How Demand Response Works

Demand response is a mechanism through which electricity customers reduce or shift their power consumption during periods of high demand or grid stress, typically in exchange for financial incentives. Rather than building additional power plants to meet occasional peak demand, utilities and grid operators pay customers to temporarily use less electricity.

The concept is simple. When the grid is under strain, typically during hot summer afternoons or cold winter mornings, the grid operator or utility sends a signal to enrolled customers. Those customers respond by reducing their electricity consumption for a specified period, usually two to six hours. In return, they receive payments that can range from modest bill credits to substantial per-kilowatt compensation.

Types of Demand Response Programs

Demand response programs fall into two broad categories. Incentive-based programs pay customers directly for reducing load when called upon. These include direct load control programs, where the utility can remotely cycle air conditioning units or water heaters, and interruptible service contracts, where large industrial customers agree to reduce consumption on short notice.

Price-based programs use dynamic electricity pricing to encourage voluntary load reduction. Time-of-use rates charge higher prices during peak hours and lower prices during off-peak periods. Critical peak pricing imposes very high rates during a limited number of extreme demand events each year, providing a strong financial incentive to reduce consumption during those hours.

Who Participates in Demand Response

Industrial and commercial customers have traditionally been the largest demand response participants. A manufacturing plant might shift energy-intensive processes to off-peak hours. A commercial building might pre-cool before a demand response event and then allow temperatures to drift upward during the event. Data centers can sometimes shift computational workloads or adjust cooling setpoints.

Residential participation is growing rapidly, driven by smart thermostats, connected water heaters, and home battery systems. Programs like those offered by Google Nest and Ecobee allow utilities to make small temperature adjustments across thousands of homes simultaneously, creating meaningful aggregate load reduction without significant comfort impact to individual customers.

The Value of Demand Response to the Grid

Demand response provides multiple forms of value. It reduces peak demand, which can defer or eliminate the need for expensive peaker power plants that operate only a few hundred hours per year. It provides emergency capacity during extreme weather events when generation may be insufficient. And it can provide ancillary services like frequency regulation, helping maintain grid stability in real time.

FERC Order 745, issued in 2011, established that demand response resources participating in wholesale markets must be compensated at the full market price, the same rate paid to generators. This policy decision significantly improved the economics of demand response and spurred substantial growth in enrollment.

Demand Response and the Energy Transition

As renewable energy penetration increases, demand response is evolving beyond simple peak reduction. The challenge is shifting from managing peaks to managing variability. The grid increasingly needs flexible demand that can absorb excess renewable generation during windy or sunny periods and reduce consumption when renewable output drops.

Electric vehicle charging is emerging as a major demand response resource. A fleet of EVs plugged in at workplaces during the day can charge during periods of high solar output and pause charging during the evening peak. Smart charging technology makes this coordination possible without inconveniencing drivers, turning millions of vehicles into flexible grid assets.