energy policy. After decades of being wholly dependent on Middle East oil – blinded, if you will – the world opened its eyes when OPEC effectively closed the spigots with their prohibitive pricing scheme. That spigot quenched the energy thirst of developed countries who were unaware of how addicted to oil and other fossil fuels their nations had become.
Amid the scramble to liberate themselves from that addiction/affliction, the blind, unable to simply rub spit-moistened dirt on their eyes to cure their affliction, turned within and figured out several ways to help themselves. Domestic oil exploration and production efforts were intensely stepped up. Alongside those efforts, conservation was studied and found to be equally effective.
Demand response grew out of these conservation efforts. In a paper entitled “Economic Principles of Demand Response in Electricity”, Larry Ruff, who has a PhD in economics from Stanford and a BS in physics from the California Institute of Technology, gives us this historical and academic perspective: “Until the 1970s, price was usually ignored in forecasting electricity demand even in the long run. When price-independent demand forecasts were used during the oil crisis of the 1970s to justify a rapid expansion of generating capacity, technological critics argued that it would be cheaper to reduce demand than to increase supply, at least to some large extent. Then some economists pointed out that regulated prices below the costs of incremental supplies give consumers too little incentive to conserve and make it unprofitable to expand supply. Under these conditions, a utility with an obligation to supply can improve consumers’ incentives and reduce its own full-cost-recovery prices by paying for demand reductions. As long as such payments do not exceed the difference between marginal costs and retail prices they are ‘price corrections’ rather than subsidies….”
After experimentation throughout the 1980s and 90s, Dr. Ruff continues: “…electricity demand is strongly affected by prices and ignoring this reality will lead to costly mistakes; today, nobody would think of forecasting electricity demand without considering prices as critical explanatory variables….More importantly…these events also demonstrate the importance of correctly understanding and applying basic economic principles in the design of demand reduction policies and programs.”
In the November 2011 edition of BACnet and the Smart Grid, Dr. David Holmberg, PhD., contributed an article entitled “Demand Response and Standards”, where he sketches an enthusiastically optimistic evolutionary picture of demand response(DR) and concludes: “Options for facility interaction with the power grid are increasing daily as standards, technology, regulations and markets advance, and as DR programs expand in scope and number. The concept of demand response has expanded from a traditional view of utility peak shaving via central dispatch to that of facility interaction with markets, grid operations, and service providers, enabled by a common protocol and standard information models….The grid is steadily getting smarter, with technology, regulations and legislative changes pushing it forward. In fact, the U.S. must move toward a system where buildings and other consumer facilities act as ‘demand response’ resources to help maintain grid reliability. We will be integrating more intermittent renewables and depending on buildings to become more intelligent, shifting and balancing load and demand peaks in response to price and grid reliability signals. You, too, will be carried along by this wave, so make plans to surf the rising water.”
So, the understanding that I get from all the jargon is that demand response is a method the power companies have devised to help them deal more efficiently with providing power to consumers during peak operation times by encouraging consumers, through financial incentives, to give back to the power company the energy that the consumer did not use. This helps control production costs in the electricity industry and at the same time ostensibly reduces the carbon footprint of the industry and helps consumers save on their power bills.