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Transforming utility customer service: Incentive structures for peak load reduction

Image by Goran Horvat from Pixabay

This series of articles explores both grid-scale and behind-the-meter grid optimization strategies and the implications for utility customers. The first three articles in the series (see list below) dealt with the regulatory framework that enabled grid-scale and behind-the-meter demand assets in Massachusetts; the game changing technology of battery storage; and the foundational technology and communication protocols necessary to ensure a successful grid optimization strategy that is inclusive of customer-sited assets. This article focuses on important design attributes of incentive-based grid optimization programs that encourage load reductions. The last two articles in this series will explore aspects related to internal utility governance processes and how the various aspects discussed in these series of articles come together to form the grid of the future.

Properly designing the incentive structure and parameters of a grid optimization program focused on customer peak load reduction is critical. If incentives are set too low, it may be difficult to attract customers to a program. If incentives are set too high, utilities may be unnecessarily spending funds to acquire load reductions. There are also considerations as to whether incentives should be paid upfront  or after a verifiable action has been taken.

One of the more popular program designs gaining traction in the industry is a pay-for-performance design. This design structure has been adopted in Massachusetts. In a pay-for-performance program design, the utility does not provide any upfront incentives. This contrasts with other program designs that provide an upfront capacity reservation payment for the customer to be available to reduce load when called upon. Pay-for-performance rewards a customer for measurable energy reductions after a set period of time. Table 1 outlines a hypothetical scenario where a utility calls five three-hour events over the course of the summer and pays a $35/kW incentive. At the end of the summer, the utility calculates the average kW reduction over those 15 event hours and pays the customer the incentive rate multiplied by the average kW reduction. In this example, the customer receives an incentive of 125 kW x $35/kW or $4,375.

Table 1. Hypothetical Pay for Performance with Full Participation

An additional consideration is whether there should be any out-of-pocket penalties for customers who did not perform during certain events. The possibility of out-of-pocket penalties may scare away some risk intolerant customers who otherwise have the potential for good savings. Pay-for-performance programs provide an alternative to out of pocket penalties by having non-performance reflected in a lower total incentive due to the lower average kW reduction. Table 2 illustrates how a customer’s incentive is impacted by not producing any savings during an event (Event 4). In this example, the customer receives an incentive of 100 kW x $35/kW or $3,500. Not enforcing out-of-pocket penalties is likely to encourage program participation while ensuring that the utility is insulated against paying for savings that never materialize.

Table 2. Hypothetical Pay for Performance with Partial Participation

One attractive attribute of upfront incentives or capacity reservation payments is that they help customers overcome first cost issues associated with installing expensive pieces of equipment, like batteries, that are used to generate peak load reductions. Customers or project developers may be reluctant to go forward with a project without any guarantee of revenue or upfront incentive. This may also make it difficult for a project to obtain financing. To deal with this issue, companies interested in a pay-for-performance design could consider a multi-year demand response incentive guarantee. The pay-for-performance criteria remains in place so customers have the operational risk to perform. However, the utility is taking away the incentive risk by guaranteeing that it will be available at a certain level for a number of years.

Developing the right design is critical to the success of any grid optimization program that includes customer-sited assets. In order to attract customers to the program and deliver a positive customer experience, utilities should carefully consider how incentives are paid and what customers are getting in return for those incentives. Done correctly, a well-thought-out program design can help a utility engage with its customers while simultaneously providing benefits to the grid.

Other articles in this series: