Using Demand Response Management to Achieve Utility Load Shape Objectives

Using Demand Response Management to Achieve Utility Load Shape Objectives

EP-P6035/C3047

Final Report, March 2002

Levy Associates
2805 Huntington Road
Sacramento, CA 95864

Project Manager
R. Levy

Plexus Research, Inc.
629 Massachusetts Avenue
Boxborough, MA 01719

Project Investigators
R. Abbott
S. Hadden

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DISCLAIMER OF WARRANTIES AND LIMITATION OF LIABILITIES

THIS DOCUMENT WAS PREPARED BY THE ORGANIZATION(S) NAMED BELOW AS AN ACCOUNT OF WORK SPONSORED OR COSPONSORED BY THE ELECTRIC POWER RESEARCH INSTITUTE, INC. (EPRI). NEITHER EPRI, ANY MEMBER OF EPRI, ANY COSPONSOR, THE ORGANIZATION(S) BELOW, NOR ANY PERSON ACTING ON BEHALF OF ANY OF THEM:

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ORGANIZATION(S) THAT PREPARED THIS DOCUMENT

Research Contractor Company Name (add others on lines below if more than one)

Levy Associates
2805 Huntington Road
Sacramento, CA 95864
916-487-8559

Plexus Research, Inc.
629 Massachusetts Avenue
Boxborough, MA 01719
978-263-6080

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Citations

This report was prepared by

Levy Associates
2805 Huntington Road
Sacramento, CA 95864

Principal Investigator
R. Levy

Plexus Research, Inc.
629 Massachusetts Avenue
Boxborough, MA 01719

Principal Investigators
R. Abbott
S. Hadden

This report describes research sponsored by EPRI.

The report is a corporate document that should be cited in the literature in the following manner:

Using Demand Response to Achieve Electricity Load Shape Objectives,

EPRI, Palo Alto, CA, 2001.

EP-P6035/C3047

Report Summary

In the late 1970’s Federal regulation initiated a major wave of utility research and implementation activity in load management. From 1978 through the late 1980’s, hundreds of millions of dollars were invested to develop general education, appliance retrofit, lighting, audit, load control, load curtailment, time-of-use pricing and other programs. Fuel shortages and service disruptions in the early 1970’s provided utilities with clear incentives to create effective demand response programs. At the peak of activity in 1990, load control programs alone accounted for approximately six million control points and over 6,000 MW of peak capacity.

Through the late 1980’s and early 1990’s improved supply conditions masked the need for long-range demand responsiveness planning. As a result, regulators and utilities reduced funding for most demand response research and development. Due to diminished need and activity in the intervening years, many utilities dismantled programs, vendors went out of business and/or consolidated their markets, and knowledgeable practitioners moved into other fields.

The majority of demand response programs were designed to support only a few days of reliability- or event-driven emergency operations each year. Once the emergencies passed, so did the apparent need and justification for demand response options.

During the last two years, supply shortages, escalating fuel costs, air quality restrictions and deregulation of the utility industry have once again fueled a resurgence of interest and need for effective demand response options. Unfortunately, programs were not in place to respond to market needs.

There is concern that demand response planning constructs developed in the 1980’s do not adequately address current market conditions. Whether they operate in regulated or unregulated environments, energy companies today are faced with electronic trading, demand bidding, and advanced information networks that inextricably link all energy markets. A consequence of electronic markets is that they compress market events by accelerating the magnitude, and shortening the life cycle, of supply-demand imbalances. This in turn substantially increases the opportunity cost of a delayed demand response. To be effective, demand response programs must be in place and must respond quickly to market needs.

This report builds on the underlying assumptions that formed the basis for traditional demand response planning and program design criteria prevalent in the mid 1980’s, to provide a context for demand response in the 21st century. A new perspective is presented that recognizes the evolution in program design required by today’s market structures, technology, and public policy needs. The relevance and applicability of this new approach are illustrated with selected examples.

Background

Over the last few years, competitive market forces for capacity (generation, transmission and distribution) have become a permanent part of the electricity business for both regulated and unregulated companies. Adaptation by different members of the electricity value chain (generator to end use) has not been without problems. Many areas of the U.S. experienced and continue to experience, supply shortages and extraordinarily volatile energy prices. At a time when demand response programs should be on the increase, their continued decline has planners and regulators alike questioning whether demand response can in fact provide an effective alternative.

Looking back over the evolution of demand response, two key questions emerge. At one extreme, there is concern that communications and control technologies have not advanced sufficiently to support the flexibility necessary to address more volatile market conditions. At the other extreme, there is concern that regulatory, organizational and other barriers have produced restrictive demand response program designs that have constrained the commercialization of cost effective control technologies. In other words, is technology a limiting factor that is reducing the effectiveness of demand response? Or, are demand response program designs constraining the evolution of more effective technology options?

What often gets overlooked is that some energy companies have found ways to successfully navigate the apparent program design and technology barriers. Demand response options are evolving that allow energy companies to address adverse impacts (and perhaps profit from) volatile markets. Well designed real-time pricing, demand bidding, and other demand response options have provided several energy companies with just this capability.

With traditional planning models, most demand response programs are designed to address only a single load shape objective (see EPRI EA/EM-3597V1, Demand-Side Management). While there are exceptions, most demand response programs also tend to employ narrowly defined incentives and technologies that are tied to a specific group of customers or end uses. Unfortunately, programs tied to single load shape objectives, and/or specialized incentives and technology, often create inequity problems and an inability to adapt to rapidly changing operating conditions. Success in volatile markets requires the flexibility to address multiple load shape and operating objectives. This requires the integration of metering, information, pricing and control technology. The capability to address multiple load shape objectives can provide energy companies with flexibility to simultaneously address infrequent reliability-driven emergency operations as well as day-to-day risk- and price-management operating strategies.

Objectives

To prepare a guidebook that presents a revised demand response design construct capable of supporting multiple load shape opportunities.

Approach

The project examined the problems with and effectiveness of existing demand response practices. Recent problems in California together with less dramatic but parallel situations in numerous other states provided a backdrop for examining a variety of programs and planning methods. Building on an EPRI Demand Side Management (DSM) planning guide prepared in the mid 1980’s, the project team combined targeted interviews at selected energy companies with a review of vendor equipment offerings, to establish revised principles for demand response planning.

Results

Historically, demand response options have been designed to address a single load shape objective. Whether developed as a load control option, curtailment program, or incentive rate, most demand response options employ inflexible technologies and/or restrictive tariffs and incentive structures that limit their ability to respond to changing market conditions. One thing is now almost universally certain - all regulated and unregulated markets are subject to volatility and uncertainty. To be effective under these conditions, demand response options must evolve.

Several basic features and characteristics are necessary to assure the effectiveness of future demand response options, specifically:

Multiple Load Shape Objectives: Demand response options should be designed to support multiple load shape objectives. There are two reasons this capability is necessary. First, whether energy companies operate in regulated or unregulated environments, they will be purchasing energy through competitive wholesale energy markets. These markets will always have periodic episodes of volatility caused by imbalances in supply, unscheduled outages, weather, fuel price fluctuations, and other uncontrollable factors. Demand response can mitigate this volatility at a fraction of the cost of conventional supply alternatives. An even more compelling need for flexible demand response options is the cost management capability they provide to customers. Customers have demonstrated that they can and will respond to energy pricing options by not only modifying their current usage patterns, but also by modifying long-run energy equipment purchasing behavior. Properly structured demand response incentives, provide customers with the opportunity to gain a measure of control over their energy costs. Most of today’s demand response options are designed to respond only to short-term peak load supply problems. Accordingly, they are usually linked to communications, control equipment, and operating strategies that limit operations to specific end uses, selected customer groups, fixed time periods, and/or a maximum number of operating hours per year. These types of restrictions are incompatible with volatile markets and they ignore customer cost management needs.

Pricing and Incentives: The incentive structure, more than any other variable, determines the capability and effectiveness of every demand response option. Effective demand response incentives include two design features: (1) incentives are designed into and are an integral part of the customer’s underlying rate, and (2) the rate is structured to link to and dynamically reflect market price and/or system operating conditions. Designing demand response incentives into the customer rate allows all customers and all loads to participate on equal terms. Existing programs that use incentives tied to participation or appliance ownership discriminate among customers, artificially restrict program load shape potential, and create numerous equity problems. In volatile markets, fixed incentives will always be out of sync with market-based price signals, alternatively over or under compensating customers. Designing rates with links that dynamically reflect market prices or system operating conditions create incentives that properly reward customers for their usage decisions. Market-based incentives that are integrated into the underlying customer rate provide a way to directly link customer actions with corresponding market-based rewards.

More importantly, incentive rates with these features create customer choice. Incentives that reflect market price allow each customer to tailor their actions to balance their respective cost of service with their value of service. This is a fundamental and significant change that will benefit energy companies and customers alike.

Advanced Metering and Communications: Advanced metering and communications should be viewed as a necessary component of all demand response options. Metering provides the capability to support more flexible pricing and incentive structures. It also provides the information necessary to support customer education. Information is essential to effective customer participation. Information provided through advanced metering and communication applications provides a foundation for customer education that is essential to encourage short-term operational changes as well as long-term customer-site technology investments. Together, metering and communications provide an information tool to integrate demand response options with power system operations.

Demand response options: Demand response options should be available to all customers as an integral component or condition of customer service. Rapidly changing market conditions do not provide sufficient time to plan and implement new programs in response to individual events. Programs and tariffs must be in place and customers must be prepared to respond. Program activation times should match market needs. To do otherwise incurs extraordinary opportunity costs. In addition, special purpose programs are too easily cancelled once the immediate problem is resolved. Customers correctly perceive these options as temporary and react accordingly, often with disinterest.

EPRI Perspective

If there is a lesson to be learned from recent electricity market experiences, it is the adverse impacts that result from the inability to provide a timely demand response to market volatility. The lack of integrated, flexible demand response options imposed severe opportunity costs on utilities and their customers in California and elsewhere. The consequences were often economically devastating. Ironically, in California, while the lack of an adequate demand response contributed to the system problems, it was also demand response that ultimately brought the system back into balance.

Well-designed demand response options can mitigate market volatility only if they are integrated into the underlying energy company operations. In short, demand response is a systems integration problem. Rates, incentives, metering, information and automation technologies all need to be integrated to create a functioning system.

Across the U.S., some energy companies are seriously using demand response as a way to manage volatility and/or electric reliability to benefit themselves and their customers. The program design perspective presented under this project will provide a foundation to maximize the benefits achievable from demand response programs.

Keywords

Demand Response

Price Response

Load Control

Load Management

Risk Management

Energy Information

Real Time Pricing

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Executive summary

Today’s evolving energy markets require options that can support multiple load shape objectives while simultaneously providing greater customer choice. Providing customers with flexible bill management tools and energy companies with dynamic resources to balance electricity supply and demand requires demand response programs that are integrated with system operations. Such demand response programs should be redesigned to provide flexibility, choice, and accountability on both sides of the meter. Refocusing programs to emphasize customer choice stands in stark contrast to the old way, in which electricity suppliers continue to determine what is best for the customer. Prescriptive programs that place artificial limits on customer participation and customer response are long overdue for change.

This report presents a new perspective for designing demand response options. It provides a design template to guide the development of long-term, sustainable demand response options. Our overriding objective is to identify a framework for developing more effective demand response options.

Pervasive Problems Challenge Program Continuity

Demand response programs have not kept pace with market requirements. As a result, energy company investments, the number of demand response programs, and customer participation has been declining for years at a time when the need has never been more compelling.

Like the service options offered by energy companies in the late 1800’s and early 1900’s, demand response today faces a rapidly changing, uncertain, and volatile market. Energy companies want operating tools that provide dependable, economical alternatives to meet service obligations. Customers want options that help mitigate energy costs and enhance service reliability. Demand response is the only tool than can simultaneously satisfy both objectives. Unfortunately, most demand response programs fail to meet either energy company or customer expectations.

Why does the investment and implementation evidence contradict what should be a growing market in demand response? There are many reasons.

Appliance load control and curtailable/interruptible programs are being challenged to provide energy management as well as reliability benefits.
Fixed incentives paid irrespective of whether customer loads are controlled from one year to the next, create carrying costs that jeopardize long-term cost effectiveness. Consequently, to sustain programs, regulators are demanding that programs be enhanced to develop new streams of benefits.
Demand response programs impose fixed load reduction obligations that customers find increasingly unacceptable. Customers prefer options that provide flexibility and economic choice.
Incentives don’t reflect the market value of the customer load contribution, distorting both the timing and magnitude of customer response. Incentives also don’t provide the flexibility that customers need to administer to their own fluctuating personal and business needs.
The predominant focus on reliability-based demand response options ignores energy company and customer needs for alternative cost management capability.

Conventional demand response options that are linked to specific technologies, those with fixed incentive structures that do not reflect market value or customer actions, and those that do not provide customer choice will continue to decline. Programs that only address peak reliability can’t address load shape objectives that focus on energy cost management.