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Working Paper | Case Study of Demand Response in California: Barriers, Policies and Business Models

Sindhu Sreedhara
Gireesh Shrimali
Adam Brandt
Sustainable Finance Initiative

California has set ambitious climate goals and promotes demand response as part of the pathway towards an environmentally sustainable electric grid. It has one of the highest quantities of enrolled demand response in the country thus lending itself as an ideal case study on the subject. Demand response can provide energy, capacity and ancillary services but there are barriers associated with each of these business opportunities. In this context, we propose a barrier-solution framework in which we list the set of barriers a demand response business can encounter. The barriers are related to existence of markets, profitability and accessibility of markets to demand response products. We present the minimum set of barriers from this framework which must be solved for a business to be viable. We then discuss the drivers of demand response – federal and state policies, financial enablers, and technological enablers – and assess them with respect to the barrier-solution framework, noting the barriers addressed by each driver. Following this, we utilize interviews with demand response providers to propose two business models for demand response – residential aggregation and commercial aggregation – based on the type of customer demand being aggregated. We note features of these models as well as the barriers they overcome. We verify that these business models, in addition to the drivers of demand response, overcome the minimum set of barriers. We end with a discussion on the policy challenges to demand response in California and the policy implications from the case study to introducing demand response into new markets.