Commercial Building Demand Response Issues and National Action Plan

When Congress passed the Energy Independence and Security Act of 2009, it charged the Federal Energy Regulatory Commission (FERC) with developing ...

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by Laurel W. Glassman, White & Case LLP, and Sara C.G. Neff, Kilroy Realty Corp.

When Congress passed the Energy Independence and Security Act of 2009, it charged the Federal Energy Regulatory Commission (FERC) with developing a national action plan (NAP) on demand response (DR).

The congressional goal was to increase DR use to cost-effectively reduce reliance on fossil fuel-fired electricity generation. The NAP’s top-down approach raises questions. Can it produce savings—at least at the commercial level—given the physical and financial constraints commercial electricity customers encounter even when they’re committed to DR?

National Action Plan

The NAP was created to meet three objectives:

  1. Identifying requirements for technical assistance to states to allow maximum DR resources that can be developed and deployed;
  2. Designing and identifying requirements for implementing a national communications program that would include broad-based customer education and support; and
  3. Developing analytical tools, information, model regulatory provisions, model contracts and other support materials for customers, states, electric utilities and DR providers.

FERC issued the NAP on June 17, 2010. It calls for:

  • A national forum on DR;
  • Informational and educational sessions for policymakers and regulators;
  • Direct assistance to states to implement DR activities;
  • A “communications umbrella” to explain energy-use reduction better;
  • Development of a Web-based clearinghouse to facilitate collection and delivery of up-to-date DR information and analysis;
  • Analytic tools to let end users optimize energy savings; and
  • Better, more transparent price information for consumers.

FERC staff submitted to Congress in July 2011 its plan for implementing the NAP. Federal implementation depends on available funding. Given U.S. economic challenges and political rancor on Capitol Hill, it remains unclear whether Congress will fund federal activities soon under the NAP.

As for commercial end users, the NAP states that several stakeholders emphasized the importance of commercial customer outreach, and these commercial and industrial customers will deliver the most impact early in the NAP. The extent of effective outreach to commercial customers under the NAP, as well as the extent of their participation in the coalition of interested parties that is supposed to implement the NAP, remains unclear. The NAP rarely mentions the commercial sector. Commercial users are encouraged to participate in energy-saving programs, but there is no mention of how commercial users might educate their energy providers about the physical and financial obstacles to implementing energy-saving programs.

Demand Response Case Study: Commercial Building Owners in California

Utility-funded and -executed DR programs have existed in California since before the Energy Policy Act of 2005. At least 68 percent of commercial building owners, however, do not intend to participate in DR, writes Jeff St. John in the Oct. 27, 2011, Greentech Media article “What’s the Use of Having a Smart Grid Connected to Dumb Buildings?” It is estimated that participation numbers are between 1 and 10 percent.

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A building participating in a DR program reduces its energy demand in response to a utility’s signal. The utility sends that signal during a peak-demand event, which occurs when demand spikes and energy is more expensive. Typical DR actions for a participating building include raising ambient temperatures, turning off noncritical lighting and shutting down energy-using equipment.

California DR programs are administered through the state’s three investor-owned utilities (IOUs): Pacific Gas and Electric Co., Southern California Edison and San Diego Gas & Electric Co. To participate, a commercial building owner with property in an IOU’s territory can bid shed power directly to the energy market or work with an aggregator, which is a third party that bids shed power on behalf of many customers. Direct bidding typically nets greater financial rewards, but penalties exist for buildings that cannot shed promised kilowatt-hours, and bidding the energy can be time-consuming.

Technology constraints of the buildings mean not every commercial building in a California IOU’s territory can participate in DR. Most California buildings are more than 15 years old and typically cannot raise ambient temperatures or turn off noncritical lighting automatically. Often the building upgrades to enable DR participation would exceed the financial benefits of participation even with IOU financial assistance.

