NOC! NOC! Who’s There? Demand Response

Although energy conservation and demand management have been around since industry inception, calling on customers to balance ...

Sep 1st, 2012
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by Tanya Bodell, Energyzt

Although energy conservation and demand management have been around since industry inception, calling on customers to balance electricity markets in real time is experiencing a renaissance. The renewed focus is a direct result of changes in technology, markets and policy. Success, however, depends on economics.

Technological Innovation

Smart phones, computers, wireless home networks, the Internet, advanced metering infrastructure and standard communication protocols create the technological foundation for end users to access energy consumption information and modify usage in real time. Imagine a software application that tracks energy usage by room and based on an off-site touch of a phone screen adjusts lights and temperature. Writing a program to do this is child’s play. So why hasn’t such an app gone viral?

The missing requirement for most users is not digital, but physical. Actual mechanisms for monitoring and wirelessly modifying operations of appliances, HVAC systems, outlets and breaker boxes are required. Smart meters and remote-controlled thermostats exist, and smart chips stand silently ready to serve in certain appliances, but widespread installation is costly. Anticipated benefits must cover costs well beyond the price of an app for customers to invest in the physical infrastructure of demand response.

Market Mechanisms

In addition to physical equipment, structural changes to energy markets are required. With the exception of commercial and industrial customers who might be on time-of-use rates, most retail end users pay a regulated retail rate that indirectly reflects the real-time wholesale market price for energy. Without the right price signal, it is difficult for end users to provide the right response.

In addition, working markets require a defined property right and means of trading such a right for value. One megawatt of energy is a clearly defined property right that can be transacted in power markets. Foregone energy consumption—often referred to as “negawatts” or “white tags”—requires baseline conditions, means of assessing availability of demand response, and validation of how much energy usage was deferred. Unlike megawatts, which simply measure what was produced, negawatts reflect the difference between consumption and an assumed baseline.

Network operations centers (NOCs) such as EnerNOC, Comverge and EnergyConnect offer to validate the amount of energy that is curtailed and therefore can be traded for value. NOCs tabulate actual vs. expected energy demand and interface between wholesale market operators and end users. They are critical to demand-side participation in capacity markets where they have proven to be formidable competitors to traditional resources. They are ready to compete in energy markets.

Policy Perspectives

Federal Energy Regulatory Commission (FERC) Order 745 allows demand response resources to participate in wholesale energy markets and requires that such resources be paid the same price for a foregone megawatt as the price paid for a generated megawatt. From an economic perspective, a penny saved is now worth two pennies earned—end users who offer to reduce demand receive: 1) a payment for energy they do not consume; and 2) realized savings from not consuming the energy in the first place.

Leading energy experts have engaged in extensive debate before FERC about this approach. In June, industry trade organizations brought the debate to federal court, challenging FERC’s decision.

Even with the proposed double benefit to consumers, however, the economic incentive to participate in demand response programs might not be enough to encourage most end users to modify their energy usage. It remains to be seen whether retail rate structures and depressed market conditions can elicit sufficient interest from the demand side of the market.

Fortunately, only a small amount of energy curtailment can have a large impact on load duration curves, generating significant cost savings and increased reliability for the benefit of users systemwide. For these reasons, states such as Pennsylvania have legislated required load-reduction requirements, prompting significant NOC activity as utilities strive to meet those mandates.

Real-time demand response requires the ability to monitor and motivate. Technology enables customers to measure and respond. Policy has opened markets, enabling load to compete against traditional supply-side resources, sometimes at preferred prices. Regulators and policymakers have shown a willingness to allow demand to respond when there’s a NOC at the door. Given current market price signals, it will be interesting to see if anybody’s home.

Author

Tanya Bodell is executive director of Energyzt, a collaboration of energy experts intent on understanding the impacts of energy integration. Reach her at 617-416-0651 or tanya.bodell@energyzt.com.

“By pursuing his own interest he frequently promotes that of society more effectively than when he really intends to promote it.”

— Adam Smith, “The Wealth of Nations”

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