Is demand response the gold mine nobody knows about?

The future of demand response looks golden.

Demand response (DR) is still a relatively untapped market. And as a result of several orders from the Federal Energy Regulatory Commission (FERC), the market is poised to grow even larger.

What is demand response and how does it work?

Electricity end-users enrolled in a demand response program voluntarily change their electricity usage from normal consumption patterns (called curtailment) in response to when the grid’s reliability is in jeopardy, or when wholesale market prices are high, or in response to changes in the price of electricity over time.

Emergency demand response participants enroll their anticipated curtailable load with the ISO (Independent System Operator) in their region and are compensated regardless of whether they are called upon for an event or not. If an event is called and they successfully drop their anticipated load, they receive an additional ‘energy’ payment. Emergency curtailments are seldom called for and in some regions and event hadn’t been called in years.  Participants get paid for a promise.

Participants in ancillary or “spinning reserves “ demand response programs receive a payment similar to emergency program participants. Participants bid their anticipated curtailable load into the ISO as operating reserves. If accepted and called upon, participants are paid the spot market rate price for their commitment. Curtailments are typically short, between 15 to 20 minutes, but no longer than 30. These occur approximately three times per month.

Economic demand response participants react to a market event, usually in the form of a price spike, rather than a system reliability or emergency event, as with the other two programs. Participants can set a price ceiling for when curtailment happens. They receive the market clearing price (LMP) for the period that their load is curtailed. Many locations enroll in both economic and emergency demand response.

One thing is for certain. The demand for electricity is steadily increasing. Population growth and the growing reliance on technology devices, combined with the closing of many coal-fired and nuclear power plants throughout the country, is undoubtedly placing more stress on an already stressed power grid – a grid with an aging infrastructure.

Power companies could very well decide to meet this increased electric demand by simply building new power plants. But, power plants are very capital intensive. Not only does it take a lot of money to build new power plants, it also takes time, effort and additional expenses just to obtain all the permits, licenses and so on. New EPA regulations have also made it less cost-effective to build new generation. For a power company today, getting a new power plant built is a long uphill battle with a tough and expensive climb.

So, instead of building new power plants, power companies have discovered that it’s far less costly to incentivize large-scale electricity end-users such as grocery stores, factories, water treatment plants, data centers, and anything else that uses a lot of electricity every day, to reduce the amount of electricity they draw from the grid when grid stability is at risk. Just as it’s cheaper for an airline to compensate passengers who volunteer to take a later flight when their original flight is overbooked, than it is to build more planes.

In essence, these large-scale end-users become virtual power plants which generate negawatts, a term used to describe how much electricity was avoided having to be generated during the curtailment period. This helps reduce demand and maintain grid stability.

If the end-user is able to successfully reduce the amount of electricity it would normally draw from the grid in the amount requested during the curtailment period, the end-user is then compensated.

3 FERC orders sweetening the pot

The Federal Energy Regulatory Commission (FERC) is an independent agency that regulates the interstate transmission and wholesale sale of electricity in interstate commerce.

FERC Order 745 directs ISOs to pay electricity users the full wholesale price when they successfully curtail their consumption in response to an economic curtailment event. The order as it stands provides a powerful incentive to draw electricity users into the demand response market. End-users really do become virtual power plants earning the same rates for the negawatts produced as the power plants do for generating electricity.

Within six months of FERC issuing its Order 745 in March 2011, economic demand response participation grew by 800 percent. The overall intention of the order was to increase participation in demand response, thereby reducing peak demand and helping prevent the need to build new power plants. It clearly worked.

According to Market Monitor Blog, in a report released by PJM in March 2013, the grid operator said, “…payment for economic demand response yielded $8.7 million dollars in revenue in the seven-month period from April to October 2012…a significant increase from the $7.1 million generated for the entire 41-month period between November 2008 and March 2012.”

An article by Katherine Tweed for Greentech Media stated, “On July 17 and July 19, 2013 the price for economic demand response rose above $220 per megawatt-hour, compared to about $110 per megawatt-hour last year…The change in price is largely due to Federal Energy Regulatory Commission’s Order 745, which ruled that economic demand response needs to be paid the full wholesale price by grid operators.”

Better compensation for energy storage

According to IMS Research, the commercial energy storage market is projected to expand by a factor of 700, to become the largest market segment in 2017. The growing solar market is helping to build this industry, but energy storage will also play a crucial role in demand response. FERC wants to use energy storage technologies to reduce the need for traditional ancillary spinning reserves typically provided by older, dirtier coal-powered generators.

FERC Order 755 provides enhanced compensation for energy storage. The order requires RTO/ISO to adopt a two-part market-based compensation method for frequency regulation services. The first part is a capacity payment reflecting opportunity costs, and the second is a market-based performance payment which rewards faster-ramping resources such as batteries and flywheels.

FERC Order 784 further expands on the rule by requiring transmission operators to consider speed and accuracy when assessing regulation resources. This order places an emphasis on the importance of more intelligent and automated DR solutions including smart grids. Smart grid technology would be able to deliver demand response faster and more efficiently. It would also help better coordinate the integration of distributed energy resources such as wind and solar. When combined with FERC Order 755 (storage), the intermittency problems inherent to wind and solar energy may be lessened.

These FERC demand response related orders are likely to also have strong positive influences on the further development of smart grids, home energy management systems (HEMS), and the increased use of renewable energy sources. According to a report by GTM research, “The utility market for HEMS solutions alone is valued at $106 million for 2013 and is estimated to grow to $992 million by 2017.”

How can you benefit?

By enrolling in a demand response program, large-scale electricity end users can take advantage of the growing demand response market. Alternative Utility Services can assist an organization in limiting any disruptions to operations, while maximizing their revenues through a demand response program.

If you can do DR and are located in PJM, NY-ISO or NE-ISO we can also show you how to reduce your cost for electricity through our Capacity PLC Management Service.

Take advantage of this ‘golden’ opportunity. Request a quote from AUS for your organization.