GAO-04-844, ELECTRICITY MARKETS: Consumers Could Benefit from Demand Programs, but Challenges Remain

To view the full product, including the scope and methodology, click on the link above. 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 blackout 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). GAO recommends that (1) FERC consider demand-response in making decisions about wholesale markets and report to Congress on any impediments to doing so and (2) GSA make demand-response a key factor in its energy decision making. 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 …