FERC paid customers to cut peak power at generator prices

In wholesale electricity markets, a handful of very cold or very hot hours a year send demand past what cheap plants can serve, forcing operators to buy from the costliest generators — and those extreme prices set the whole market clearing price, so everyone pays the spike. Building a peaker plant that runs a few hours a year is an absurdly expensive way to buy reliability, and forbidding consumption (brownouts, rationing) punishes the very homes and factories the grid exists to serve.

The conventional reflex was to treat demand as the fixed thing and supply as the only lever: build more generation or throttle customers. Nobody thought of the other side of the ledger as a resource worth paying for.

FERC Order 745 (2011) required organized wholesale markets to pay demand-response — customers who cut consumption at peak — the same Locational Marginal Price paid to generators, so long as a net-benefits test showed the payment bought cheaper overall prices. Demand reduction, an absence, was rebooked in the settlement as if it were an increase in supply.

Paid customers who cut peak use the same price as generators, booking the absence as supply, gated by a net-benefits test so only cost-lowering reductions are paid.

Paying demand response the same LMP as generation makes cutting load financially attractive.

The net-benefits test ensures only reductions that lower overall costs are paid.

Settling an absence as supply recruits millions of small consumers as a virtual peaker fleet.

Supreme Court upheld it, confirming the market-wide benefit.

When demand peaks are extreme, treat reducing demand as a supply resource and pay it the scarcity price.

Supreme Court upheld it Jan 25, 2016 (FERC v. EPSA): demand response lowers prices and raises reliability — now entrenched in U.S. markets. The ruling formalized that 'reduction' and 'generation' are interchangeable resources in a market design, and the compensating principle — a demand-side absence pays at the scarcity price, subject to a net-benefit check — has spread to capacity markets and demand-response programs worldwide, becoming a standard tool for deferring new peaking plant.