Updated: Mar 17
The backbone of the utility industry has always been the generation sector. No matter where you are in the supply chain of energy, it all can be traced back to power plants or other sources of generating where electricity is created. As such, the power generators on the grid have long been the most critical assets—they are typically large in scale, they require large amounts of capital and planning to build, and as we look to the future challenges in the power sector (such as ensuring energy supply continues to meet demand and that we continually move towards a decarbonized grid) the generation assets have typically considered the crux of solving these problems.
But the energy industry is becoming more agile, digital, and forward-thinking, these old ways of thinking are getting turned on their head and new tools are available to chart the path forward. Specifically, the more widespread implementation of demand response and energy efficiency programs are becoming increasingly recognized as key assets that can be a shortcut to accomplish some of the same goals as the generation sector.
These tools may not be obvious to outside observers as key solutions in the same way that generation has always been, but in this third entry into the Broker eXcelerate Series we’ll explore how exactly demand response and energy efficiency are becoming unavoidable tools for the traditional energy markets.
WHAT ARE DEMAND RESPONSE AND ENERGY EFFICIENCY PROGRAMS?
Seeking to find ways to power demand from customers across the grid, utilities have found demand response and energy efficiency to be a tandem suitable to be added to their war chest of tools. Demand response is defined by the Federal Energy Regulatory Commission (FERC) as follows:
Changes in electric usage by demand-side resources from their normal consumption patterns in response to changes in the price of electricity over time, or to incentive payments designed to induce lower electricity use at times of high wholesale market prices or when system reliability is jeopardized.
Put simply, demand response programs are ways in which utilities can look to the customer to reduce their power usage during critical periods as an alternative to increasing generation to ensure that supply and demand remain in sync. Utilities can engage in demand response in several ways, including having a set pricing structure that charges customers more for energy used during a pre-defined peak usage time, by implementing a dynamic price signal that can send alerts to customers when the supplies are getting constrained and adjusting rates in real-time to encourage the turning off of unnecessary devices, or even by rewarding customers with flat discounts or rebates if they respond to a given number of grid congestion alerts by reducing their power loads appropriately. However it ends up looking varies from utility to utility, but the main principles are that utilities can economically incentivize customers to shift their energy use away from times of increased demand, allowing a smoother peak that doesn’t require additional generation to be brought online while customers benefit with their wallets for their optional flexibility.
Energy efficiency programs are more commonly understand and straight forward. If demand response is seeking to dampen the peaks of power use, energy efficiency programs seek to reduce overall demand profiles during the entire day. Most customers have an inherent understanding of how energy efficiency will benefit them through reduced bills and the benefits to the planet of less energy use, but implementing changes can be challenging to them on an individual level can be challenging for numerous reasons. Customers may not know the best way to reduce their energy use, they may not have the money available to make necessary upgrades, or they may know they should make these changes but simply not be motivated. To help fill these gaps, utilities offer many different forms of energy efficiency programs. These options include directly sending customers equipment to upgrade their homes (such as more efficient light bulbs) for free, offering rebates or discounts to upgraded energy-efficient appliances (such as water heaters), or educational campaigns to make more customers consciously aware of the energy efficiency options they have. Many utilities will also partner with governments or private companies to offer energy audits that send energy professionals directly to homes and businesses to help identify energy-saving opportunities customized to those specific buildings. Whatever the strategy, the goal is to reduce the daily average energy use for these customers in an accessible and reliable way.
CRITICAL CAPABILITIES OF THESE ENERGY ASSETS
Electricity demand is constantly growing in industrialized nations like the United States. Not only is this true thanks to a growing population who needs more power to continue the same functions, but the per-capita energy use is also growing thanks to how widely digital technology is ingratiating itself into all aspects of daily life. In the traditional utility industry, growing demand could only be suitably met in one way, through the comparable growth of generation assets. The action-reaction relationship between growing demand and subsequently growing generation capacity creates numerous challenges.
First, growing energy demand isn’t a trend that necessarily requires more generation to be available at all hours of the day, but namely to be available during the times of peak demand, or the time of the day where the most energy is needed at once. Peak demand typically occurs in the early evening as people return home from work or school, start using energy-intensive appliances like the washing machine or the oven, and lights all get turned on. The amount of energy needed during peak demand is the first aspect of the demand curve that will risk exceeding supply, so new generation assets traditionally will get built out by utilities to meet demand during these times, but that excess generation is not needed at all hours of the day. That fact means that the highly capital-intensive act of building a new power plant is even less cost-effective because it will only be able to make the utility money during that more minimal window when the extra supply is needed.
Further, because peak demand tends to happen in these early evening hours, solar power is not available to meet the demand, and wind power may not be available in great enough quantities. That means that it’s typically fossil fuels, namely natural gas, that fill in this gap to ensure supply meets demand, resulting in more carbon-intensive energy being sent through the grid, a trend the industry is trying to buck through decarbonization efforts.
All of that is to say, making sure supply can meet demand using new generation sources can be costly and highly polluting, but if instead energy efficiency and demand response are tapped into as the ways to alleviate the stress during peak demand hours, then it will save utilities and customers money and fewer carbon emissions will be poured into the atmosphere in order to keep the grid humming.
On top of those challenges of using new generation to make supply meet demand, the utility industry must also contend with the challenge that the capacity of transmission and distribution infrastructure to physically carry all the electricity needed during peak demand is inherently limited. If during the height of peak demand, such as during sweltering summers where air conditioners are blasting, the grid simply can’t carry any more power from generation to customer, the only option is rolling blackouts to ease the congestion on the grid. These events are absolute last resorts because of the danger they can pose to widespread health and safety, as electricity is not a modern luxury but indeed an essential necessity. As seen in California just this past summer, the real-life impacts of forced blackouts can be quite serious. And while these specific blackouts were attributed to market forces that prevented certain power generation sources from coming online when others had failed, many experts have pointed to demand response and efficiency strategies as outcomes that could have prevented these worst impacts if they had been tapped into appropriately.
TREATMENT ON THE MARKET
Demand response and energy efficiency as energy assets akin to generation may have been a pretty radical thought only a few years ago, but increasingly the ability of these tools to provide shortcuts away from additional generation and the resultant benefits to utilities, customers, and the grid as a whole is impossible to avoid.
For one, in the development of virtual power plants, energy efficiency and demand response as load management assets are considered vital. Virtual power plants are constructs meant to directly replace the need for central generation sources like the traditional power plants that have always powered the grid. By creating a digital network of smaller assets—such as rooftop solar panels, wind farms, energy storage assets, and programs for on-demand efficiency and load reduction—virtual power plants can in aggregate make up similar generation scale as a singular power plant and thus replace the need to lean solely on utility-scale generation in certain regions.
In an effort to contribute to the stability and reliability of the grid, stakeholders behind demand response programs have recently even petitioned FERC to allow demand response to be able to participate in wholesale power markets just the same as generation assets do. And in September 2020, FERC issued Order 2222 which did, in fact, allow that demand response programs could participate as distributed energy resources in the wholesale market, a win for the future of the strategy.
Energy efficiency, load management, and other demand-side approaches to balance supply with demand are only going to get more popular, more widely appreciated, and increasingly widespread. The time to truly dive in, whether as a customer, an investor, or a broker, is now while the advantages of getting in early still exist.
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