The Supreme Court’s big ruling in favor of clean energy, explained

On Monday, the Supreme Court issued a ruling that had clean energy fans dancing in the streets (by which I mean excitedly updating their PowerPoint presentations). It represents a huge win for cheaper, cleaner electricity and for modern grid management.

Unfortunately, it's pretty complicated and obscure. The case, FERC v. Electric Power Supply Association, turned on three things that the vast majority of normal human beings do not understand: 1) the Federal Energy Regulatory Commission, or FERC, 2) demand response, and 3) wholesale electricity markets.

Specifically, the ruling determined that demand response can participate in wholesale electricity markets, based on rules structured by FERC.

I realize that sounds boring as hell, but it's actually pretty neat. It's going to give demand response — a way of coordinating people to not use energy at certain times — a huge boost, which in turn will help reduce carbon emissions and the price of electricity. It's also a glimpse into the smarter, more responsive electricity grid of the future.

Let's unpack it a bit, to better appreciate the significance.

(Shutterstock)

Wholesale electricity markets are where generators sell power to utilities, which then sell it to you

As I've detailed before, roughly half the US electricity sector is "deregulated."

In regulated markets, power utilities own the whole electricity value chain, from customer service all the way up to power plants.

In deregulated markets, utilities keep their monopoly over local electricity distribution, but electricity generation is spun off into competitive markets.

Those are wholesale electricity markets. Generators sell their power to utilities and retail electricity suppliers at wholesale rates set in a competitive bidding process. Distribution utilities then add their costs for transmitting and distributing that power. The result is the retail price that customers see in their electric bills.

Wholesale markets are managed by nonprofit regional transmission organizations (RTOs), which ensure that the grid remains reliable and that wholesale power prices remain "just and reasonable" through the use of competitive auctions. There are nine in North America, covering about 60 percent of US power supply.

FERC

RTOs were created in 1999 by FERC, the federal agency in charge of wholesale, i.e., interstate, electricity markets. (FERC also does some other stuff.) FERC, in turn, was created by the Federal Power Act, which dates back to 1920, though it has been amended many times since.

Okay, that's very basic background on wholesale power markets. Now let's look at the rising role of demand response.

Power demand can increasingly be controlled

For most of the 20th century, power markets were simple: Generate it, send it over a power line, dump it into a building, charge a regulator-approved rate.

What happened to the power once it passed the meter and entered the customer's house or building ("behind the meter") was of no concern. Demand for power was considered an external variable, something determined by economic growth, outside the control of the electricity sector.

But over the years, more and more techniques developed by which power demand can be reliably controlled. In the lingo of power markets, it can be made "dispatchable."

Consider a crude example. Say a savvy entrepreneur contacts 10 industrial facilities. He says, "According to utility forecasts, power demand is going to be unusually high, and grid congestion unusually bad, on Friday at 6 pm. I will pay you a reasonable fee to reduce your demand by 10 percent around that time, by dialing back nonessential processes."

They agree. So this entrepreneur goes to the utility and says, "I can sell you X amount of demand reduction on Friday at 6 pm." This saves the utility from grid congestion and the high costs of "peaker power."

Plus, by reducing demand, it pushes down the price of wholesale power, benefiting consumers. It's a win-win-win.

(GoodEnergy)

That, in simplified terms, is "demand response." It's a somewhat loose term that covers any way of deploying timely reductions in demand in response to changing grid conditions.

The companies that organize these reductions are called "demand response aggregators." They are like power generators, only they sell not-power, or "negawatts," as Amory Lovins famously called them.

Recent advances in technology have made demand response much more sophisticated. Now customers (residential or industrial) can sign up to be part of demand response programs and never have to hear about it again. The aggregators can often communicate directly with their appliances and HVAC systems, subtly and imperceptibly ramping power use up and down in response to real-time grid conditions.

That is true of a growing pool of customers as smart(er) appliances and grids catch on.

Anyway, as demand response got easier, smarter, and cheaper, it started to take off.

FERC wants dispatchable negawatts treated like megawatts

Hoping to encourage demand response, FERC (under George W. Bush!) developed Order 719, finalized on October 2008, which instructed RTOs to allow demand response into wholesale markets.

Basically, it said that RTOs, when organizing competitive auctions in wholesale markets, have to treat a megawatt of avoided energy use — a negawatt — the same way they treat a megawatt of energy.

When Obama took office and Jon Wellinghoff took over FERC, one of his priorities was to further boost demand response.

Wellinghoff wasn't sure that Order 719 entirely made the point, so in 2011 FERC finalized Order 745, which instructed RTOs to compensate negawatts at the same rate — the locational marginal price (LMP), in the jargon — as megawatts. In other words, it's not just that demand response could play in the market, but that its value was equal to that of electricity.

