As operators for regional power grids such as PJM Interconnection begin to roll out more robust demand-response programs, the private sector is responding with software products that can save energy for large commercial and industrial consumers and help utilities avoid brownouts and perhaps even blackouts.

One of the emerging leaders in this space — Constellation Energy — provided a tutorial for The Energy Fix during this week’s GridWeek 2011. Bear with me here because it’s an informative, even intriguing, peak inside the new world of virtual power generation.

Imagine you’re a large manufacturer and served at the wholesale level by a grid operator with a demand / load response program. The first prerequisite is to upgrade or install a meter that lets the “VirtuWatt Energy Saver” team from Constellation learn how you’re using power in real time — actually a one-minute delay.

What’s needed next is a platform on which to bid demand resources into the regional grid. VirtuWatt managers identify and capitalize on the elasticities companies have in their need for power. Often, they have a LOT more elasticity than they ever could have imagined.

Part of Constellation Energy's VirtuWatt Energy Manager interface. Credit: Constellation Energy

“The construct of demand response that has emerged over the last five years is that everything you can buy on the supply side from generators you should be able to create the inverse on the demand side for customers who change their behavior,” said Peter Kelly-Detwiler, Senior Vice President – Load Response at Constellation Energy.

The third pre-requisite is the automated software needed to respond, or even capitalize on the need to adjust demands on the power grid. Enter Constellation Energy’s “Virtuwatt.”

Five years ago, ISO’s such as PJM did not put much teeth in demand response programs for anybody to pay close attention. Now, not only do PJM and other Independent System Operators (ISOs) offer demand response options, the opportunities to save energy and for vendors to make money doing so are mushrooming.

The programs began slowly and put market participants on “training wheels” of sorts to help ensure a smooth ramp up.

Detwiler explained at the outset the ISOs tested their programs maybe 10 times a year for six hours at a time. And it they gave participants two-hours lead time. Even if there weren’t “events” requiring balancing demand on the grid, participants were still paid.

The next round became a sort of “open book test,” Detwiler said, with more events involved. Participants we not told in advance because the grid operators needed to count on their commitments to maintain reliability. Now demand respond has reached a critical mass and can account for up to 7-8% of the power needed in a given region.

From here, demand response programs are expected to grow with each passing season. The difference is being felt in myriad ways. Earlier this year, bids for demand response in PJM backed out a significant amount of dirty, coal-fired generation.

If  a participant drops less load than it bid in, an email will notify them they shorted the ‘system’. If they don’t adjust, a second email tells them they are out of compliance and ‘if you don’t change we’re going to pull your bid.’  If the participant receives a third email, it’s game over. The ISO has pulled their bid.

With so much opportunity, Constellation was compelled to staff up quickly and did so in part by acquiring CPower in 2010. Part of the logic was to compete more effectively vis a vis EnerNOC.

Today, Constellation operates a dispatch center in Texas certified by the North American Electric Reliability Council, or NERC. There, the company helps clients turn on and off power plants throughout much of the country. For the Bonneville Power Authority, Constellation balances generation from its wind farms and hydro-power facilities.

Perhaps the most dynamic element entering the mix is the human one. “How do you make it easier for customers to participate,” is how Detwiler sees the challenge, and the opportunity. Even if your company is taking advantage of spot prices, or hedging against higher prices, real-time energy management can pay off quickly.

One real estate concern in the Washington, DC area has been working with Constellation for two years. It used to operate under a half-dozen independent building energy management systems. Today, each building has identified its elasticity and a probabilistic idea of how much demand can be shed.

“Where we have to go ultimately with this,” Detwiler ssaid, “is this has to be as dispatchable as any power plant.”

What sets Constellation apart is that it serves two-thirds of the Fortune 100 and manages more than 15,000 megawatts of retail electric load every day.  “We’ve got risk exposure,” Detwiler is quick to acknowledge.

Constellation offers would-be customers two approaches, Detwiler said: “(1) give them the price based upon the call option built in and they would pay you when they’re not in compliance; or, (2) we’re going to price you based on last year’s (consumption) and every time you get under that we’re going to send you a check for 80% of the savings.

“It now has to do with the psychology of the manager,” he added. “What we have found over year one is that people or pretty cautious about what they’ll commit to. Then they realize that (their first run) didn’t hurt at all. It’s a learning process. It’s all about risk/reward.

“If you’re a facility manager and you mess up it might cost you your job. The real trick is not to over promise and work hand in hand with the customer so they are jointly involved in all the strategies we’re creating.”

Detwiler shared the case of a cement maker with two facilities in the PJM market each supplied by different utilities. They can have different prices at the same time. The cement company arbitrages his production schedule based upon on the real-time price of power. Assuming its inventory is sufficient, he shuts down capacity in one place and moves it to another.