by Stuart Schare and Brett Feldman, Navigant Consulting
On October 14, the Supreme Court heard oral arguments in the case of the Federal Energy Regulatory Commission’s (FERC) Order 745 on demand response (DR) compensation in wholesale electricity markets. Many industry players are waiting for the court’s decision as a watershed moment for DR that may make or break its future.
In a rapidly transforming electricity industry that is demanding greater generation flexibility and less centralization, however, evolving DR technologies and changing market drivers will spur DR growth regardless of how the court rules.
While the amount of DR capability in North America has grown considerably in the past five years, DR technologies and policies have generally relegated DR to a minor role as a last-called resource. Regulatory policies in support of DR have focused on the magnitude of megawatts achieved at the expense of the quality and usefulness of those megawatts. Slowly, but surely, this is changing.
The use of DR in grid planning and operations has solidified as utilities increasingly rely on DR to meet installed capacity requirements and sometimes even operating reserve requirements. Furthermore, independent system operators (ISOs- led by PJM-have incorporated DR into procurement mechanisms for capacity, energy, and ancillary services, Utilities with high penetrations of renewable energy-led by Hawaiian Electric-are actively soliciting “grid services” from aggregators of demand-side resources.
Industry acceptance of DR as an integral part of the future grid also continues to grow, with states like California and New York rolling out major regulatory initiatives. But government policies are not the drivers of DR that they once were-it is utility industry business and operational dynamics that are moving DR into a more integrated and valued resource.
This article describes the current DR landscape in North America, including activities that affect how much DR is in place and how it is utilized. It covers some of the emerging DR technologies that are allowing DR to be viewed more on par with generators, and it reviews new applications of DR that are raising its prominence as a valued resource alternative for utilities and system operators.
DR in North America
Utility DR resources are typically based on a regulator-approved tariff, and offer a fixed incentive, or set of participation and incentive options, to eligible customers who voluntarily enroll in the programs. In the wholesale markets, some of the nine major Regional Transmission Organizations (RTO) and ISOs in the United States and Canada have crafted DR programs or integrated DR into their market designs (Figure 1), thereby encouraging customer load participation. DR has matured in the electricity market and has been afforded the opportunity to bid directly against generation in these markets-commonly for capacity, but also for energy and ancillary services in some regions.
In New York, the Public Service Commission is undertaking perhaps the most ambitious plan to date from a state looking to modernize its electric utility sector. Called Reforming the Energy Vision (REV), the initiative’s goal is to transform the current utility model into a distribution system platform (DSP). The role of the DSP would be to lay the groundwork required for energy service providers on both the grid side and the customer side of the meter to provide products and services to enhance the distribution system’s efficiency. As part of the proceeding, utilities are required to develop their own DR programs as a supplement to New York ISO DR programs.
In California, the ISO (CAISO) is one of several bodies contributing to a “bifurcation” plan to split DR into supply-side and “load-modifying” resources. Essentially, this means is that price-based programs intended to shape loads will remain with the utilities, while programs focused on reliability, flexibility, and ancillary services will reside with CAISO. The CAISO recently announced plans to allow DR aggregators to participate in its markets, while the California Public Utilities Commission has instructed the utilities to run a DR Auction Mechanism to procure DR as a capacity resource.
The FERC Order 745 Supreme Court Case
In 2011, FERC issued Order 745, which required wholesale energy markets to pay the same price for DR as they do for electricity generation. Energy supplier and generation groups challenged the order in federal court as unjust and unreasonable compensation.
In 2014, a panel of the U.S. Court of Appeals overturned the order by a 2-1 vote, potentially reverting things to how they were before-or making them worse, depending on interpretation. The majority opinion went even further and found that DR in the wholesale energy market is a retail transaction, which is outside of the FERC’s jurisdiction.
FERC asked the U.S. Supreme Court to review the case, which was granted and set the stage for the hearing on October 14 with a decision likely in early 2016. If the worst-case scenario plays out and DR is disallowed from all wholesale markets, states and utilities will have to fill the void. Depending on their status and disposition, this could take months to several years to enact. The short-term momentum of DR would be halted, but in the long term, if states and utilities assign higher value to DR than do the wholesale markets, it could lead to increased opportunities for DR.
DR as a Grid Management Resource
If DR is now well-established as a capacity resource that can provide emergency relief for reliability purposes, it has only recently begun making a name for itself as an operating resource to be used on a more regular basis for providing 10-minute operating reserves and other more precise ancillary services.
Figure 1: North America RTO and ISO Map and Associated DR Capacity
Many of the core attributes describing combustion turbines and other generators have analogs for DR resources. The real question is whether the performance of DR is comparable to generation-or at least whether DR can perform well enough compete and to provide a portion of the services required by grid operators.
