In March 2011, the Federal Energy Regulatory Commission (FERC) in Order No. 745, ruled that demand response, in other words paying for reducing power demand, must be compensated at the same rate as power generation, all other things being equal. 

Demand response programs involve paying power consumers not to use power at certain times.  Reducing peak load can save consumers money by avoiding the use of or even construction of “peakers”, generation facilities that are very expensive to run and that are only used at times of peak load.  If I remember correctly, something like 15% of US generation capacity is only used 5% of the time.  Demand response programs are very common in parts of Europe including Switzerland and Germany where they have been in wide use for at least ten years to reduce peak load and smooth out the diurnal load curve.  In the Czech Republic I recently discovered that for many years there have been two electric power networks, low tariff and high tariff.  The low tariff network is shut down when load exceeds generation capacity.

In the US there have been regional discrepancies in how demand response is compensated. The US electric grid is composed of distinct organized wholesale energy markets, each of which compensates demand response at different rates.  The Midwest and California ISOs paid the same for a megawatt-hour generated as for a megawatt-hour saved (“negawatt-hour”).  PJM, the mid-Atlantic wholesale market, paid less for a negawatt-hour than for a megawatt-hour.

By Order No. 745, FERC has established a nation-wide policy that demand resources should be paid the same as generators in organized wholesale markets — as long as the demand response programs is cost-effective and capable of displacing the need for generation.  This provides a uniform incentive to participate in demand response programs.  For those consumers who don’t directly participate, demand response reduces the need for peakers and should lower consumers’ electricity costs.