California's Demand Response Revolution

California is moving another step closer to strengthening its grid through a new mechanism to provide compensation for demand response.

The Demand Response Auction Mechanism (DRAM) is a program which allows demand response providers – including those in solar storage, behind-the-meter batteries, load control, and EV charging – to get compensation for providing services to the grid.

This is good news for a number of California demand-side players including Tesla, SolarCity, Stem, Green Charge Networks, Advanced Microgrid Solutions, EnerNOC and Comverge, to name a handful.

Providers have two ways of getting paid.

First, the California Public Utilities Commission (CPUC) has called on California’s three large investor-owned utilities to collectively procure 22 megawatts of capacity through demand response. The idea is that by having control of resources that can cut down on load during peak times, ratepayers benefit from reduced capital expenditures and the elimination of emissions from gas peaker plants.

Second, demand response will soon be allowed to bid into the wholesale market on a much wider scale. DRAM allows demand response providers to pool together portfolios of EV chargers, smart thermostats, behind-the-meter storage and more, and bid these resources into the wholesale market as an alternative to traditional generation.

Let’s look more closely at these two opportunities.

Capacity payments

In California, electricity retailers are required to demonstrate that they have procured enough generation capacity to meet projected peak loads. Traditionally, this capacity requirement has been met primarily through bilateral contracts with generators.

But since 2014, the California Public Utilities Commission has examined ways of expanding the role of distributed demand response. DRAM introduces a bidding process, allowing any demand response providers who can meet certain requirements to make their assets available to help the utilities meet their capacity requirements. In exchange, utilities pay these demand response providers a capacity fee based on the number of kilowatts they can provide to reduce peak load when the grid needs it.

In the DRAM capacity auction, demand response providers are called on to offer a price for their capacity. Providers are keeping these prices secret, as the market is highly competitive.

The 22-megawatt procurement is a minimum amount set by the utilities commission, so there is the possibility that utilities will procure more. In an effort to drive up residential demand response, the utilities commission has required that at least 20% of the procured capacity should come from the residential sector.

Utilities will select the winners of this procurement at the end of the month.

Wholesale market

Beginning next June, approved demand response resources will be able to bid into California’s wholesale electricity market.

In this system, the wholesale prices paid to these demand response providers will vary depending on their location. Due to the fact that some regions are grid-constrained or may have imbalances in supply and demand throughout the day, the wholesale price of electricity also changes. Using these price signals, demand response providers can choose where to focus their efforts, and then bid their assets into the day-ahead wholesale market.

The first step in the wholesale market process begins in February, and we won't see demand response on the market until June. In the meantime, demand response providers will be tested to make sure they can deliver the load curtailment they say they can. In case they fail to deliver when they hit the market, the providers will have to pay for the load curtailment they fail to provide.

The DRAM program also promises to make changes to how California’s grid looks for solutions to ramping problems caused by California’s rapidly growing solar generation base. This is a topic we will cover in a future piece.