Demand Response Programs

Demand response programs compensate households for reducing energy use during peak periods while supporting grid reliability.

Table Of Contents
  1. Why This Matters
  2. Policy Solution
  3. Model Policy Features
  4. Potential Limitations & Pitfalls
  5. Complementary Policies
  6. Additional Information
  7. Examples
  8. Resources
COMMUNITY BENEFITAffordability, Energy reliability
KEYWORDSElectricity, Distributed energy
REGIONState, Local
AFFORDABILITY STRATEGYDecarbonization, Utility reform
OVERSIGHTUtility Commission
POLICY MECHANISMLegislation, Regulation

Why This Matters

In traditional electricity systems, the utility supplies electricity and customers consume it and pay the bills. Power is primarily sourced through centralized generation: primarily fossil fuel generation, complemented by nuclear, hydropower, and renewables. Consumers have little control over their bills, except by using less or investing in energy efficiency, which only owner-occupied households can typically control. As a result, electricity bills are unaffordable for tens of millions of  households, even as fossil fuels create pollution and climate change. Renters, who are the majority among low- and moderate-income households, have almost no tools to reduce their bills. Decarbonizing the energy system will bring more challenges, since solar and wind will play major roles and their supply varies with the seasons and the weather. At the same time, renewable energy supply variability can create major opportunities since the cost of electricity will depend even more on the time when it is demanded. Peak energy demand, typically on hot summer days when air conditioners are turned on, has also been increasing, driving up prices to meet the growing load.

Policy Solution

Consumers can reduce their bills via demand response by being compensated for shifting the times at which they consume electricity from periods of high demand to periods of low demand. In some cases, consumers could even supply electricity to the grid, for instance using solar and battery systems or electric vehicle batteries to provide power to the grid. In effect, participation in demand response can enable consumers to reduce their electricity bills, thereby changing the partition of electricity system revenues between utilities and consumers. At the same time, utilizing effective demand response programs to address growing peak demand can preclude the need for expensive peaker power plants, thus saving systemwide costs and reducing bills for all ratepayers.
The International Energy Agency defines demand response as “balancing the demand on power grids by encouraging customers to shift electricity demand to times when electricity is more plentiful or other demand is lower, typically through prices or monetary incentives.”1 To enable consumers to participate requires that demand response be recognized as, and integrated into, the suite of technologies providing resources to the electricity grid. The approach is a generalization of widespread air-conditioner “cycling” programs under which utilities pay consumers to agree that their air-conditioners would be cut off for short periods of time during periods of peak demand on the hottest days of the year.2 Electric space heating, hot water heating, some appliances (such as clothes washers and dishwashers) and electric vehicles are also amenable to demand response participation. The latter can also provide electricity to the grid, via bi-directional chargers. Regulatory agencies, specifically utility commissions, would oversee the development of customer compensation levels. The scale and efficiency of providing demand response resources can be increased by aggregating small demand response amounts among many homes and businesses and providing them to grid operators as a large resource. This may require coordination between regional transmission operators and utilities that operate distribution systems as well as suitable regulations.

