Last week’s heat wave in the US was record-setting. Historically, the combination of a persistent heat wave with static, regulated retail markets and fixed prices has resulted in brownouts or blackouts in peak hours (and, at least from my personal experience with ComEd, exploding transformers in substations). However, as reported by Martin LaMonica in CNet today, such was not the case last week (apart from some isolated small events around New York). Why not? Two things: peaking plants that operate only a few hours a year provided additional generation, and large-scale demand response provided peak demand reductions:

Grid operators met soaring demand by ordering power from addition generators, called “peaker plants,” which only operate a few days a year. But ratcheting down power demand across many locations, sometimes called a virtual power plant, is increasingly being used to maintain grid stability–and keep a cap on energy prices. Demand response provider EnerNoc today said it curtailed 1,230 megawatts of power through utilities across the U.S. last week, the most it has done yet. …

Rather than contact large energy users individually as they used, grid operators now work through third-party demand response companies, such as EnerNoc and Comverge. By participating in the voluntary programs, customers, who can be businesses or consumers, receive a payment or have reduced rates. Demand reductions can be automatic, such as adjusting lighting in a warehouse or changing the settings for an air conditioner.

Demand-response companies contract with customers to manage their electricity use, bid demand reductions into organized wholesale power markets, and essentially split the surplus with their customers. Note the win-win-win-win nature of this: customer saves money even after paying the DR company, DR company profits, peak demand is reduced and reliability maintained, and wholesale electricity prices don’t increase by as much as they would otherwise.

The administratively-determined demand response “products” in wholesale markets are not perfect, the demand curve in most organized wholesale markets is an artificial construction based on too many static and fixed retail prices, and there are lots of payment disagreements and nuances in wholesale markets that arise from both the administrative definition of the product and the economic interests of the generators and the DR companies who are both jockeying for “economic dispatch” in the wholesale supply curve. That said, though, it’s clear that even in this incomplete and imperfect set of markets, large-scale demand response is providing value during peak hours in heat waves.

But the persistence of such a regulated and administrative approach is hampering efficacy and value creation in other “programs”. As LaMonica notes,

Not all demand response programs worked out as well as hoped last week. Baltimore Gas and Electric has a PeakRewards program, where it can reduce load by dialing down consumers’ air conditioner thermostats in exchange for annual credits worth $200 in the first year and then $100 per year. Making use of the voluntary program reduced 600 megawatts from the grid, which prevented black outs or brownouts, BGE said.

But the utility admitted yesterday that it needs to review its procedures after people were left without air conditioners for several hours on Friday when temperatures hit 108 degrees, according to reports. BGE said it intends to improve communication, including potentially calling affected consumers. It’s also investigating why the air conditioning cycling didn’t restore cooling in about 30 minutes after the end of the emergency demand response event.

I remain as skeptical about air conditioner cycling programs as I have always been — programs, programs, programs, not markets, not prices, not any truly interesting or valuable ways of actually exploiting the features of digital technology to benefit consumers and profit firms. Whether it’s air conditioner cycling or energy efficiency, regulated distribution utilities and regulators seem incapable of thinking in terms of anything other than a “program”!

Not good enough. The technology exists to do better, to allow consumers to use the technology to set more granular temperature changes in response to changes in prices, to enable a truly transactive network. Increasingly consumers will expect better, especially when the deficiencies of these administered “programs” continue.