Benchmarks

We were engaged in a lively discussion on energy procurement strategies in Memphis earlier this spring when cell phones started ringing. Corporate energy managers representing companies with major operations in California were getting frantic calls from staff in the Golden State concerned with getting power now! One manager sighed, "Our energy bills are growing every month, summer's not even here yet. … And now they're shutting off our power with almost no warning."

Slim reserve margins in the Northeast and escalating natural gas prices across the country added to the mounting financial risk this group was exposed to. Some chose to sign long-term agreements for power, locking in prices that looked attractive at the time. But summer has arrived, demand is lower than expected, and market prices have even forced officials in California to sell back some of their "firm" power at a loss.

What happened to change the situation so dramatically? Did every company take its manufacturing out of state? Maybe a few did, and some of the demand reduction can be attributed to a relatively mild summer thus far. But, there is also evidence that customers have chosen to adopt new technologies that increase the effectiveness of the power they purchase.

New control technologies, for example, allow end-use equipment such as lighting and HVAC systems (which account for about 60 percent of commercial loads in the US) to respond automatically to price signals. In New Zealand, where retail markets have been competitive for a decade, many customers have real-time meters. The response to coincident peak pricing programs there has shifted enough load to off-peak periods to significantly flatten system peaks. In the US, while not everyone has a real-time meter, multitudes of active load-management programs are being offered.

For instance, Cinergy estimates that its PowerShare program reduced summer peaks by more than 20 percent on certain days. That response is consistent with findings from a recent Esource survey of 700 facility managers across the US. They indicated a willingness to shed 11 percent of their load for an incentive of $.20 per kWh. If one targets those most likely to participate and raise the incentive to $.50/kWh, respondents say they would reduce demand by a whopping 27 percent. Given on-peak supply costs in many regions, this data suggest that most price spikes could be mitigated by offering appropriate incentives to customers.

The real question is whether the current reduction in demand is temporary. Our research indicates that about 80 percent of the floor space at Internet server farms is vacant, and the power density of the computing muscle that is there will continue to decrease. We've seen similar overbuilding in the telecom sector. Maybe there is something to learn from these industries.

Even before the politicians inside the beltway started screaming "crisis" this spring, our country was poised for the largest generating capacity expansion in history. Nationwide, new supplies are expected to exceed 40,000 megawatts per year for each of the next three years! In New York, reserve margins are expected to rise to over 30 percent by 2004.