It's Order 745 that proved controversial and ended up in the Supreme Court.

(Photo by Ethan Miller/Getty Images)

By this time, power producers were getting alarmed. Demand response is often cheaper than even the cheapest power generation. They were getting undercut.

So the Electric Power Supply Association (EPSA), which represents power producers, sued. Their contention: FERC only has jurisdiction over federal power markets, but by setting the compensation rate for demand response customers, it is meddling in retail electricity, the states' domain.

In 2013, a three-judge panel of the DC Circuit Court of Appeals, led by far-right Bush appointee Justice Janice Rogers Brown, sided with the power producers and vacated Order 745. (I wrote a long and detailed post about the case at the time.)

Now the Supreme Court has sided with FERC and demand response

Energy wonks, demand response providers, and environmentalists were horrified by the decision, which would have severely hampered the spread of demand response, thus ensuring higher prices and dirtier energy.

So FERC and the demand-response aggregators immediately appealed the case, with environmental groups like Earthjustice and the Natural Resources Defense Council filing briefs in support, and the Supreme Court agreed to hear it.

Rather quickly, as these things go, SCOTUS heard the case and ruled. On Monday, in a 6-2 ruling, the Court sided with FERC and overturned the Circuit Court ruling. (Justice Alito recused himself; Justices Scalia and Thomas dissented.) Order 745 will go forward.

The key to the ruling is that the Federal Power Act (FPA) gives FERC authority over wholesale rates but also any rule or practice "affecting" those rates, as demand response clearly does.

Justice Kagan, writing the majority opinion, lays it out (references omitted):

The practices at issue directly affect wholesale rates. The FPA has delegated to FERC the authority—and, indeed, the duty—to ensure that rules or practices "affecting" wholesale rates are just and reasonable. To prevent the statute from assuming near-infinite breadth ... this Court adopts the D. C. Circuit’s common-sense construction limiting FERC’s "affecting" jurisdiction to rules or practices that "directly affect the [wholesale] rate." That standard is easily met here.

Since rules governing demand response clearly and directly affect wholesale power prices, they fall within FERC's purview, Kagan concludes.

(Photo by Mark Wilson/Getty Images)

More broadly, Kagan says, EPSA has argued itself into a corner.

EPSA acknowledged in its filing that states do not have jurisdiction over demand response participation in wholesale markets. Those markets are clearly "interstate," which puts them outside of state jurisdictional reach.

But then EPSA also argues that the feds have no jurisdiction over demand response participation in wholesale markets, because it affects the compensation of retail customers.

If EPSA's arguments are taken at face value, then neither states nor the feds have jurisdiction over demand response participation in wholesale markets. No one does.

Problem is, Kagan notes, under the FPA, "wholesale demand response programs could not go forward if no entity had jurisdiction to regulate them."

In other words, EPSA is effectively arguing that demand response should be kept out of wholesale markets altogether.

But that can't be right, says Kagan. The whole purpose of the FPA is to protect against "excessive prices" and ensure smooth grid operation. It would be bizarre to read FPA as prohibiting something that so obviously serves both those purposes.

So, Kagan concludes, both the spirit and the letter of the law indicate that FERC has legitimate jurisdiction here.

What the ruling means for demand response

So it's full steam ahead for demand response.

In 2014, GTM Research issued a report on the "U.S. Demand Response Market Outlook." Among its findings was that vacating Order 745 would cut the growth rate of the demand response industry by almost half, which translates to $4.4 billion in lost revenue over the next 10 years.

(Greentech Media)

Now that higher growth rate has been vouchsafed.

And it's not just in the US. Navigant Research expects total global demand response capacity to grow from around 31 gigawatts in 2014 to about 197 gigawatts in 2023, and for annual industry revenue to grow from $1.6 billion to $9.7 billion.

For my part, I suspect these forecasts are conservative. The more intriguing possibilities lie in a convergence of technologies and social change. How will smarter devices and electricity grids interact with changing utility models ... with the spread of electric cars ... with the growth of rooftop solar power and distributed energy storage ... with rising corporate interest in clean energy ... with local and state politics ... with EPA rules?

A lot of currents are coming together in the electricity world these days (ahem). It's not just this or that piece of the system changing, it's the system itself. And system changes can be dramatic and nonlinear, which makes them extremely difficult to forecast.

So at this stage, it's probably not possible to isolate the effects or future prospects of demand response. Linear projections are a poor guide to system change.

But we do know that demand response is already reducing the need for dirty peaker plants, thus avoiding pollution and saving customers money.

And we know that thanks to Monday's ruling, one of the last remaining substantial barriers to the industry's growth has been removed.

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