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Demand Response Programs AN OVERVIEW OF DEMAND RESPONSE Demand response can be defined as what a consumer does or how a consumer responds with respect to electricity load. Electricity load refers to the power-providing requirements of an energy producing system, the energy consumption or requirement of a piece or group of equipment. It is the total amount of power being provided to consumers at any given time. Load is similar to demand, but but while demand describes how much electricity the consumers “ask for,” load is seen from the suppliers’ side as how much power is “sent” to consumers. In recent years it has become more evident that electricity demand is growing at a faster rate than the current capacity is able to handle. As consumers and businesses intensify their use of air conditioners in response to high summer temperatures and increase their use electrical devices in homes and offices, electricity loads climb and the power grid becomes increasingly stressed.i For example, the North American Electric Reliability Council (comprised of most of the power generating and distribution companies in the United States) predicts that peak demand will grow an average of 1.8% annually over the next 9 years.ii A March 2000 reliability study on the Northwest power system predicts that the probability of a power generation shortfall will reach approximately 24% by 2003.iii Demand response programs allow consumers to respond to electricity prices directly, offering mechanisms to help manage the electricity load in times of peak electricity demand to increase reliability and relieve grid congestion. This has the added benefit of providing increased market efficiency and more efficient transmission and distribution. Significant consumer benefits also accrue from demand response programs, chiefly in the form of cost savings due to lower peak electricity prices, less opportunity for market manipulation by electricity providers, and additional financial incentives to induce their participation in these programs. iv,v In wholesale electricity markets, consumers have the capability to ease tight capacity situations, mitigate reliability concerns and discipline the markets by reducing power consumption, or choosing not to purchase power when prices rise. To have this impact on electricity markets, consumers must be provided with the opportunity as well as the necessary tools and information to choose when and how to curtail power consumption. The design, implementation, and components of demand response programs are critically important to their success. They must include the right combination of mechanisms and an adequate number of ways for consumers to participate in order to avoid or significantly reduce the number and severity of power shortages and optimize benefits. While full consumer participation is not necessary in order to positively and significantly impact the electricity market, there is a minimum level that is critical to the overall success of any demand response program. In addition, the program mechanisms should be appropriately targeted to impact enough of the peak power load to improve reliability. vi Certain types of demand response mechanisms can help to reduce air pollutant emissions, leading to improvements in public health and air quality, while other types of mechanisms can increase air pollutant loadings and exacerbate poor air quality and its associated health problems. The benefit of reduced emissions from central generation resulting from some demand response mechanisms can potentially be more than offset by the increase in air pollution coming from high-emitting distributed or on-site generation used as alternative peak power sources. All these factors must be taken into consideration when designing demand response programs. The goal is to provide greater power and system reliability while simultaneously mitigating detrimental environmental and public health impacts. ELEMENTS OF TYPICAL DEMAND RESPONSE PROGRAMS Two key elements comprise a typical demand response program. The first is the set of mechanisms that are being made available to consumers to modify power usage. The second is the set of incentives and tools that motivate consumers to participate in the program. Mechanisms for Modifying Power Usage Demand response programs give electricity consumers the ability to respond to outside indicators by changing their grid electricity usage and providing them with the knowledge and necessary tools for why and how this can be done. The outside indicators that influence electricity consumers are economic impacts, including bills, prices, payments and shared savings, and power system conditions, such as reliability. vii Demand response mechanisms that utilize some or all of these indicators and in turn modify power usage fall into three categories: load management, demand management and distributed/on-site generation. Load Management Load management mechanisms are those that provide customers with the option to avoid or curtail central station electricity use during peak hours. Typical load management mechanisms include: price signals, curtailment, demand-side and day-ahead bidding, emergency measures, and load shifting. Price signals provide electricity consumers with the real-time price of electricity. As demand for power rises, so do power prices. Price signals alert consumers to these changing prices, allowing them to respond by curbing electricity consumption during the peak hours that also correspond to the highest electricity costs. The financial incentives provided by price signals are, at a minimum, the savings consumers get by curbing use during peak price periods. Demand-side bidding is another mechanism for managing peak load. Programs such as those adopted by the New York Independent System Operator (NYISO) allow consumers with loads aggregated by a load serving entity (LSE) or other provider to bid for load reductions to the grid in the same way that generators bid for energy contributions to the grid. Just as supply-side generation units offer a price for the megawatts they contribute to