Demand Response Incentives: How You Get Paid

Demand Response (DR) programs offer financial incentives to C&I participants for providing valuable grid services. Understanding the different payment structures is key to evaluating program profitability. Compensation typically falls into two main categories: capacity payments and energy payments, sometimes with performance adjustments.

1. Capacity Payments ("Availability Payments")

  • What it is: Payments made for committing to be *available* to reduce a certain amount of load (kW or MW) during specific periods, regardless of whether a DR event is actually called.
  • Purpose: Compensates participants for reserving their load reduction capability to meet grid reliability needs (resource adequacy). Common in emergency or capacity-focused programs.
  • Units: Typically measured in dollars per kilowatt (kW) or megawatt (MW) per time period (e.g., $/kW-month, $/kW-year, $/MW-day).
  • Calculation: Based on the amount of load reduction committed (nominated capacity) multiplied by the program's capacity rate (which might be set by auction, tariff, or contract).
  • Examples:
    PJM Capacity Performance DR payments based on RPM auction prices ($/MW-day).
    NYISO ICAP SCR payments based on zonal ICAP auction prices ($/kW-month).
    ERCOT ERS payments based on awarded bids ($/MW for availability during specific hours).
    Utility interruptible rate bill credits ($/kW-month discount).
    California BIP monthly bill credits ($/kW-month).
  • Key Consideration: Provides a relatively predictable revenue stream, but often comes with mandatory participation requirements and potential penalties for non-performance during events. Market-based capacity prices (PJM, MISO, NYISO, ISO-NE) can be volatile year-to-year.

2. Energy Payments ("Performance Payments")

  • What it is: Payments made based on the *actual* amount of energy reduction (kWh or MWh) delivered during a dispatched DR event.
  • Purpose: Compensates participants for the energy they *didn't* consume when called upon, reflecting the value of that avoided energy consumption to the grid at that specific time. Common in economic programs, and sometimes offered as an additional incentive in capacity programs.
  • Units: Typically measured in dollars per kilowatt-hour ($/kWh) or megawatt-hour ($/MWh).
  • Calculation: Based on the measured load reduction (baseline usage minus actual usage during the event) multiplied by the program's energy rate. The rate might be fixed (e.g., $2/kWh in CA ELRP) or variable based on wholesale market prices (LMP).
  • Examples:
    PJM Economic DR payments at LMP ($/MWh).
    NYISO EDRP payments (min $500/MWh).
    ISO-NE ADCR energy payments at LMP ($/MWh) when dispatched.
    California ELRP ($2/kWh) and CBP energy component (~$0.50/kWh).
    ConEd CSRP/DLRP performance payment ($1/kWh).
  • Key Consideration: Revenue depends directly on performance during events and the frequency/duration of those events. Market-based energy payments (LMP) can be very high during scarcity but are unpredictable. Pure energy-only programs often have lower risk (no penalties for non-participation).

3. Performance Adjustments, Penalties, and Bonuses

  • Performance Factors: Many programs (especially utility ones like ConEd CSRP/DLRP or capacity programs like NYISO SCR) adjust capacity payments based on average performance across events or tests. Consistently delivering less than the committed amount reduces the payment earned.
  • Penalties: Some programs, particularly mandatory capacity programs (PJM CP DR, CA BIP) or utility interruptible rates, impose significant financial penalties for failing to curtail load when dispatched during an event. These penalties can sometimes exceed the potential program revenue, making reliability crucial.
  • Bonuses: Conversely, some programs may offer bonus payments for over-performing during critical events (e.g., PJM CP DR can pay bonuses if a resource delivers more than committed when others underperform) or for responding during specific conditions (e.g., weekend events in some utility programs).

Summary

The economic value of participating in DR comes from a combination of these payment streams. Capacity programs offer baseline revenue but often carry higher performance risk, while energy programs offer variable income based on actual curtailment. Evaluating the specific mix of incentives, reliability requirements, and potential penalties is essential when choosing DR programs. Tools like LoadViz Pro can help model potential earnings under different program scenarios.