What is the Problem with Demand Response Baselines?

§  Incentive programs pay consumers to reduce their consumption relative to some level.  In order to gauge their reduction, one must estimate the counterfactual-- how much the consumer would have consumed in absence of the event.  There are several distinct problems associated with this:

o   Measuring the counterfactual of what the consumer would have otherwise consumed requires sophisticated statistical or economic models.  However, electric load is a fundamentally extremely difficult variable to explain and even the best models account for only a fraction of this variability.  Given this, although load reductions are typically communicated as static variables, it may be more accurate to describe them in terms or ranges, or atleast static quantities with error margins.  However, this is rarely the case.

o   Setting up baselines in this manner essentially rewards customers for having a higher baseline.  This creates incentive to game the system, attempting to over consume electricity during the days which will be used to calculate their baseline average.  This is exacerbated if customers are paid ahigher price for each KwH reduced than they actually would pay for that same kwh at the retail rates they pay while establishing their baseline.

o   Heavy support for incentive programs may crowd out dynamic pricing by overpaying customers for reductions that do not actually occur

Source: Jim Bushnell "When it comes to DR, is FERC its own worst enemy?"