Dude, Where is my ISO-NE Demand Response Check?

Once upon a time, ISO-NE Demand Response (DR) was nearly a gravy train. Back in the early 2000s, the state of Connecticut would practically buy you a back-up generator if you were in the Southwestern Connecticut (SWCT) load pocket. While it wasn't quite money for nothing, it was a really good deal and customers only had to respond to audits and the occasional (like once a year) DR event. While I may wax nostalgic in hindsight, ISO-NE had a severe capacity crunch in that era, especially in SWCT and Boston. DR met a very important social and business need and people were able to make money by helping out by being a DR resource.

When EnerNOC launched its IPO in 2007, ISO-NE accounted for 60% of the firm's revenues. This halcyon period for DR in ISO-NE spawned a revolution in energy management as ISO-NE clearly demonstrated that customer load could exhibit demand elasticity. ISO-NE was the first deregulated market to embrace third party demand response providers. and the companies that pioneered the New England market are now selling their solutions globally. In addition to EnerNOC, other firms such as CPower (now Constellation), Energy Curtailment Specialists, and Comverge thrived in the ISO-NE market during this period. When the ISO-NE Forward Capacity Market (FCM) made its debut in 2007, it added a layer of complexity to DR but it also validated DR as a dispatchable capacity resource.

Fast forward to the spring of 2013 and the ISO-NE DR landscape looks much different. Many of the players from several years ago have left the market or substantially pulled back. EnerNOC recently significantly reduced its position in the ISO-NE FCM as the market had become unprofitable for all but the largest customers or those with advanced automation. 

Why did this happen? If you really want to get into the weeds, read FERC's Order on ISO-NE's proposed tariff revisions in Docket ER12-1627-000 but I'll summarize below.

Must Offer Requirement - ISO-NE is going to force DR providers to always offer DR capacity into the Day Ahead and Real-Time energy markets on a 24x7 basis. In a portfolio of many customers, its extremely difficult to determine how much capacity is available from each resource on an hourly basis and even more difficult to determine an appropriate offer price. Most DR resources have high opportunity costs and don't want to be dispatched more than a few times per year. In addition, a DR provider could be subject to a market manipulation accusation if they only offered their capacity at high prices not connected to opportunity costs. The Must Offer Requirement is really bad for DR.

Onerous Data Requirements - The DR providers remaining in the ISO-NE market have invested in data infrastructure, but the challenges of gathering near-real time data from many sites, ensuring its integrity, and sending that data to ISO-NE is a very difficult task. ISO-NE imposed data requirements on DR providers that became onerous, yet the economics of the market didn't justify the labor effort or technology required to meet ISO-NE's data standards. In addition, when corrupted data accidently slips past your quality control filters and results in a FERC investigation and penalty, you think long and hard about whether continued participation in the market makes sense.

ISO-NE FCM Floor Price Goes Away in 2017 - In all of the FCM Auctions, there has been a price floor that has provided certainty regarding the minimum price for capacity. ISO-NE has been oversupplied for capacity, but the price floor has provided support for capacity payments and ensured DR's economic viability. In 2017 this price floor goes away and that is likely to significantly diminish demand response payment rates in most of ISO-NE where it will no longer be economic for many end users to participate.

I'm pretty sure that DR will thrive again in ISO-NE, but for the average commercial or industrial customer, DR will be on hiatus for a couple of years until these issues get worked out at ISO-NE. In the meantime, customers can manage their ICAP tags or participate in price response, but capacity based DR in ISO-NE is taking a break for now.