Model Policy Features

  • Enacting public utility commission regulations to enable utilities to offer a variety of demand response options, including but not limited to air-conditioner cycling. These should, at a minimum, include electric space heating, electric water heating, batteries, and electric vehicle charging, with suitable participation incentives for consumers.
  • Including the value of environmental and climate benefits in setting of demand response compensation, in addition to grid benefits (using values applied across all utility and distributed resources).
  • Extending cooling and heating demand response programs to pre-cooling (in the summer) or pre-heating (in the winter) to shift loads away from the peak load hours but without going above the set summer temperature or below the set winter temperature.
  • Providing incentives for purchase of demand response-enabled appliances (including clothes washers and dishwashers).3
  • Incentivizing efficient electrification of heating to enable winter demand response participation.
  • Design program incentives for low-income households to reflect the additional benefits of lower energy burdens, better health and nutrition, and lower conflicts between paying for essentials when low-and moderate-income households.
  • Updating appliance standards to include remote control; many appliances have this feature but it is not required.
  • Providing incentives for bi-directional electric-vehicle charging equipment to enable electric vehicles to feed power to the grid (called “vehicle-to-grid,” or V2G).
  • Providing incentives for electric vehicles to have inverters so that they can be plugged directly into loads (called “vehicle-to-load,” or V2L). 
  • Developing and implementing intensive educational programs (for households and for contractors) on the affordability and environmental benefits of demand response programs, preferably implemented by community-based organizations and funded by a small ratepayer charge (which may be offset by the savings of using demand response instead of peaker power plants).
  • Developing rules, including privacy protections and rates for third party demand-response aggregation companies, including those that may be owned by municipalities, or cooperatives. These rules would be designed to implement the 2020 order issued by the Federal Energy Regulatory Commission, FERC Order 2222,4 which permits aggregated distributed resources, including demand response, to be offered to grid operators on a par with generation resources. 
  • Lifting state-level full or partial regulatory bans on third-party aggregation of distributed resources. FERC Order 2222 permits states to ban third-party aggregation of distributed resources. As a result, a dozen states currently have full or partial bans (as of 2023).5
  • Development in tandem with broader demand-side programs, such as virtual power plant programs that support the aggregation, operation, and compensation of distributed energy resources in lieu of traditional power plant dispatch.

Potential Limitations & Pitfalls

  • There are total bans on third-party aggregation in ten states and a ban on third-party aggregation of residential loads in two states as of 2023.6
  • Demand response program participation is low due to a number of obstacles, including lack of advanced metering infrastructure, lack of knowledge, and utility reluctance to extend demand response into the residential market where there may be customer backlash.7
  • Vulnerable populations may be reluctant to participate in demand response programs that cut off air-conditioning or heating even for short periods, although this fear may be alleviated if customers have direct control over appliances and can opt out if needed. 
  • Landlords may be reluctant to bear any additional expense associated with demand-response-enabled appliances.
  • While demand response does not depend on broadband, its availability can enable it more easily and widely. This presents an economic barrier for many households and a technical barrier in rural areas where broadband service is not of high quality.
  • Participation by disadvantaged communities may be low for a variety of reasons (e.g. renter status, lack of access to broadband) unless explicit steps are taken to reach and enroll them.
  • Privacy of residential consumers needs to be protected for instance, by anonymizing individual household data when it is aggregated.

Complementary Policies

Additional policies that support the realization of effective demand response programs include: 

  • Residential solar + storage programs to support the adoption of distributed energy storage which can be used in demand response programs. 
  • Residential building codes including “stretch or “reach” codes that support adoption of demand response-ready appliances. 
  • Efficient residential electrification programs which support adoption of demand response-ready heat pumps for space and water heating.
  • Policies to quantify and compensate the full value of distributed energy resources.

Additional Information

A number of states are beginning to rescind their bans on third-party aggregation of demand response. Missouri and Michigan have partially rescinded their bans on third-party aggregation, though third-party aggregation is still not permitted for the residential sector.8 Missouri rescinded its policy partly in view of a potential decision by the Federal Energy Regulatory Commission to modify FERC Order 2222, thereby preventing states from banning third-party aggregation. Missouri lifted the ban initially only on commercial and industrial aggregation in order to allow experience to be gained before it is extended to the residential sector.9

Examples

1. California Demand Response Programs –CPUC: Demand Response, SB1414: Electricity: Demand Response (2014)

Details:

  • In 2014, the California legislature passed SB 1414: Electricity: demand response, which requires utilities to consider demand response in their resource adequacy planning and request bids for demand response through a procurement process.10 
  • The California Public Utilities Commission (CPUC), after extensive consideration of comments, including from utilities and third-party suppliers, issued a decision in 2017 in part aimed at leveling the playing field between utility and third-party aggregation of demand response.11 Among other things, it required each investor-owned utility (IOU) to post the names of qualified third party suppliers on the “main home page of each utility’s demand response home page.” 
  • In the same 2017 decision, the CPUC authorized over $1.1 billion dollars for the demand response programs of the three investor-owned utilities (IOUs) in the state over a five-year period, including about $32 million for education and marketing. 
  • As of 2025, California had seventeen registered third-party aggregators.12 
  • As of October 2024, California had more than 100MW of demand response resources, as part of nearly 500MW of demand-side resources (including energy storage) enrolled in the Demand Side Grid Support program.13

