Demand Response Program Design: Start at the End

By Chelle Izzi, ConsumerPowerline

A growing number of utilities are increasing their commitment to implementing and enlarging demand response programs. At the same time, ISOs are introducing new and improved demand response (DR) programs and specialized DR firms are expanding nationally. All of this has brought more attention to demand response. Perhaps we”ve finally reached a tipping point where the question is no longer “if,” but “how,” to design and manage demand response programs that work best for all stakeholders.

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This “how to” – that is how to make demand response work most effectively for all involved – is the subject of this article. It is based on ConsumerPowerline’s experience as a demand response provider since 2000 and includes feedback from commercial, industrial and institutional clients and prospective clients in New York, New England and California – as well as our interactions with utilities and ISOs across the country. But first, a little background on how we got where we are today.

DR’s Checkered Past

Historically, DR programs were often designed by utilities and ISOs based on the existing rules and operations requirements that applied for generators. Understandably, resource planning and operations place a premium on reliability and total flexibility. Unfortunately, the DR program rules that would give operations all the reliability and flexibility they wanted were also likely to drive away many DR participants.

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Today, program design can incorporate not only the needs of operations, but also the needs of end-users. A substantial “installed-base” of residential, commercial, industrial and institutional end-users has participated in demand response. These end-users – and the demand response firms that represent them – can now provide valuable insights for utilities trying to design new DR programs, or increase the effectiveness of existing programs.

In fact, at conferences, I’m often overwhelmed by the enthusiastic response I receive from utility representatives charged with the design and launch of demand response programs; unfortunately, they often have little local end-user experience upon which to base their program design. Everyone wants to know answers to the same questions:

  • How do you secure and grow participation?
  • How do you ensure performance?
  • How do you retain participation?

Program Design is Key

There is no demand response without willing participants. The most important thing for program designers to keep in mind is that for end-users, demand response is voluntary. Even if participants will realize substantial savings or revenues, most end-users will not participate in a program – at any price advantage – if it jeopardizes their core business. Hospitals won’t risk lives; hotels won’t risk guest discomfort. Manufacturers won’t risk quality on critical processes; financial services firms won’t risk data, and property managers won’t risk tenant satisfaction. End-users vote with their feet – DR programs that have required events too frequently, for too long, or with little predictability have seen participation drop off dramatically.

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While most facilities will execute substantial load reductions if they truly believe the grid is on the verge of failure and that their efforts will help prevent a blackout, these last-ditch efforts are often not captured demand response commitments that can factor into resource planning. The challenge for everyone who believes in DR is to bridge the gap that exists between the current participation levels in DR and each facility’s curtailable load under the worst-case scenario.

Balancing Utility Operations and End-user Needs

The biggest obstacles to increased participation are often program rules that make participants fear their ability to protect or manage their core business.

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Unfortunately, it’s not unusual for the operations group and the DR group within utilities/ISOs to function quite independently. To achieve DR program rules that recruit and retain high levels of customer participation, organizations should commit to ongoing discussions among operations, DR program managers, curtailment service providers and program participants. When this happens, it makes the program stronger; in California, for example, active input from curtailment service providers based on client feedback led to changes in program rules that have reduced the barriers to entry for new participants.

While DR is still evolving and there is no perfect program design, our experience with end-users follows a familiar business pattern. Not all customers are alike; they seek the product that best fits their needs and they are willing to make trade-offs between price, convenience and quality. In the case of DR, this trade-off is typically between the perceived economic and community benefits of participation vs. the hassle, unpredictability and risk of participation.

For example, while potential participants may be capable of – and comfortable with – responding on a 30-minute or 2-hour notice for events, they may not be able to manage the open-ended risk of programs that do not cap the total number of hours required to perform per day or per season. As a result, they may choose to participate voluntarily and eliminate any potential penalties of non-performance in a mandatory program.

The good news is that DR programs can be designed with different types of end-users in mind to attract the maximum number of participants at terms the utility/ISO is willing to offer. Traditionally, DR offerings have been mandatory or voluntary, reliability-driven or price-responsive. What if there was more than one type of mandatory reliability program? You could create different types of DR offerings that match the varying levels of commitment end-users are willing to make for varying levels of payments that can be justified by the utility/ISO. This is already happening under the ISO New England (ISO-NE) and with several utilities in California.

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Ultimately, it is a local exercise to strike the right balance among operations needs, justifiable payment structures and varying DR program offerings that end-users will embrace. The table (above) offers a few guidelines to keep in mind as you undertake this process.

Sizing and Growing the Market for DR

In launching a DR program, your goal may be to achieve DR across your end-user base, in the largest/fastest-growing segment of your end-users, or in the most “peaky” portion of your end-user base. Alternatively, you may set a target number of MWs to achieve through DR across all customers based on constraints in establishing new generation resources and/or the level of annual load growth. The aggressiveness of your goal will determine how many types of customers you need to reach. At ConsumerPowerline, we generally use 10 percent of peak demand as a simplistic guideline for the potential market size of DR reduction across all customer types in any market.

Many existing programs have successfully reached the few very large C&I end-users with extensive controls or emergency generation capacity. But creating a sustainable, diverse set of DR resources means penetrating more mainstream commercial, institutional, multi-family and single-family residential properties.

One key to maximizing the number of potential enrollees is to think beyond facilities with direct load controls. While direct load controls reduce the burden on client staff and reduce response time to event notifications, controls may still be cost-prohibitive in some settings. We have found it is often better to enroll a client with limited existing control capabilities and then use the DR revenues they earn to finance controls upgrades and/or additional control points. We have also found that as long as DR participants clearly understand how performance affects their earnings, they will achieve high performance levels without direct load controls.

Another critical factor in securing broad enrollment in DR is data reporting requirements. Over time, this issue will become less of a factor as AMI is incorporated into smaller and smaller end-users. For now, often the single largest factor in how fast a new demand response resource can come on-line is how fast interval metering can be installed. Most major commercial and industrial facilities have interval data already; but accessing the rest of the market requires metering upgrades by the local utility, acceptance of non-utility metering and/or acceptance of statistically based results for user-types based on sampling data.

At a minimum, launching a new DR program requires establishing a clear internal process so utility metering departments know how to prioritize and manage increased demand for meter upgrades associated with new DR resources. In our experience, metering departments are often not involved enough in designing DR programs, or in planning the operational roll-out of new programs. The end result can be months of lost DR participation by end-users that are otherwise fully committed and ready to participate.

The acceptance of non-utility metering data is largely a function of how responsive the utilities’ metering departments can be; if they can install/upgrade metering in a matter weeks, then alternatives may not be required. However, if metering install/upgrade times average more than one to two months from order to completion, then DR program managers should consider alternatives.

The acceptance of statistically-based results for user types using sampling data has long been used for billing and is also accepted in some ISO / utility programs under “small customer aggregation.” If small C&I and/or residential customers make up a large portion of your total peak load, you may need to create rules for accepting sampling data for DR performance in order to increase enrollment.

Motivating End-users

Once you’ve designed your DR program to balance operations requirements and end-user concerns, the next challenge is to reach prospective customers and secure their participation. According to a Peak Load Management Alliance (PLMA) study (“Demand Response: Design Principles for Creating Customer and Market Value,” PLMA, November 2002), end-users participate in DR for the following reasons (in order of importance):

  • Obtain bill credits and incentive payments,
  • Help the utility company during peak situations,
  • Help the community, and
  • Obtain a non-financial product or service.

However, in our experience, C&I clients are much more motivated by earned revenues than bill credits. Demand response revenues provide a source of financing for other energy initiatives and capital upgrades that facility managers can use. In contrast, electricity cost savings often go to a general budget, where the staff responsible for creating the DR load reductions rarely receives recognition or rewards.

So it’s not just about providing an economic incentive for DR. It’s also important to think about how to motivate the facility-level staff – those who assume the hassle, responsibility and risk of participating in DR. When DR gives facility-level staff revenues for long-postponed projects and recognition that extends beyond the sub-basements and control rooms, DR is not hard to sell.

The Green Side of Demand Response

Of course, many firms also choose to participate in DR out of a sense of corporate responsibility and environmental stewardship. To help make these corporate contributions more credible and visible externally, program designers should translate and quantify the community benefits of achieved DR performance.

For example, how does each MW of DR load reduction positively impact the environment through reduced greenhouse gas emissions (via load reduction and reduced reliance on peaker power plants)? How does sustainable and reliable DR reduce prices for all ratepayers? How does DR support economic development and save business and tax revenues by providing business continuity during periods of grid stress? Studies have been done attempting to quantify all these benefits, but they often require a localized interpretation or don’t make it into basic marketing materials. We have to help DR participants quantify and get credit for what they do if we want to achieve mass-market enrollments.

One way to dramatically accelerate enrollment would be to include demand response reductions achieved through curtailment (not emergency generation) as qualified renewable resources. This deserves an article in itself, but there can be no doubt that giving DR participants the additional benefits of “generating” a renewable resource would spur increased participation in DR.

Program Design and Program Management Plans for Success

This article has focused on identifying program design elements that can have the biggest impact on the number, size and quality of participant enrollments. However, creating a program design that motivates potential participants is only half the battle. Actually reaching and signing-up end-users is the next challenge. In New York, ConsumerPowerline was one of the first demand response providers. As we have entered each new market, we have learned that in a DR program’s early days, an effective sales approach is often about education and evangelizing, and this can be a time-consuming, expensive process. Sales and customer service can also be difficult because often, in many organizations, no clear decision-maker is responsible for demand response, or there are multiple decision-makers, and they are not necessarily the same players responsible for utility bills. As you plan your DR program, consider the operational requirements for launching and managing such a program.

Utilities use a growing number of models to implement DR. Some manage their entire program internally. Some issue RFPs and award one or more DR providers a set number of MWs at a set price. In other cases, the utility-run program competes head-to-head with private firms. Some utilities rely on the ISO programs to reach potential participants in their area. Not surprisingly, we advocate DR programs that are open and competitive; this entices more firms to promote DR, leads to higher revenues for end-users, increases the percentage and MWs of total enrollment, and spurs innovation.

Regardless of the structure you choose, sustainable end-user participation is the key to success for all DR programs. So remember, start with the end – the end-user.

Chelle Izzi is general manager for ConsumerPowerline in New York. She has worked extensively with some of ConsumerPowerline’s largest clients and frequently speaks at industry conferences such as DistribuTECH, EUCI, TFM and PLMA about the needs of end-users and the opportunities for leveraging demand response to achieve integrated energy management.

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