In the late 1990′s, U.S. energy regulators began to recognize how the demand side affects wholesale power markets by effectively creating new power resources at far lower costs than building either traditional or renewable generation. Following several years of development, demand response has now started transforming wholesale markets — and reducing costs for ratepayers.

Demand response programs compensate customers for agreeing to reduce their electricity usage for a few hours, usually on summer afternoons. These programs also can include energy efficiency — that is reducing energy use throughout the year, usually by replacing equipment or appliances with more efficient models.

In May PJM (the wholesale market operator for 13 states and the District of Columbia) announced its May capacity auction results. PJM noted price reductions of up to 85 percent — driven largely by demand response resources.

In PJM, as in many wholesale markets, retail energy suppliers (utilities) pay for power supply in two ways:

Capacity: These purchases ensure that sufficient power resources are available to meet the annual peak demand of utility customers. This can be considered a reservation payment: a retailer with a million customers would reserve, say, a 2,000 MW power plant to serve their customers on the peak day of that year.

Energy: Retailers also must pay for the actual energy (kWh) consumed by their customers every day.

via How demand response cuts wholesale power costs — Cleantech News and Analysis.