Relying solely on building expensive new power generation in response to state energy requirements could be a costly mistake that state ratepayers must pay for.

State policymakers would be wise to encourage utilities to allow permanent and dispatchable forms of demand reduction and to participate in electricity capacity markets through their Independent Service Operator (ISO) or Regional Transmission Operator (RTO). For example, a supermarket may be able to automatically dim its lights in response to a dispatch signal from the grid operator. Alternatively, a factory could make its entire operation more energy-efficient, which has the added benefit of reducing peak demand. A proposal to create a permanent or dispatchable form of demand reduction can bid into a utility’s capacity market under which projects are compensated and counted towards the region’s capacity supply. Stiff financial penalties can be put in place to ensure the demand reductions are implemented and deliver the promised savings.

One option widely utilized in some parts of the country is to require utilities to develop integrated resource plans. Under integrated resource planning, utilities develop plans to meet the long-term peak demand and energy needs for their system using advanced cost-benefit analytical tools. If integrated resource planning is implemented, policymakers could consider requiring utilities to investigate lower cost demand reduction alternatives before authorizing new generation projects. In exchange for granting utilities a monopoly franchise, utilities and regulators must ensure that ratepayer money is not being spent on unnecessary power plants that could be avoided with demand reduction. Alternatively, if a state moves away from a centralized planning process towards a market-based approach for capacity planning, the state utilities commission could ensure that demand reduction proposals have the ability to bid directly into wholesale markets, without having to go through their local utility as an intermediary. Under both options, allowing either permanent or dispatchable demand reductions to participate in the capacity planning process would be beneficial for state ratepayers and businesses.