Demand response: One view of the the US industry- history and trends


Demand response has been around in many forms for at least the past quarter century. In its infancy, direct load control was the method of choice. Electricity utilities would have switches under their control, installed on selected customers’ loads, which were activated either manually or via a radio signal.

This gave the utility the ability to interrupt, and therefore control, the customer load when they needed to. It was a basic implementation of demand response. The customer didn’t have an option – the load was removed from the system when the utility wanted. In exchange, the customer received preferable rates and usually some limits to the number of occurrences. Most often the type of customer that accepted this interruptible service was an industrial customer whose process would allow the interruption of power.

Advances in technology allowed the concept to progress to the residential consumer, who would allow control of his central air conditioner and possibly other loads. The technology also allowed a varying response, such as 50 or 100 percent cycling, along with a varying reward, giving the consumer some level of choice. At the same time, another large segment – the commercial consumer – was given an option to participate using many different types of programme, most of them involving a manual action of load reduction on the part of the consumer. These programmes still offered a monetary reward for the effort, however.

Such was the state of demand response for many years, with different customer segments and technologies being emphasised, de-emphasised and re-emphasised over time, but with little overall change in concept. That concept was that the utility would need a certain amount of load reduction/demand response from its customers at infrequent times, and a rate was created to define the fixed reward due to the customer.


The concept of using the price of electricity as a means of demand response has its roots in time-of-day or time-of-use rates. These were designed to reflect higher costs at certain times during the day, and possibly also at certain times during the year. They could influence a consumer to change his energy use, but since the periods and prices were set, that change was usually a general change and could not be relied on to address any immediate and unforeseen utility system needs.

Then hourly real-time price rates were developed which allowed for a much shorter horizon of response, usually the day ahead. These original real-time price rates usually only applied to large industrial customers and were sometimes very complicated for all to understand. As time went on they were revised and improved upon, to allow other customer segments to participate, but the number of customers on these real-time rates was still limited.

All of this was occurring while the electricity utility industry was still in a completely regulated state, and the benefits of and responsibility for demand response stayed within the individual utility. With the advent of deregulation/re-regulation, additional players have entered the mix. It is no longer just an agreement between the consumer and his distribution utility. The energy suppliers have a stake in it, as do the ISOs and RTOs. And products and offerings are being developed to address their needs.


Real-time prices are now evolving into different forms for the different markets and their participating members. Pricing seems to be either at the forefront or at least an underlying component of what can be termed demand response nowadays. This is not to say that the technology solutions don’t play in the mix. In fact, a case can be made that the larger the price differential between the highest and lowest price, the higher the value of the load reduction/demand response. That higher value will allow additional technology to be developed and deployed. It is therefore possible that a price-based demand response solution could drive new technology requirements on a cost-effective basis.


For a residential consumer, demand response could be a multi-tiered rate where the highest price – the critical peak price – would be invoked only when conditions warrant and may be limited in duration. It could be a variable highest price, also depending on conditions, or it could be a pass through of the actual hourly wholesale prices.

All of these are being explored in one form or another in various states across the country. All of these could also have a technology component that allows for an automatic response by the consumer, such as using a load control switch for cycling the central air conditioning or a communicating thermostat triggered by the price. These technologies can allow for load reductions which are consistent and measurable, but which have a minimum effect on the consumer’s comfort level. They also require minimum ongoing interaction by the consumer, a trait that is popular.

Variably priced rates are not something new for commercial and industrial customers, but tying them to a market-based price has been gaining in acceptance. In certain areas, the largest consumers have been encouraged to seek market-based prices, and with that, market-based demand response incentives. These real-time market-based rates have the potential to provide a substantial level of demand response.

The large consumer, alone or in aggregate, who is able to reduce demand reliably, is beginning to see the opportunity to use that ability at both a retail and wholesale level. At a retail level, consumers’ distribution utilities may provide programmes where they can receive a reward for helping to address local distribution or procurement for bundled service constraints. Their energy supplier, if not the local utility, may also offer a procurement-related benefit. In some areas consumers are now allowed access directly into the ISO’s demand response programmes; in others they may still have to go through their energy supplier.


In order to increase acceptance and participation in demand response programmes, certain issues need to be acknowledged. These are generally seen as being regulatory, market, value and technology related.

Regulatory issues involve the changing rules that the parties are operating under. The stakeholders and investors need to see that the rules will remain stable enough, or are at least predictable enough, for a cost-effective expected value to be forecast over a reasonable timeframe. Regulatory change and uncertainty affects that outcome adversely.

The market and price signals are still evolving. Some areas have functioning retail and wholesale markets, but they are usually disconnected. While the wholesale markets may still be in their infancy and not as fully efficient as needed, most are moving in the right direction.

Consumers are more likely than not to undervalue their demand response, if they recognise a value there at all. This usually has to do with a lack of technical knowledge of their energy use and the resultant economic opportunity. Most consumers have very few opportunities to gain that knowledge.

This brings us to technology. From the consumers’ viewpoint, they need to understand their energy usage. And, while they may not be aware of it, affordable advanced metering is at the forefront here. It can be the basis to providing the data required to advance their understanding of their energy use. This can lead to more enabling technology that consumers can deploy to help them in their demand response activities. All of this requires cost-effective processes and systems from the supplier’s perspective, including notification/activation systems, and metering, measurement and performance verification processes


The opportunity for growth and expansion of demand response in the market is there – if not today, surely tomorrow. To fully utilise the value it can provide will require a concerted effort by all parties. The consumer must become more aware of his energy usage patterns and then of his options. Market-based prices can be a part of this. To help accomplish this, technology in the form of advanced meters and control devices should continue to be developed and deployed. The data from these same meters can provide benefits to the utilities and energy suppliers alike, and this in turn can further help the evolving wholesale and retail markets. It is a winning solution all round.