the grid, demand-side bidders can offer a bid to not consume the same amount of electricity. This can be done in the spot market or in the day-ahead markets. If the bid for supply-side megawatts is more expensive than the demand-side bidder’s offer for negawatts, economic efficiency will guide the market towards reduced consumption over increased production. A financial incentive is provided to consumers in the form of the cost savings they enjoy from reducing their load combined with the price paid for their negawatts. Emergency measures are an essential management component for any electricity grid; consequently, they are the most established load management technique. In this context, emergency options for peak load response generally begin with pre-arrangements between participants (generally LSEs), and consumers (usually large consumers, such as commercial and industrial facilities) which allow the LSE to curtail electricity provided to the consumer during times when system reliability is threatened. These programs often involve service contracts in which consumers are paid to be available for curtailment whether or not any occurs, with a premium paid for any hours when it does occur. Load shifting is another mechanism for reducing peak load. Rather than curtail central station electricity use, load shifting involves changing consumption to non-peak hours. Demand Management Demand management is different from the other mechanisms for modifying power usage because it does not provide the customer with an actual tool to respond to market conditions on a daily or hourly basis. Demand management involves options such as energy efficiency and conservation, which encourage an overall reduction in electricity consumption during base and peak periods of load generation. Energy efficiency has had a key role in reducing peak demand for many years; however, when utility restructuring emerged in the mid-1990s, many utilities cut back on their energy efficiency programs.viii While spending on these programs was cut, the evidence remains clear that such programs have a significant impact on electricity savings. In the early 1990’s, utility demand-side management programs saved a total of 29,000 MW at a cost of about 3 cents per kWh saved.ix The cutback in energy efficiency programs has contributed to the rise in peak demand and ultimately to power reliability concerns. While this has been the trend for several years, past energy efficiency programs continue to illustrate the significant savings that can be achieved by adopting the technologies that were available in the mid-1990s, as well as some new technologies that were not used prior to electricity restructuring.x In 1997, the DOE’s five National Energy Laboratories concluded that cost-effective energy efficiency investments could displace 15% of the nation’s total electrical demand by 2010.xi The state of California also demonstrated the significant role which energy efficiency can play in demand response through the success of its $800 million investment in energy efficiency and conservation programs in 2001, which is discussed later in this paper. Energy efficiency programs have proven to be the most readily accessible load response option for small customers, and can often be cheaper per kW hour saved than the cost of alternative power supply and power reduction strategies. These characteristics make energy efficiency an appealing option that has the potential to provide benefits to individual consumers as well as providing system wide benefits of base and peak electrical load reduction. Energy efficiency programs that have the ability to impact peak demand in the short-term must: • save energy at peak hours; • have enough impact on dominant loads that massive savings will result; • use technologies and practices that are already proven and in the market; • build upon program designs that have been demonstrated to be successful. xii According to the American Council for an Energy-Efficient Economy (ACEEE), examples of energy efficiency measures that demonstrate the highest potential for diminishing reliability concerns within the context of the above criteria include: • efficient HVAC equipment; • proper installation, maintenance, and use of HVAC and other building systems; • commercial sector lighting.xiii Not only can improving efficiency within these areas significantly and positively impact reliability concerns, but programs of this type can also mitigate environmental impacts through reduced emissions from power plants if they are well-designed and properly implemented. Additional cost-effective benefits include better lighting, more effective cooling, improved worker productivity, and health care savings. Conservation is a mechanism whereby the consumers choose to make a behavioral change rather than utilizing a device or tool to conserve their electricity usage. Actual reductions in the base and/or peak load are made without using alternative power or control technologies or following a particular program. Conservation works best for smaller operating facilities and individual consumers. Distributed/On-Site Generation The option to switch from central station power to an alternative source in response to price variations, as opposed to reducing electrical consumption at a time of high prices, involves using distributed or on-site generation technologies and applications. There are many options for distributed/on-site generation available today, and many others are expected to be available in the near future. Distributed generation technologies and combined heat and power (CHP) applications are some examples of technologies that could be used as alternatives to central station generation during periods of peak power demand. However, there are a number of issues with respect to on-site generation that must be resolved before these technologies can be widely used in demand response programs, including: permitting restrictions that allow for emergency use only, distribution system tariffs, back-up supply rates, and interconnection requirements.xiv Distributed generation technologies that can serve as alternatives