Why are there Demand Response programs?
Reducing Peak Energy Use Is a Win-Win for Everyone
Heat waves, repairs and storms can lead to high electricity demand and short supply, making power interruptions and blackouts a real threat. But building enough power plants to satisfy every possible supply and demand scenario is unworkable due to the tremendous costs and environmental impacts.
A 2007 study by The Brattle Group shows that a 5% drop in peak demand could result in substantial savings in generation, transmission and distribution costs – enough to eliminate the need for more than 600 infrequently used peaking power plants over the next 20 years along with many substations and miles of transmission lines. With an annual savings of $3 billion, this translates into $35 billion in avoided costs to ratepayers.
The chart above produced by the California Independent System Operator (CAISO) shows that peak demand events occur infrequently. This is why utilities around the world offer incentives for customers to reduce their demand for power rather than build and operate new “peaker” power plants. Demand Response programs are four-way wins for enrolled customers, ratepayers, utilities and the earth’s resources.
The challenges that power companies are facing:
- Generating extra power for short duration events when electricity demand peaks—such as hot summer days—is highly expensive and complicated
- When demand peaks, the cost of buying “spot” electricity from out-of-state producers is highest
- Electricity cannot be stored like other natural resources, such as water, lumber, mineral ores and other commodities
- The California electric grid has exhibited signs of stress during peak demand periods, like hot summer afternoons when blackouts have occurred
- Bringing new renewable forms of energy like wind and solar power requires the ability to manage inconsistent loads due to the fickle nature of "passive" generation resources like wind and sunshine
So power planners have been developing ways to manage both the supply of--and demand for--electricity. Turns out, it's actually cheaper and easier to incent some consumers to NOT use power when overall demand is very high than it is to build new power plants, transmission lines, substations and other expensive infrastructure.
Eventually, new capital investments will have to be made in generation and transmission. But the governing bodies like the California Energy Commission and the California Public Utilities Commission are encouraging utilities like Pacific Gas & Electric (PG&E) and Southern California Edison (SCE) to incorporate energy management programs into their rate structures. Moreover, it will always be more cost effective to match generation resources to the average demand and then supplement with cost effective resources and programs to provide power for the short-term peak periods, which occur less than 2 percent of the time.
Demand Response programs are characterized by their ability to provide benefits from all participants with no "losers." These programs do, however, often require a different way of thinking about energy use as well as new processes to accommodate shifting rates and to optimize incentives.