About four months ago, at a conference at Stanford University’s Center for International Development, the economist and utility industry expert Frank Wolak turned heads with a not-so-new but very...
Demand Response: The Missing Link
Everyone is in favor of more demand response, but little gets delivered when system operators need it the most.
With growing demand, rising electricity prices, and dwindling reserve margins, utilities and system operators around the country increasingly are focusing on bringing demand into the delicate real-time balancing of supply and demand. This elusive goal has preoccupied the industry for more than 30 years. Starting with relatively primitive and inflexible schemes, such as interruptible loads or time-of-use pricing (TOU), 1 the industry gradually has become more sophisticated.
Schemes such as time-variable pricing—also called real-time pricing (RTP)—and critical peak pricing (CPP) increasingly are being offered. In fact, the Energy Policy Act that Congress passed in August 2005 makes it mandatory to provide such tariffs to virtually any customer who wants it. 2
At the same time, state regulatory commissions in a number of states, notably California, have decided that the time for a virtual switchover to interval smart meters with two-way communication capabilities has arrived, encouraging utilities to undertake massive investments in so-called advanced metering infrastructure (AMI). 3
As more smart meters are installed and more utilities offer time-variable prices, more customers are expected to enroll in these programs, enhancing the system operators’ ability to better manage the peak demand. Among the most promising concepts is the idea of demand response (DR), where customers volunteer to reduce electricity consumption during peak demand periods in exchange for financial incentives.
Voluntary shedding of discretionary load in response to real-time price signals—akin to the airlines’ practice of getting a few passengers off an overbooked flight so the remaining passengers can get the service they need—is the industry’s holy grail. Its key significance is that it is voluntary; customers are not denied service, but rather they choose to forgo service in exchange for incentives offered. 4
When supplies are tight, customers with discretionary loads, like airline passengers with flexible schedules, agree to get off, and do so only when the incentives are sufficiently attractive. And just as the real-time auction that takes place at the boarding gate, where the rewards offered rises to get sufficient number of passengers to come forward, the system operator can adjust the incentives to get sufficient number of megawatts off the network.
The problem, as experienced during this past summer’s heat wave, is that typical system operators do not have the necessary means to get anywhere near the full potential of DR. What they currently can get typically is the “tip of the iceberg,” a mere fraction of the