The biggest hurdle to commercial buildings’ DR participation is that the energy end users who would experience the raised ambient temperature and decreased lighting typically do not own the buildings. Commercial building tenants pay for the energy they use and are financially incentivized to participate in DR, but building owners must obtain tenant permission before enrolling a building in a DR program. Commercial buildings often have multiple tenants that lease small spaces, and the financial upside of their DR participation can be negligible.

Typical commercial DR events last four hours—often long enough for tenants to experience discomfort. Half-hour programs can avoid this problem, but the only California IOU that offered a half-hour program recently discontinued it. In addition, lease language often specifies that building temperatures must be kept within certain parameters. DR participation can violate lease terms.

Commercial buildings that enroll in DR programs can benefit. For example, the Leadership in Energy and Environmental Design (LEED) certification system offers a credit for DR participation in 2012, so a building with an eligible DR program might find it easier to achieve LEED certification. This might provide a significant economic benefit because LEED certification has been shown to increase occupancy by some 2 to 6 percent. Tenants interested in sustainability look for buildings that are on the cutting edge of energy efficiency. A building’s participation in a DR program can contribute to the building’s environmental credentials.

Some Northern California DR programs combine their reduction measures with sophisticated historical weather data analysis to reduce peak-demand charges, further reducing costs.

California commercial buildings have two options to participate in DR:

  1. Tenants are made aware of the DR event and are asked to participate by unplugging noncritical items such as vending machines, chargers for handheld devices and laptops; or
  2. Tenants are not made aware of specific DR events. Instead, buildings shed only a small amount of their energy load and raise temperatures during no more than an hour per floor. During these events—which typically last four hours—ambient temperatures are raised noticeably and noncritical lighting is turned off. Buildings compensate for the decrease in load shedding by participating in more events, but this method means buildings must be able change temperature settings on a floor-by-floor basis.

The second option appears to be gaining popularity because it compromises between minimizing tenant discomfort and shedding enough loads over a DR season to make the program financially worthwhile, author David K. Roberts writes in an April 2011 article on http://automatedbuildings.com.

Outdated building technology, limited and diffuse financial rewards and fear of tenant discomfort appear to be the main reasons California has not seen greater DR adoption in commercial buildings. California DR adoption likely will increase dramatically in coming years, however, for several reasons.

First, the California Public Utilities Commission is expected to levy increased rates for energy usage during peak hours, which will increase the financial incentive for participation.

In addition, as old buildings are retrofitted or rebuilt, these newer buildings can implement DR programs without compromising tenant comfort.

Finally, tenants are becoming more sustainability-savvy about commercial properties and likely will request or require that their landlords engage in DR programs to contain operating costs and fulfill corporate sustainability mandates.

DR—A Look to the Future

To increase commercial building owners’ DR participation, more efforts must be made to design DR events that are palatable to building owners and tenants.

The success of short-duration events is growing, and longer-duration events are mimicking short-duration events. State regulatory commissions should be encouraged to collect more information about commercial sector-friendly events. It would help if the NAP were revisited to ensure the commercial sector is involved in formulating DR programs.

Without more commercial feedback about DR obstacles, such programs’ success will be diminished. Efforts of state regulatory commissions to facilitate peer-to-peer information sharing among commercial building owners and managers would be helpful. Higher peak-demand charges will push the commercial market toward a higher participation rate in DR programs, but such participation could be enhanced significantly if DR programs were designed to meet commercial challenges.

Authors

Laurel W. Glassman is an attorney in the energy infrastructure and global finance group at White & Case LLP in Washington, D.C. She is a graduate of Rutgers School of Law and Smith College. Reach her at 202-626-3594 or lglassman@whitecase.com.

Sara C.G. Neff is director of sustainability programs at Kilroy Realty Corp., headquartered in California, where she oversees sustainability initiatives throughout the 15 million-square-foot portfolio. She has an MBA from Columbia Business School and a bachelor’s degree from Stanford University. Reach her at 310-481-8449 or sneff@kilroyrealty.com.

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