DR has been active in the synchronous reserves market in PJM for several years, providing up to 25% of the requirement at times. The frequency regulation market has shown signs of growth, particularly since ISOs implemented FERC Order 755 which affords greater compensation to faster-responding resources. Several alternative resource providers, including batteries and DR, have begun bidding into the markets and showing their ability to compete.
Another growing application of DR is as a balancing resource to help integrate the increasing penetration of intermittent renewable energy. Output from resources like solar and wind power is less predictable than from thermal generation, and the necessary backup capacity has typically been provided by thermal plants on standby or generating at below optimal levels. Flexible, fast-responding DR resources may be able to provide this backup and possibly at a lower cost.
In 2013, CAISO constructed the now famous “duck chart,” (Figure 2) which shows the anticipated future load shape for the state in the shoulder seasons as solar becomes a larger part of the generation portfolio. The state will experience steeply declining net loads (customer demand minus customer-sited renewable generation) in the mid-to-late morning as solar production picks up, and even more dramatic increases in net load growth in the late afternoon as solar production drops off concurrent with an increase in residential loads.
The new load shape provides opportunities for DR (as well as storage), especially in the late afternoons when load curtailment could slow-or at least help manage-the sharp ramp up. Alternatively, DR could be used to shave off some of the new evening peak. In the mornings when net load is in decline, DR can also help to balance the grid by soaking up excess supply as generators struggle to ramp down. This an example of how DR does not always have to be a reduction in demand. An increase in demand-in response to an incentive or price signal-is also demand response and is a contributor to the growing view of DR as an active resource for grid operations.
Some of the applications and technologies for DR as a down-ramping resource include over-cooling cold storage facilities and refrigerated warehouses-essentially using existing facilities and technologies for on-demand thermal storage to draw power from the grid, as well as to tap into the stored energy at a later time to reduce demand from the grid. On the residential side, grid-interactive water heaters provide similar services, controlled by real-time, two-way communication with the utility, grid operator, or load aggregator.
The Future of DR in North America
If DR is on a decades-long evolutionary path, will it continue to mature into an even more valuable grid resource on par with generation? Or will energy storage and the increasing demands for grid management in a world of high renewables penetrations squeeze DR out of the picture?
Aside from government policy, the power sector is undergoing a fundamental transformation that could lead to an increase in DR capacity or how widely DR is used. Led by rooftop solar, encouraged by the prospect of cheap storage, and with the possibility of massive amounts of electric vehicles on the grid, the industry is slowly shifting away from a centralized hub-and-spoke grid architecture based on large centralized generation assets like fossil fuel, hydro, or nuclear power plants.
The new paradigm-dubbed the Energy Cloud in a 2015 Navigant white paper-envisions an increasingly decentralized electrical grid that makes greater use of distributed energy resources, including DR. This change encompasses a diverse suite of technologies that includes energy storage, energy efficiency, DR, and the advanced software and hardware that enable greater control and interoperability across heterogeneous grid elements. These are all key components of the emerging energy cloud that is being accelerated by evolving regulation of carbon emissions, a more proactive consumer or prosumer, and the continuously improving financial viability of distributed resources compared to traditional generation.
Navigant projects that there will be about 70,000 MW of DR in North America by 2023, an 11 percent annual growth rate. One indication of the growing prominence of DR and the vendors/service providers supporting it is the growth in membership of the leading DR trade association. The Peak Load Management Alliance (PLMA) has been in existence since 1999, yet just in the past three years had more than doubled in membership from less than 40 members to nearly 90 today.
Figure 2: California’s Future Load Shape and Opportunities for DR
|(Source: Adapted from California Independent System Operator)|
The regulatory uncertainty caused by the FERC Supreme Court case-while interrupting DR’s long-term trajectory-is an indication that the industry demands more responsiveness and accountability from DR resources. This will push the continued evolution to more fully automated, fast-responding, and controllable DR resources that are able to play an increasing role in integrating intermittent renewable energy and in managing real-time grid operations.
Stuart Schare is a Managing Director in Navigant’s energy practice and one of the firm’s leaders in demand response strategy, program design, and resource evaluation. Stuart is an elected member of the Peak Load Management Alliance’s Executive Committee, and he is a frequent speaker on topics related to utilities’ use of DR for resource planning.
Brett Feldman is a senior research analyst with Navigant Research, contributing to the Utility Transformations program. The chairman of the Business Issues Committee of the Association of Demand Response and Smart Grid, he focuses on demand response programs and their implications for the global power industry.