to central station power include: back up generators, renewable energy technologies, fuel cells, biomass, microturbines, and internal combustion engines (ICE’s) fueled by natural gas or diesel fuel. Certain distributed generation technologies are used as on-site generators to provide base or back up generation, including back up generators, fuel cells, microturbines and ICEs. Some back up generators are permitted for use strictly during emergencies. Combined heat and power (CHP) applications generate thermal and electrical energy in a single system located at or near a facility, and can deliver energy at efficiencies of 70 percent or greater.xv Because CHP applications improve the efficiencies of power installations, they also reduce the emission rates associated with the underlying technology. CHP can be applied to all forms of distributed generation technologies that produce waste heat when they convert their fuel to electricity, including fuel cells, biomass, microturbines and ICEs.xvi Incentives and Tools for Motivating Consumers Incentives and tools for persuading consumers to adopt demand response mechanisms for modifying power usage are critical to achieving a more reliable power supply. Currently, consumers are charged an average price for electricity, not a price based on whether there is adequate supply to meet demand. Therefore there is no “natural” price incentive to reduce demand. This is further exacerbated by the limited amount of information that is made available to retail electricity consumers, and the scarcity of options for responding to varying market conditions. Four main purposes for providing incentives to customers to reduce demand include: • urging individual customers to reduce their demand for central station electricity in order to preserve short-term reliability; • overcoming barriers created by the current price of electricity; • spurring interest and familiarity with the concept of demand response; • providing system wide benefits that are much greater than the benefit to the individual customer. xvii There are several types of incentives and tools that can be used to facilitate the adoption of demand response mechanisms, including: financial incentive programs/tools, federal and state programs, communication tools, and technology tools. Financial Incentives Financial incentives must vary in design and approach in order to target an optimal portion of the electricity market. As stated above, incentives and tools are critical elements of successful demand response programs. Examples include: real-time pricing; bonuses or rebates; the sale of unused electricity; tax incentives; buy-back programs; low cost financing for energy efficiency and clean power projects; and system benefits charges. Real-time price incentives result from curtailing the use and purchase of central station power during times of peak prices, the decision to switch to a distributed or on-site power source that is less costly, and/or programs that allow consumers to sell unused or curtailed power back into the electricity markets. Price signals offer an inherent “bonus” or “rebate” to consumers. Bonuses or rebates (in a more explicit form) are offered by some demand response programs in addition to or instead of price signals. A bonus or rebate is a payment to consumers not to consume, and can be justified based on the system-wide benefit of increased reliability. The bonus or rebate is usually an amount based on the difference between the real time and average price of electricity. Essentially, consumers are paid for the central station kWh they do not use during periods of peak power demand. Tax incentives reduce sales tax or other types of tariffs associated with purchasing, adopting or using energy efficient technologies and equipment or distributed or on-site generation. Tax incentives have been proven to be successful in accelerating the adoption of new technology and equipment in a number of states. Buy-back programs for inefficient air conditioners, back-up diesel generators, and other inefficient equipment subsidize the high cost of replacing inefficient goods with those that employ newer and more energy efficient technologies. Low cost financing provides an incentive to invest in energy efficiency and clean power technologies within demand response by offering a reduction in the total cost that would be paid over time through a decrease in finance payments. System benefit funds (SBF) can be leveraged in demand response programs to provide funding for financial incentives. An SBF consists of a mils-per-kWh charge on a consumer's bill from an electric distribution company to provide funding for certain public benefits such as low-income assistance and energy efficiency. Federal and State Programs Many existing state and federal programs promote adoption of demand management and distributed or on-site generation, including cogeneration and renewable energy technologies, through recognition, benchmarking and even financial incentives, as detailed above. The most recognizable federal energy efficiency program is Energy Star, a national energy efficiency program for individuals and businesses, managed in partnership by the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Energy (DOE). Rebuild America, another federal program sponsored by DOE, is a network of community partnerships that improve the energy efficiency of their commercial and multifamily residential buildings. Federal standards for appliances, equipment, and lighting products are a cost-effective and powerful policy tool for conserving energy by facilitating a shift to more efficient technologies. DOE offers a BestPractices Program, which evolved from the Motor, Steam, and Air Challenge programs, combining these into one cross-functional energy efficiency assistance program for businesses. State governments have also taken a leading role in developing programs that encourage base and peak load shaving through energy efficiency, improving the effectiveness of demand response. One example is the state of New York’s air conditioner replacement program, which provided $45 million to programs for the retail