In addition to the daily  variation in demand, electricity demand varies seasonally, mainly because  air conditioning accounts for a large share of overall electricity usage in  many parts of the country during the summer. Market-Based and Reliability Programs Allow Demand to Respond to Changing Prices and Supply Shortages but Are in Limited Use

Two types of programs enable customers to respond to price variations or  to supply shortages that may compromise reliable grid operations:  market- based pricing and reliability-driven programs. Two of these programs---time-of- use and real-time pricing—provide customers with retail prices that reflect  the changes in the cost of electricity throughout the day, as shown in figure  1. Real-time pricing  programs are available in only a few locations, and the number of  customers enrolled in these programs is generally small. These  programs are not appropriate for all consumers, however. Demand-Response Programs Have Saved Millions of Dollars and Can Improve the Reliability of the Electricity System

Demand-response programs have saved millions of dollars and could save  billions of dollars more, as well as enhance reliability in both regulated and  competitive markets, according to the literature we reviewed and experts  we spoke with. One study  examined the electricity crisis of 2000 to 2001 in the West and estimated  that, had market-based pricing been in place, the high prices seen in  California during 2000 might have been reduced by 12 percent—resulting in  a $2.5 billion reduction in the state’s electricity costs. Multiple Barriers Make It Difficult to Introduce and Expand Demand- Response Programs

Demand-response programs face three main barriers to their introduction  and expansion:  (1) regulations that shield customers from short-term price  fluctuations, (2) the absence of needed equipment installed at customers’  sites, and (3) customers’ limited awareness of programs and their potential  benefits. Lack of specific guidance  to the tenants in GSA buildings regarding participation and the tenants’  lack of incentive to reduce consumption have also limited GSA’s  involvement in these programs. Several Outside Factors Have Also Served to Limit the Benefits of Participating in Available Demand- Response Programs in Recent Years

Several factors have also reduced the incentive to participate in demand- response programs over the past several years. Federal agency tenants have little incentive to reduce their  consumption. Certain Programs Show How Barriers Were Overcome and Provide Lessons on How to Cultivate New Programs

Certain demand-response programs that we reviewed illustrate how the  barriers we identified were overcome and also point out three broader  lessons on how to cultivate new programs. First, programs with sufficient incentives  make customers’ participation worthwhile. Because demand-response programs offer potential financial benefits to  the federal government and to demonstrate the federal government’s  commitment to improving the functioning of electricity markets, we  recommend that, for locations where the General Services Administration  has significant energy consumption, its Administrator take the following  four actions:   Require regional energy managers to identify what demand-response  programs are available to them, require building operators to determine  whether they could actively participate in the programs, and quantify  the benefits of that participation. Clarify the incentives for participation by defining how the GSA, its  building operators, and its federal agency tenants will share the benefits  and risks of participating in these programs through its leases. GSA agreed with the report’s conclusions regarding the importance of  demand-response to an efficient and reliable electricity industry. GSA also  stated that it agreed with the majority of our recommendations, but it  expressed some concern about one of them. 1. GAO Comments

1. 2. 3. 4.
Why GAO Did This Study

The efficient and reliable functioning of the more than $200 billion electric industry is vital to the lives of all Americans. As demonstrated in the 2003 black- out in the Northeast and the 2001 energy crisis in the West, changes in the cost and availability of electricity can have significant impacts on consumers and the national economy. The Federal Energy Regulatory Commission (FERC) supports using demand-response programs as part of its effort to develop and oversee competitive electricity markets. GAO was asked to identify (1) the types of demand-response programs currently in use, (2) the benefits of these programs, (3) the barriers to their introduction and expansion, and (4) instances where barriers have been overcome. Additionally, GAO examined the federal government's participation in these programs through the General Services Administration (GSA).

What GAO Found

There are two general types of electricity demand-response programs in use: (1) market-based pricing programs enable customers to respond to changing electricity prices and (2) reliability-driven programs allow either the customer or the grid operator to adjust electricity usage when supplies are scarce or system reliability is a concern. The federal government's GSA participates in both types of programs. Demand-response programs benefit customers by improving the functioning of markets and enhancing the reliability of the electricity system. Some recent studies show that demand-response programs have saved customers millions of dollars and could save billions of dollars more. The GSA--as only one example of federal involvement in these programs--has reported saving about $1.9 million through the participation of only a few of its buildings in demand-response programs during the past 5 years. However, GAO estimates that GSA could potentially save millions of dollars more with broader participation in these programs. While benefits from demand-response are potentially large, three main barriers limit their introduction and expansion: (1) state regulations that shield consumers from price fluctuations, (2) a lack of equipment at customers' locations, and (3) customers' limited awareness about the programs and their benefits. Regarding prices, customers do not respond to price fluctuations because the retail prices they see do not reflect market conditions but are generally set by state regulations or laws. In addition, in recent years, moderate weather conditions and other factors have kept overall electricity prices low, reducing the benefits of participating in these programs. According to GSA, its participation in demand-response programs has been limited because it lacks specific guidance on participation and tenants have little incentive to reduce their consumption since current leases do not provide a way to share in the savings that might occur. Two demand-response programs that GAO reviewed illustrate how the barriers GAO identified were overcome and also point out lessons on how to cultivate new programs. Lessons learned include the necessity to provide sufficient incentives to make participation worthwhile, working with receptive state regulators and market participants to develop programs, and designing programs to include appropriate outreach materials, necessary equipment, and easy participation. In commenting on the report, FERC and GSA agreed in general with the report's conclusions and recommendations, but GSA expressed concern about one recommendation to share potential savings with its tenants.