Demand Response Gets a Boost from Proposed FERC Rulings

1Executive Summary

Is reducing demand for power worth the same amount of money as supplying power? That’s a hot question in the world of demand response — the business of turning down energy use to help utilities manage brownout-begetting loads on the electrical grid.

The idea behind demand response is to reduce energy use (instead of generating more energy) at moments of peak demand, in order to save utilities money and improve the efficiency of the power grid. It’s already a big business, but a proposal from the Federal Energy Regulatory Commission (FERC) could make it even bigger, by setting rules that would offer companies the same price for both generating electricity (measured in megawatts) and reducing peak energy use (measured in “negawatts”). That, in turn, could lead to new and interesting ways for broader energy-efficiency technologies to pay for themselves.

An Industry In Transition

Demand response, as a practice, has been around for decades. In exchange for a credit on their power bill, many of utilities’ industrial customers agree to turn down their power use when they get a call from the utility. The terms are usually narrow and, historically, limited to only the largest users and the most urgent situations.

Importantly, demand response isn’t specifically aimed at broader energy efficiency. Rather, it’s a way to help utilities avoid not only grid failure, but also the outsized prices they have to pay for power to prevent a grid failure. Most utilities still earn a direct profit on every megawatt of energy they sell — which doesn’t exactly encourage them to spend money to reduce their customers’ appetite. Peak power, on the other hand, costs utilities dearly, giving them a direct incentive to spend to help customers be more energy efficient at those particular times, which can be as few as 100 hours every year.

In the last decade, demand response has taken on a life of its own, outside utilities’ direct customer relationships. Publicly traded players EnerNOC and Comverge, as well as private companies like CPower and Energy Connect, aggregate lots of smaller customers’ energy demand into market-shifting blocks. They also help negotiate the bewildering array of arrangements, from sole-source contracts bid at long-term auctions to some small-scale participation in the markets, that govern the purchase and sale of electricity.

In some RTOs and ISOs, however — including, for the last several years, big demand response buyer PJM— the more lucrative energy markets have been paying less for negawatts than megawatts. That is, they pay a price that the same number of megawatts would have been worth, minus some portion of the power’s retail price if the customer had used it. Power generators have supported these arrangements, arguing that giving full market price to negawatts constitutes double dipping — not only are utility customers saving money on power bills, thereby reducing energy producers’ profits, they’re also getting to earn money by bidding that energy savings into the market as if it were real live electrons.

FERC’s March 18 proposal renders that argument moot: it would require all Regional Transmission Operators (RTOs) and Independent System Operators (ISOs) “to pay demand response providers the market price for energy for reducing consumption below their expected levels.” In other words, those providing a negawatt of energy get paid the same as those providing a megawatt of energy.

Demand response companies are predictably supportive of FERC’s proposal. “The objective here is to run an efficient marketplace, which is a balanced grid,” said Audrey Zibelman, CEO of microgrid and demand response software maker Viridity Energy and former COO of PJM. “Doing it this way is very efficient, and allows for a great deal of clarity, and is absolutely essential if we’re to meet our objectives regarding demand response.”

FERC predicts that demand response could save the country 38-188 gigawatts (GW) of power over the coming decade. That’s a wide range, in part because the return on investments for demand response so far have been question. One of the key variables in that 150 GW spread is the value that can be realized for the investments needed to make demand response a reality. That uncertainty is part of why FERC is pushing for the change in payment practices. “Without this move by FERC, the demand side of the market would remain underdeveloped everywhere,” said David Brewster, president of demand response company EnerNOC. The idea is that opening new markets at predictably higher prices could boost investment in demand response systems — both those from utilities and established aggregators like EnerNOC, as well as new models.

So, what are some of those new models?

Microgrids
Viridity, for one, is interested in aggregating the energy generation and reduction clout of microgrids, or isolated systems that link campuses, office parks or other installations into single points of contact with the grid at large. Instead of controlling a multitude of end points, the utility looks at a microgrid as a single entity. Viridity specifically is working on ways to market that power production and reduction capacity on energy markets, and Zibelman said FERC’s proposal could open the door to that kind of activity.

Smart Meters
Piggybacking on smart meters is a route being taken by demand response aggregator Comverge, as well as a host of home energy management vendors, from startups like Tendril to industry veterans like Control4 and IT giants such as Google and Microsoft. While many of these companies’ services are aimed at helping customers reduce their overall energy use, many are also being built to interact with utility signals to turn down power when the grid is reaching peak loads — in other words, demand response.

Finding a way to aggregate and market that power reduction could open up new revenue streams for home energy networks — being able to sell unused power at its full energy market price seems like a good way to add value to these technologies. Today, very few utilities are offering dynamic rates to their residential customers just yet, let alone ways to play into energy markets. Instead, residential demand response nowadays involves giving utilities direct control over home thermostats and other household devices with pager, radio or broadband networks, then paying the customer some pre-set fee for the privilege. Just how well these technologies are able to deliver reliable and predictable power reductions may well determine how well they can be sold as demand response.

Expanding C&I Operations
On the commercial and industrial (C&I) side, where changing power rates, sophisticated building control systems and some level of energy market participation already exist, the opportunities for selling demand response will likely grow if FERC’s proposed rules are adopted. Given that the biggest demand response providers now hold less than 10 percent of the potential U.S. market, according to Pike Research, anything that boosts demand response’s payback could represent huge opportunities for energy services companies (ESCOs) like Siemens, General Electric, Honeywell, Johnson Controls and Schneider Electric — as well as startups that can provide innovative ways to help demand response grow outside its traditional confines.

After all, the same technology that allows a factory to shut down specific lines, or an office building or grocery store to dim lights and cut air conditioning only in rooms that aren’t being used, could be used for more general energy efficiency improvements. EnerNOC is seeking to exploit this opportunity its own efficiency and power marketing offerings, using demand response as its foot in the door. The same situation could happen in reverse, as building energy management systems, such as Echelon’s LonWorks or Cisco’s EnergyWise platforms, seek to deliver power reductions at specified times to meet demand response needs.

In other words, what’s good for demand response is likely to be good for energy efficiency as a whole.

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