Demand Response and Competitive Electricity Markets
Demand Response (DR) refers to strategies customers, typically large commercial and industrial consumers of electricity, use to reduce their consumption at times of high demand or in response to rising market prices. Many large energy users participate in organized demand response programs to control their energy costs and sometimes profit by reducing their use.
During 2007, 8 percent of energy consumers in the United States participated in some kind of demand response program and the potential demand response contribution from all such programs reached close to 41,000 megawatts, or 5.8 percent, of U.S. peak demand. This represents an increase of about 3,400 MW from the 2006 estimate.
Why are demand response programs more successful in competitive electricity markets?
Competitive markets provide a superior environment for demand response programs for a number of reasons:
-- Value: Organized markets assign a greater value to a kilowatt saved or produced during peak demand than a kilowatt saved or produced during normal times.
-- Transparency: Markets provide transparency so customers can act on price signals during times of high demand and reduce electricity use.
-- Innovation: Competition encourages innovation and as a result, entirely new markets have emerged such as automated demand response programs that make energy saving easier for consumers and suppliers.
Demand response providers make substantial additional capacity available during peak demand periods and have become important players in unregulated electricity markets such as PJM and ISO New England.
In non-competitive markets, demand response programs are dictated by regulatory fiat, not consumer choice, and are far less robust.
How do demand response programs work?
Various methods are used by customers to monitor and control power use, from programmable thermostats and smart meters to more sophisticated software programs. Generally, at times when energy demand is high and therefore prices are rising such as a very hot summer day, these devices allow customers to reduce use of services such as air conditioning, lights, and machinery and thereby reduce the “demand” for electricity. Under conditions of tight supply, demand response can significantly reduce the peak price and, in general, electricity price volatility. With the more sophisticated programs, unused power can be sold back to a utility, or on the open market, reducing the need to turn on additional power plants. In addition to saving money by not using energy when prices are highest, in some cases these energy customers are also directly paid for reducing their energy usage through so-called “capacity payments”.
Beyond savings for participants, what greater benefits do demand response programs provide in competitive markets?
Demand response programs can aid reliability, helping ensure that the lights stay on so businesses can continue to operate. For example, through demand response programs PJM Interconnection received an extra 1000MW of electricity – enough to power 1 million homes - in 2007 on its peak demand day, which occurred in July. Demand response programs are an important factor for maintaining grid reliability and controlling wholesale costs during peak demand.
Demand response also reduces the need to build new power plants.
A recent study sponsored by the ISO-RTO Council, whose members operate regional markets that serve two-thirds of electricity consumers in the United States, found that regional markets are meeting 4.5 percent of their electricity demand through demand response programs. That means more than 23,000 megawatts of demand were met without building or turning on existing expensive peak generating plants.
