Demand Response Basics

The cheapest megawatt is the one you never had to generate. Demand response treats reduced consumption as a resource equivalent to generation, paying customers to use less electricity during peak hours rather than building power plants to serve those peaks.

Demand response (DR) is the voluntary reduction of electricity consumption by end-users in response to price signals or direct utility requests, typically during peak demand periods. DR programs fall into two categories: price-based (time-of-use rates, critical peak pricing) and incentive-based (direct load control, interruptible tariffs, capacity bidding into wholesale markets).

In PJM, demand response participates directly in the capacity market, competing head-to-head with generators. In the 2024/2025 capacity auction, DR cleared nearly 8 GW of capacity commitments, roughly 5% of PJM's peak demand, at a fraction of the cost of building equivalent peaking generation.

The economics of not consuming. A factory with 5 MW of curtailable load enrolls in a DR program. During the 50 peak hours per year, it reduces consumption by 5 MW. The utility pays $50/kW-year for the commitment.

How does the factory's DR revenue compare to the cost of a gas peaker that would otherwise serve those 50 hours?

DR wins by a wide margin. The factory earns $250,000/year for curtailment that costs it perhaps $50,000 in lost production. A new 5 MW gas peaker would cost $4-5 million to build and $80-120/MWh to operate. Over 20 years, DR costs ratepayers roughly half of what the peaker would cost, with no fuel risk and no stranded asset if the peak shrinks.

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