LIMITATIONS:

  • Disadvantaged communities have faced numerous obstacles to participation in California’s demand response programs, including the fact that the area of aggregation for grid requirements was larger than the disadvantaged community census tracts and high customer acquisition cost. 
  • Another major obstacle to enrollment was that not enough granular grid data was available to enable targeting of disadvantaged communities in marketing to increase enrollment.14 
  • A $4 million budget was allocated to gather data and develop pilot programs for demand response in disadvantaged communities.15 One proposed goal was to reduce emissions from peaker power plants, which are disproportionately located in disadvantaged communities.16 However, the proceeding did not include the possible monetization of the many benefits of reducing energy cost burdens, such as reduction in bill assistance needs and other non-energy benefits.17 
  • Third-party aggregators have raised concerns that the CPUC is unfairly designing demand response cost-benefit analyses in a way that favors utilities over third-party aggregators.18
  • California’s Demand Side Grid Services Program—which supported both demand response and distributed energy storage through a virtual power plant model—had its budget zeroed out in 2025 even after successfully demonstrating its ability to meet 500MW of demand.19

Resources

For an overview of demand response strategies and opportunities, see: 

Written: November 2025

  1. International Energy Agency. (2025). Demand response: Overview. Accessed: November 24, 2025. ↩︎
  2. See, for example: Pepco DC Energy Wise RewardsTM Program. Accessed: November 24, 2025. ↩︎
  3. Such appliances would either have radio-controlled switches that can be operated remotely (as is the case with air-conditioner cycling) or be Internet-enabled to enable remote control. ↩︎
  4. Federal Energy Regulatory Commission. (2020.) Participation of Distributed Energy Resource Aggregations in Markets Operated by Regional Transmission Organizations and Independent System Operators, FERC Order 2222. ↩︎
  5. Microgrid Knowledge. (2023.) Demand Response Aggregation Bans Partially Lifted in 2 States; 10 More to Go. Microgrids, DERs Benefit. ↩︎
  6. Microgrid Knowledge. (2023.) Demand Response Aggregation Bans Partially Lifted in 2 States; 10 More to Go. Microgrids, DERs Benefit. ↩︎
  7. Lilli Ambort and John Farrell. (2020). Sparking Grid Savings Starts at Home: Demand Response. Institute for Local Self-Reliance, September 2020 ↩︎
  8. Microgrid Knowledge. (2023.) Demand Response Aggregation Bans Partially Lifted in 2 States; 10 More to Go. Microgrids, DERs Benefit. October 27. ↩︎
  9. issouri Public Service Commission. (2023.) Order Partially Modifying the Commission’s 2020 Order Regarding ARCs  [Aggregator of Retail Customers}.  October 12. ↩︎
  10. California State Senate. (2014). SB 1414: Electricity: demand response. ↩︎
  11. California Public Utilities Commission. (2017). Decision Adopting Demand Response Activities and Budgets for 2018 through 2022. (D.)17-12-003. ↩︎
  12. California Public Utilities Commission. (no date.) FAQ – Demand Response Providers (DRPs)/Aggregators. ↩︎
  13. California Energy Commission. (2025). Staff Analysis of the DSGS Program 2024 Performance Data. ↩︎
  14. California Public Utilities Commission. (2018.) Targeting Demand Response to Benefit California’s Disadvantaged Communities. February 15, Section 9, pp. 140-142. ↩︎
  15. California Public Utilities Commission. (2018.) Targeting Demand Response to Benefit California’s Disadvantaged Communities. February 15, p. 146 ↩︎
  16. California Public Utilities Commission. (2018.) Targeting Demand Response to Benefit California’s Disadvantaged Communities. February 15. ↩︎
  17. Elena Krieger et al. (2025). Affording Our Clean Energy Future: Pathways for Action. Just Solutions. ↩︎
  18. Smith, C. (2025). Are utility demand response program costs outstripping their benefits in California? Utility Dive. ↩︎
  19. Lutz, M. (2025). California zeroes out funding for worlds ‘largest virtual power plant.’ Utility Dive. ↩︎