Value of Demand Response Participation to the Retail Customer

By John Bonnin

(John Bonnin has 25+ years of industry experience, including 15 years at CPS Energy. He has directed the Day Ahead and Real Time activities of Energy Supply and Market Operations, with a focus on managing market risks to native load customers and optimal dispatch of our power generation fleet. Mr. Bonnin has a Master of Science in Management/Computer Resource Management from Webster University and a Bachelor of Science in Chemistry from Louisiana State University)

Many utilities and other load serving entities use a portfolio of approaches to decrease risk in the energy market.  One of the highest risks faced by such a group is exposure to high spot market prices during peak usage, whether in summer or winter periods.  To avoid this exposure, utilities could either increase power supply or decrease power demand.  The reduction in retail demand is a valuable tool in the portfolio, whose value has been greatly enhanced in today’s market due to better integration of decision-making and controls.

The ability to call on a retail customer to reduce his or her electric consumption has the same value to the utility as the ability to ramp up a power plant when the market is tight.  But what incentive does a customer have to allow this?  What specific aspects of a customer’s operation represent opportunities to monetize demand response?

At first, the only Demand Response (DR) tool available was a simple blunt instrument used by the utility to prevent rolling blackouts.  Customers with large power demand were on “interruptible rates,” wherein the utility had a no-notice option to completely interrupt power to a load, in exchange for a rate slightly lower than normal commercial rates.

As power grids evolved to focus on economic incentives, the value proposition for DR also grew.  A sophisticated DR control system works as a scalpel to capture value for both the customer and the utility, creating a win-win.

The chief short-term value streams of DR are it can:

  1. Lower the utility’s coincident peak, and its share of grid costs.
  2. Lower a customer’s demand charge, a chief component of the customer’s rates.
  3. Decrease exposure of the utility to market prices, especially during peak times.

Longer-term value includes:

  1. Reducing total energy generation and associated air emissions (CO2, SOX, NOX, & particulates)
  2. Help to defer investments in additional generation.

These are the value streams that have been traditionally used to justify and price DR products and services.  But there are nuances within these criteria that are impacted by specific customers’ processes and energy use, and require more thoughtful decision-making and integrated control.

Many industrial, commercial, and residential customers can curtail air conditioning use during the peak hour of the summer.  Simply raising the thermostat pays off in all of the above criteria.  However, the demand reduction is sometimes short-lived as A/C units kick back on when the new thermostat set point is reached.  Additionally, using this tool for many days in a row will lead to customer fatigue, leading many to opt out of the program.  A control system that sends a signal to pre-cool, however, can lengthen the effective time frame of a DR event.  Customer incentives can offset fatigue if designed correctly.  These incentives depend on quick feedback of customer performance.

Shutting down energy-hungry equipment is another very effective way for industrial and commercial customers to reduce demand.  The amount of curtailment (in kilowatts or megawatts), the notice time required, the duration that the equipment can be out of service, and the frequency of interruption all play into the value of this DR product.  Let’s break each down.

  1. A reduction of just a few KW, while welcome, is probably not as valuable as a 1 MW or higher capability. Level of effort and program complexity reduces the value of smaller DR resources on an individual basis, but when aggregated can step up their value.
  2. Notice time is a large driver of value. Day-ahead notice is less valuable than 1-hour or even no-notice capability.  This is directly due to the option value of the capacity:  more flexibility = higher option value.
  3. Duration affects value as well. A curtailment with no minimum or maximum limits has higher value than one with a three-hour minimum for example.
  4. Frequency of activation is also a driver of value. A DR resource that can be deployed sixty times across the summer months is inherently more flexible than one that can only be called on ten times.

Naturally, all these factors are determined by the nature of the customer’s operations.  Some production processes can tolerate frequent and long-duration outages better than others.  Customers must decide for themselves what is acceptable, and what payout will be required from the utility to offset the costs of interruptions.  Strategic investments by customers in on-site backup power, expanded cold storage space for stock, building management systems, and other technology, can improve the customers’ ability to offer more flexible, and hence more valuable DR capability to the utility.

Control systems in use by the utility must be able to utilize and optimize the varied DR resources.  In an environment where there are numerous customers, each with individual notice requirements, duration requirements, etc., there is a great need for these to be organized into portfolios of like products.  The AutoGrid FlexTM platform offers the ability for market operators and traders to analyze and optimize resources for each DR event.  Backed up by sophisticated analytics, the deployment of these DR resources is done quickly and reliably in the control room, with greater situational awareness and feedback related to the response of load to deployment commands.  Finally, accurate and granular measurement and validation of the actual reduction builds engagement with the customer and allows fine-tuning of operations.

With all these capabilities in place, a utility can plan and execute specific DR events to drive value in all the above listed areas.  Customers can enhance their value as DR resources knowing their specific capabilities are being presented to the market in an optimal way.  There is a true win-win!