Demand side management (DSM)

Demand side management (DSM) is the modification of consumer demand for energy and may be used to: a) reduce customer load during peak demand and/or in times of supply constraint, b) shift loads from times when supply is short to times when there is excess supply, or c) reduce overall customer bills by improving the efficiency of end-use processes. DSM is utilized in both natural gas and electricity marketplaces. There are two broad categories of DSM:

Energy efficiency

Energy efficiency reduces overall energy intensity for a specific energy use without concern for the timing of the use. Examples include putting insulation in a building to reduce heating and cooling loads and installation of energy efficient lighting.

A worker spraying attic insulation to reduce overall home energy usage
A worker spraying attic insulation to reduce overall home energy usage

Demand response (DR)

DR reduces demand during specific times or shifts demand across time. DR can be emergency demand response (where customers are required to reduce demand when their failure to do so will create reliability issues) or economic demand response (where customers are given economic incentives to reduce demand during times when it is cheaper to reduce demand than to purchase or generate additional units of electric supply and/or shift usage to times when plentiful renewable supply is available).

Examples of demand response include an electric hot water heater that can be remotely controlled to stop heating water for thirty minutes during peak demand periods, a consumer’s thermostat that can be remotely controlled to adjust temperature to reduce gas use during peak hours, and a commercial building with electric battery storage that charges the battery during the middle of the day when solar energy is plentiful and discharges during the system demand peak in late afternoon. In addition to adjusting energy usage, demand response can also provide other system needs such as short-term frequency response. 

Hot water heater than can be remotely controlled by PJM as a means for managing frequency and shifting hot water heating loads

In the 1980s utilities implemented DSM programs in an effort to reduce the need for costly new generation construction. These programs encourage customers to implement energy efficiency measures through rebates for more efficient appliances and offer incentives such as discounted curtailable rate schedules that allow the utility to curtail service during times when high demand threatens system reliability. There has been a trend lately toward DR programs. These programs can have a significant impact on reducing peak loads, shifting loads to times with plentiful supply, and/or muting price spikes in competitive markets. DR programs include:

  • Real-time pricing — Customers pay hourly prices that reflect same-day or day-ahead market conditions.
  • Voluntary load response — Customers are offered a payment (usually in the day ahead) if they agree to curtail blocks of load during a peak period.
  • Demand response capacity — Customers are paid a capacity payment to give the utility or marketer the right to curtail blocks of load under certain conditions; failure to curtail results in economic penalties
  • Automatic load response — Customers are given an up-front payment to give the utility or marketer the right to remotely and automatically curtail specific appliances or pieces of equipment.


With the growth in renewables, system operators now require increasing amounts of flexible resources and often experience significant shifts in costs of generation across the day. DR is becoming an increasingly common option for meeting system need for flexibility. Meanwhile energy efficiency programs are becoming increasingly popular as a means to address system capacity needs – capacity payments that in previous years would have been paid to build generation are instead used to reduce loads by increasing the energy efficiency of end-use consumers.