Demand Response - A Fast Growth Market

Demand Response (DR) has taken a higher profile as Constellation Energy signed an agreement to acquire CPower. CPower manages about 850 MW of DR capacity rights. Constellation Energy manages a similar amount. The acquisition would nearly double the company’s DR portfolio.

Constellation, in their press release, identifies synergies related to CPower providing additional systems, personnel, and helping to accelerate the pace of  Constellation’s participation in this segment as primary reasons for the acquisition. Constellation stated it sees the demand-response market as maturing to the point that it functions like generation supply for reliability purposes.

So  what gives with Demand Response?

DR is a fast-growing opportunity for retail customers. Pike Research, a provider of for-profit analysis of global clean technology markets, is predicting triple digit growth from 2010 to 2015 and Barclay's Capital forecasts the market at $20 billion by 2020.

Demand Response offers real financial incentives to reduce consumption at critical times or in response to market prices. Since compensation for participating drives the risk-reward equation when viewed from a risk management perspective, pricing for DR is the main focus. Current practice is to cap prices whereby DR for retail customers is compensated at lower price levels closer to retail rates. The Chart below provides information on states where programs are available and the market share potential.

A Federal Energy Regulatory Commission (FERC) proposal would allow all demand response participants including retail (industrial, commercial, institutional) to  receive the  wholesale Locational Marginal Price (LMP) that generators receive for DR services. And, given the  history as to how high LMP can get, DR providers would anticipate getting much higher rates of compensation  than  in  current  programs should it get approved. As a result, service  companies such as CPower to DR providers who earn a portion of the compensation as their income would expect to see higher returns for their investment. This may not have escaped the attention of larger competitors to DR service companies such as Constellation.

Consumer-oriented organizations and some companies are weighing in. At a meeting called by FERC, opinions were presented to support payment for DR providers at the full LMP price. CPower competes with many other DR service companies. The interest level of other potential competitors to Constellation as a competitive response may be in the future.

Department of Energy - Energy Efficiency and Renewable Energy Programs by State

^{(Source: Department of Energy)}