Economic Value of Demand Response


China has used demand response to solve power supply shortages and react to power incidents since the 1990s. Traditional Chinese demand response is organized under the “orderly use of electricity,” led by the government to shift peak load and control power usage during emergency periods. This method played an important role in assuring safe grid operation in the past, but demand response’s value has not been fully explored as a clean and low-cost resource compared with conventional power plants.

China began moving in this direction when it developed its first demand response pilot in Shanghai to explore different compensation methods for encouraging greater demand response participation. With their long and effective history of using demand response to provide multiple grid services, including system balancing, reducing price volatility, and increasing demand flexibility, utility payment methods in the United States offer examples China might adapt. In addition to monthly payments or price discounts to demand response participants, U.S. utilities allow demand response resources to bid into capacity markets, energy markets, and ancillary service markets, which provide more incentives to the participants.

需求响应对电力系统的经济价值 (Economic Value of Demand Response, available in Chinese only) illustrates the concepts and method for calculating the capacity value of demand response, using two examples that simulate basic grid systems in the U.S. and China. Although the starting point is different, the value demand response provides to the power system is similar. In the U.S., demand response reduces the need for investment in expensive peaking units, so its value could be approximated as the avoided marginal capacity cost. In China, because there is no economic dispatch, demand response increases the load factor of coal fleets, which leads to more economic operation and fewer emissions.

China’s power system requires more flexibility to face new challenges. Demand response as a system resource can play an important role as demonstrated in the U.S. and other places. China needs to establish a new mechanism to better reflect the economic value of demand response to the system in line with customers’ expectations of payment. In the near term, China should consider the economic principles of the grid when making resource decisions among end-use efficiency, demand response, and other supply-side resources in order to optimize the allocation of overall system resources. Although China might take a different compensation approach than the U.S., the analytical tools used there could also be useful to China.