substitution of about 38,000 older air conditioners with new ones in 2000 and 2001. Other state efforts, such as energy codes, smart growth policies, building energy efficiency programs (such as Pennsylvania’s Green Buildings Council program), building commissioning and school efficiency programs, have improved system reliability, cut costs, and provided public health benefits by reducing air emissions through reduced electricity consumption. These types of federal and state programs promote greater energy efficiency and adoption of cleaner and more efficient technologies. They can also leverage other incentives, such as financial ones, to reduce electrical load. Communication Tools As with the development of any new concept, communication and information sharing is a key element to building a foundation of support and a framework for continued growth and improvement for demand response programs. Creating educational programs for the electricity supplier and consumer on demand response program elements is a first step to promoting consumers’ participation in such programs. Programs provide information and materials that explain when and how to participate, as well as the relative benefits of the various options available to the consumer. Examples of communication tools include information and marketing campaigns designed to educate consumers about demand response programs. Others facilitate consumers’ decision-making in real time. For example, there are a number of communication devices available that deliver real-time electricity price and usage information to consumers throughout the day. These tools, e.g., software programs or building controls, actively engage consumers in reducing demand at the times it is most needed. Technology Tools Technology tools and innovation are critical to achieving greater consumer participation in demand response programs and maximizing benefits to all participants. For example, while prices can be manually monitored, current technology provides for the use of automatic controls to assist consumers in managing electrical usage. These technologies make it possible for customers to avoid having to continually monitor price variations and make hourly decisions, which in turn provides better consistency and has less variation in consumer response. Curtailment tools are becoming more readily available as concerns about maintaining a reliable power supply increase. One example of such load curtailment software, made available by Silicon Energy, allows an energy supplier to notify its end-use customers of a price spike via email, PCS phone, and alphanumeric paging. Customers can respond in real time by curtailing their usage. xviii Metering technology is an integral part of any demand response program, and is used to verify load reductions and provide the basis for incentives and payment. The standard utility interval metering equipment used for regular customers is sufficient for some programs, but others require more sophisticated metering equipment. Demand response participants must be able to submit their consumption and metering data in a common format that is verifiable and easy to use. Consequently, some demand response program providers have deployed equipment that is able to relay the information, in real time, to the ISO. Other demand response program providers rely on e-mail submissions with a 45-day turnaround. i Steve Nadel, Fred Gordon, and Chris Neme, “Using Targeted Energy Efficiency Programs to Reduce Peak Electrical Demand and Address Electric System Reliability Problems,” a report by the American Council for an Energy-Efficient Economy, November 2000. ii Ibid. iii Ibid. iv Lucy Johnston, “Load Response and Environmental Impact,” a presentation prepared by Synapse Energy Economics, November 15, 2001. v Lucy Johnston, “Consumer and Environmental Benefits of Load Response,” a presentation prepared by Synapse Energy Economics, July 16, 2001. vi Ibid. vii Ibid. viii Steve Nadel, Fred Gordon, and Chris Neme, “Using Targeted Energy Efficiency Programs to Reduce Peak Electrical Demand and Address Electric System Reliability Problems,” a report by the American Council for an Energy-Efficient Economy, November 2000. ix Richard Cowart, “Efficiency Reliability: The Critical Role of Demand-Side Resources in Power Systems and Markets,” a report prepared by the Regulatory Assistance Project for the National Association of Regulatory Utility Commissioners, June 2001. x Steve Nadel, Fred Gordon, and Chris Neme, “Using Targeted Energy Efficiency Programs to Reduce Peak Electrical Demand and Address Electric System Reliability Problems,” a report by the American Council for an Energy-Efficient Economy, November 2000. xi Richard Cowart, “Efficiency Reliability: The Critical Role of Demand-Side Resources in Power Systems and Markets,” a report prepared by the Regulatory Assistance Project for the National Association of Regulatory Utility Commissioners, June 2001. xii Steve Nadel, Fred Gordon, and Chris Neme, “Using Targeted Energy Efficiency Programs to Reduce Peak Electrical Demand and Address Electric System Reliability Problems,” a report by the American Council for an Energy-Efficient Economy, November 2000. xiii Ibid. xiv ACEEE, “Using Targeted Energy Efficiency Programs to Reduce Peak Electrical Demand and Address Electric System Reliability Problems,” Steve Nadel, Fred Gordon, and Chris Neme, November 2000. xv Bruce Hedman and Tina Kaarsberg, The Distributed Generation Handbook, Pacific Northwest National Laboratory, Spring 2000. xvi Nathanael Greene and Roel Hammerschlag, “Small and Clean is Beautiful: Exploring the Emissions of Distributed Generation and Pollution Prevention Policies,” The Electricity Journal, June 2000. xvii Bruce Biewald, Lucy Johnston, Jean Ann Ramey, Paul R. Peterson, and David E. White, “The Other Side of Competitive Markets: Developing Effective Load Response in New England’s Electricity Market,” a report by Synapse Energy Economics prepared for the Maine Department of Attorney General and the Maine Office of the Public Advocate, July 13, 2001. xviii Ibid.
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