Designing bidding systems for demand-side resources: Maximizing benefits and minimizing risks

In the last six years over thirty five electric utilities have issued requests for proposals (RFPs) to procure hundreds of MW of demand-side resources. Many of these demand-side RFPs have been issued in response to regulatory mandates that require all-source bidding. By providing significant savings relative to electric utilities` avoided costs and by reallocating risks to the power provider supply-side RFPs have provided ample evidence that competitive procurement systems offer significant benefits. To a large degree, the differences in utilities` experiences with demand-side and supply-side RFPs reflect the inherent differences between the two resources. Nonetheless. the experiences of some utilities illustrate that demand-side RFPs can effectively procure demand-side resources and ensure that demand-side management (DSM) costs are minimized. However, by involving third-parties in the delivery of demand-side resources and basing decisions on which third-parties will be awarded contracts on an open competitive procurement process, the utility exposes itself to new risks. Several demand-side bidders have done just this. While a properly designed demand-side RFP does not ensure a successful demand-side bidding experience for an electric utility, a poorly designed RFP will surely lead to problems for both the issuing utility and the participating energy service companies (ESCos). Presented below ismore » a series of recommendations that, if followed, will enhance the competitive benefits provided by demand-side bidding, ensure that development and performance risks are largely borne by the bidder rather than the rate-payers and the utility, minimize the potential for RFP-related litigation and complaints, and ensure that the proposals that are awarded contracts are able to satisfy the purchasing utility`s objectives. These recommendations are provided in two specific areas: (1) administrative issues; and (2) evaluation process issues.« less