On a napkin
The short version
When the grid is stressed — demand is surging, a large generator has tripped offline, or transmission is constrained — the cheapest and fastest solution is often to reduce demand rather than fire up additional generation. Demand response programs pay electricity consumers to do exactly that: voluntarily reduce load on request, earning payments that can be substantial for large facilities.
From the grid operator's perspective, curtailed load is functionally equivalent to a generator dispatching power. From the customer's perspective, DR is a revenue stream hidden inside their electricity bill — one that most C&I facilities are leaving on the table.
The baseline is everything. DR payments are calculated as the difference between what you would have used (the baseline) and what you actually used. Understanding how your ISO calculates baselines — and whether your facility's usage patterns lead to a favorable baseline methodology — is the first step in evaluating DR economics.
Types of demand response programs
Emergency DR is triggered by reliability events — when the ISO declares a capacity emergency and needs load curtailed to prevent outages or rolling blackouts. Participants receive a capacity payment ($/MW-year or $/MW-month) for committing to curtail, plus an energy payment when actually dispatched. Call frequency is low — often just a handful of hours per year — making emergency DR relatively low-burden for participants.
Economic DR is triggered by high real-time prices rather than reliability emergencies. Participants can curtail whenever the market price exceeds their cost to do so, earning the real-time LMP for their load reduction. Economic DR requires active monitoring and faster decision-making but can generate higher payments during volatile market conditions.
Utility programs sit outside the wholesale market and are administered directly by utilities or third-party aggregators. They typically offer simpler enrollment, lower minimum size thresholds, and flat incentive payments — at the cost of lower potential revenue than direct wholesale market participation.
Which ISOs offer the strongest programs
PJM offers the most mature and liquid DR market. The Emergency Load Response Program (ELRP) and capacity-based DR through the capacity market provide multiple revenue stacking opportunities. ISO-NE has strong capacity-based DR programs driven by high capacity prices in the region. NYISO offers ICAP-based DR programs with strong demand signals in New York City. CAISO has historically had more limited wholesale DR, though the Emergency Load Reduction Program (ELRP) expanded participation significantly after the 2020 heat wave.
What makes a good DR customer
The ideal DR participant has large interruptible load — manufacturing processes that can be paused, HVAC systems that can be pre-cooled, refrigeration that can coast through a 2-hour event, or backup generation that can be dispatched to island a facility from the grid. Response time requirements typically range from 10 to 30 minutes depending on the program. Facilities below 100 kW generally need to aggregate through a curtailment service provider (CSP) to participate; above 1 MW, direct wholesale market participation becomes economically attractive.
The economics are compelling for the right facility: a 1 MW commercial facility in PJM participating in both emergency DR and the capacity market can earn $40,000–$80,000 per year with minimal operational disruption — effectively a significant reduction in net electricity costs.
Common questions
Related reading on The Outlet
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