Demand Response in the US Electricity Market
Demand Response in the United States has now grown to a point where it can potentially meet about 9.2% (i.e. 72,000 MW) of peak demand nationwide. That is an increase of 22% from as recently as 2010, according to the annual demand response survey conducted by the Federal Energy Regulatory Commission (FERC).
In the coming years, with the overall electricity grid becoming ‘smarter,’ a number of demand response programs can be integrated, which will further assist in realizing the full potential for peak reductions.
What is Demand Response?
Electricity, unlike other commodities that can be stored, has to be consumed at about the same time as it is generated. This means matching the demand and supply for electricity, at any given point in time, is a critical job. Historically, a large part of this real-time matching was achieved by way of having surplus power generators – or ‘spinning reserves,’ that could react quickly to changes. However, with the price of electricity generation on the rise and growing demand for greener alternatives, new technologies and practices have been developed to help better match demand and supply.
One such practice is called Demand Response, which fundamentally means an alteration in the usage of electricity by the consumer. Alteration in usage can be either voluntary, where a consumer makes a decision herself to help in maintaining grid reliability, triggered in response to directives sent by the utility. Or, consumers can shift her usage pattern to avail themselves of incentives offered by the utility. Either way, the end result is changes to the customer electricity usage patterns.
The 2007 National Action Plan on Demand Response provided a major boost to the development of demand response programs. In the six years since, demand response programs have grown significantly. As I said before, demand response now can meet 9.2% of the country’s peak demand, which represents a 22% increase over 2010, which FERC had reported an aggregate nationwide potential of 59,000 MW.
Growth in Demand Response potential
Demand response is not new. As early as the 1890s, engineers, utility executives and economists of the era believed that time-of-day rates were needed for the precious services of electricity generation and distribution. From then on, the principles of demand response have evolved. Today various options are available to the consumer – peak time rebate, critical time pricing, demand bidding and buyback, etc.
According to the latest FERC report, the commercial and industrial category has shown the largest increase in demand reduction potential – a whopping 31%, as compared to about 26% increase by the wholesale markets and a less than 13% increase by the residential category. Within the wholesale markets, the PJM Interconnection, LLC and the Midwest Independent Transmission System Operator have shown the biggest potential with an increased enrollment of demand response resources.
Out of the eight North American Electric Reliability Council (NERC) regions, the one that leads is the ReliabilityFirst Corporation (RFC), which has reported a potential peak reduction to the tune of 25,000 MW. Only one region, the Northeast Power Coordinating Council (NPCC), has reported a 40% decline in peak reduction potential, mainly because of a significant decline in the ability of its participants, especially those operating in the state of New York.
Popular demand response programs
Demand response programs are of two types – one that induces the customer to alter behavior by offering certain incentives (referred to as ‘incentive-based programs’) and the other that offers price signals so as to make the customer change her usage pattern (‘time-based programs). The FERC survey reports that so far incentive-based programs have been more popular with customers as compared to time-based programs. Further, only four types of programs are popular and constitute more than 80% of total reported peak reduction. These include load as capacity resource (29% peak reduction or ~ 19,327 MW), interruptible load (24%), direct load control (15%) and time-of-use (12%).
The largest number of programs have been introduced under ‘direct load control’ and more are expected to be released between now and 2017. There have been no takers for two programs – which are the ‘demand bidding and buyback’ and ‘real-time pricing’ programs. However, the respondents believe that participation from real-time pricing may see an increase over the next year. Direct load control programs are largely offered to residential and small commercial customers and involve a remote shut down of the customer’s electrical equipment by the program sponsor.
A total of 151 entities have rolled out a residential time-of-use program, which have been used by some 2 million customers in the country. Investor-owned utilities have carried out the most outreach for residential time-of-use programs and now claim to have a total of 1,726,314 customers enrolled.
Some utility programs had very good results. For example, Detroit Edison in Michigan has reported a 3,000 MW demand reduction from its time-of-use program for commercial and industrial consumers. This is more than 50% of the total peak reduction for the state of Michigan. Another utility, Baltimore Gas and Electric has reported a 180% increase in its residential direct load program – a potential of 763 MW in 2012 from a mere 272 MW in 2010.
Expected trends for demand response
In reality, the full potential of demand response is not realized today and in 2012 only 31% (about 20,256 MW) of potential peak reduction was actually achieved. This was still up by 27% as compared to the actual realized peak reduction in 2010.
Ongoing developments in the utility industry may lead to growth of demand response program deployment and acceptance. In the near short term, time-based programs might see renewed interest from the utilities as well as consumers. This is largely due to the fact that the growth of advanced meter deployments will allow utilities to measure time-based use and therefore introduce more of such programs. The advanced meter penetration (i.e. the number of advanced meters installed as a percentage of total electric meters) in the US has increased from 8.7% in 2010 to about 23% in 2012, amounting to a total of 38 million advanced meters. This number shall grow up to 65 million by the year 2015 as per industry estimates. A smarter grid will allow utilities to integrate various demand response programs thereby increasing the overall potential of possible peak reduction.
Widespread use of distributed generation, especially from residential consumers (for instance roof-top solar) will provide further push to maximize demand response potential. In these cases, the utilities can provide what is known as an ‘export demand response’ potential, where distributed generation consumers can feed electricity into the local grid as a means of participation, instead of only through load curtailment.
Demand response offers a win-win situation for all participants and is therefore expected to become more mainstream in the coming years. It provides opportunity to save money and at the same time reduce the need for increased investments in power generation thereby helping in the reduction of carbon dioxide and other greenhouse gases.
image: demand response
Rasika is the Founder of MindCrunch, a boutique business outsourcing and advisory firm which assists infrastructure sector companies in conceptualizing and developing high quality Thought Leadership content – including Case Studies, Thought Leadership Position Papers & social media strategy. She has previously worked as a management consultant for KPMG & PwC and advises clients on policy, ...
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