A Framework for Evaluating the Cost-effectiveness of Demand Response

Demand response programs have the potential to provide many utility system and societal benefits, in addition to improving the economic efficiency of the electricity grid. Regulators and policymakers are interested in the costs associated with these potential benefits and many require that the cost-effectiveness of particular demand response options be evaluated by utilities and others prior to implementing programs. The working group conducted an extensive literature review and examined existing demand-side program cost-effectiveness frameworks and then discussed ways in which the costs and benefits of demand response might require special consideration in applying the frameworks, as distinct from energy efficiency programs.

This report focuses on two key questions:

• What framework should be used to evaluate the cost-effectiveness of ratepayer funded demand response programs?
• What are the key costs and benefits to account for in evaluating the cost-effectiveness of demand response programs?

The authors find that the energy efficiency cost-effectiveness framework, which builds off of the program screening tests described in the California Standard Practice Manual, can be adapted for DR purposes with minimal, albeit important modifications.

With regard to costs, DR programs sometimes involve costs that are not as significant or do not occur with energy efficiency programs. Two such examples are a participant's "value of lost service" as a result of curtailing load in a DR program, and the "transaction costs" associated with DR programs that can be much higher than those associated with energy efficiency programs.

With regard to benefits, avoided capacity costs typically represent the most significant DR benefit. However, estimating avoided capacity costs for DR is very complex due to the nature, timing, and uncertainties associated with DR programs. Consequently, estimates of avoided capacity costs are often contentious and there appears to be little consensus among industry stakeholders as to how they should be calculated.

Other DR issues addressed in the report that regulators and other stakeholders should consider in assessing cost-effectiveness include the study period, baselines, customer participation and response levels, sensitivity analyses, and transparency. The report concludes with a summary of areas for further research.