Two years ago, the words ‘demand response’ might have provoked a quizzical look on the face of even a wizened energy expert if asked what he thought about the topic. But during those two years, demand response has increasingly come to be an expression on the lips of many policy makers, energy providers, energy technology companies and energy practitioners. And the result of this has been more than lip service. Demand response is indeed on the rise when it comes to new energy policies, and new energy programmes and products.

Demand response means enabling electricity customers to see price signals and respond to them by reducing/shifting usage such that they become both a long range and dynamic resource for addressing pricing, reliability and other issues, while allowing the optimisation of the planning and operation of the electricity grid and system.

That said, demand response remains an emerging energy discipline that still means different things to different people. While many definitions currently exist, the one on the left may work to get us all on the same page:

The biggest part of the ‘enabling’ that this definition begins with is technology. In fact, with few exceptions you can’t have demand response without some kind of technology that enables it to happen. To those who are technology providers to the energy industry this is good news, in that it means you have a new market driver for your offerings. But of course for that to happen there must be drivers for demand response. Let’s take a look at what they are.

What is driving the increased focus on DR?

The initial driver for demand response, and still the most oft-cited, is management of peak prices and load. The sensibility of providing price-based incentives to electricity users to encourage them to shift their load off-peak came into sharp focus in the shortage situations faced in recent years in California and the Pacific Northwest Region, and in the recent successful programmes run by the Independent System Operators in New York and New England. Demand response programmes in these places have demonstrated that users – both large and small – will respond, and that peak usage can be modified.

Another driver has been the continuing desire for increased energy efficiency. The use of demand response technologies such as advanced meters and automated end-use control systems lead not just to a transfer of electricity usage from a peak period to an off-peak period, but to an overall reduction in electricity usage. This ‘conservation effect’, while still being studied to verify its magnitude and other characteristics, has been demonstrated to occur in demand response programmes to date.

A driving force for demand response that has not been as robust in the U.S. as many had hoped is deregulation (liberalisation). The logic and assumptions still seem to be valid. They held that a competitive marketplace would unleash both creativity and economics that together would result in dynamic pricing and other forms of demand response being increasingly offered. This thinking was further reinforced when a number of states in the U.S. began to move beyond the unbundling of electricity service to attempt the same for other distribution service components, such as metering and billing.

But retail electric competition continues to struggle in the U.S. and today represents only a small number of customers. Moreover, the bloom is off the competitive metering rose, as even those who were the most adamant supporters of it realised the economic challenges of implementing it other than on a mass deployment basis. Even retail marketers now realise that it wasn’t necessarily meter ownership that they wanted; they wanted the meter to be there. In other words, what was really important to them was the data that the meter produces, and having accessibility to it.

Earlier this year, an apparent shortage of natural gas in the U.S. led to yet another energy ‘crisis’ and a new driver for electricity demand response. Most of the electricity that has been brought on line over the past decade or more has been gas-fired, particularly for peaking plants. Thus it was realised that electricity demand response could actually be one of the things that could be included in the portfolio of options to address the pressure on natural gas supplies and prices.

The Blackout becomes a new driver

Another factor that has always been on the list of demand response benefits is reliability. But the Great Northeast Blackout of 14 August 2003 has shed new light on the fact that the decade-long focus on competitive commodity markets may have shadowed a growing inadequacy of the highway over which that commodity is transported – the grid.

To most, the grid means the wires, switches, substations, and other related hardware, software and operating systems. Increasingly, however, the grid is being seen as including the meter and other communication and control systems that connect the end-user to the grid.

That is the way the Electric Power Research Institute (EPRI) sees it. The leading proponents in the U.S. of a smart, self-healing grid, the organisation released a new report called Electricity Sector Framework for the Future soon after the blackout, which outlined a vision for restoring a reliable and affordable power system in the U.S. In the report EPRI called for empowering the customer to help make the system more economical and more reliable. EPRI also urged that technical innovation is key, and specifically called for transformation of the electricity meter into a two-way energy and information portal.

Demand response is seen as being good for the grid in a number of ways. Reducing demand at peak, the time when reliability is most threatened, obviously helps – not only in moments of need but also in the long run, when demand response is used as a strategic tool to reduce the need for both new generation and new transmission facilities. In addition, as has been demonstrated in Southwest Connecticut, demand response can be targeted to address specific pockets where transmission is constrained.

But another aspect of demand response technologies is also receiving new attention and respect. Advanced meters and other demand response technologies have two-way communication capabilities that help in outage detection and restoration. While these capabilities may be more applicable to less dramatic outages than the great blackout, they are nevertheless an important new tool in grid management.

There is another interesting application of demand response to outages. Officials in New York State report that they were able to use demand response customers, and the communications and control technologies they had in place, to actively and creatively manage restoration such that the entire state was back up a day earlier than they believe would otherwise have been the case.

Other Drivers Are Still Needed

So if there are all these drivers for demand response, is it safe to assume that things are on autopilot; that demand response will happen and happen fast, and those in the demand response technology business can look forward to good times ahead?
Not necessarily. For in an electricity industry which is still largely regulated, both for retail and wholesale demand response programmes (the latter offered by the new Independent System Operators and approved by the FERC), most demand response pricing and programmes still have to be actively created or enabled by policymakers before they can be put in place.

What is it that policy makers need to do to help demand response? There are a number of options. Tax incentives can be created to lower the cost of demand response technologies. Creative financing mechanisms such as ‘wires’ charges can be put into transmission rates. Metering and data policies can be established. Last but not least is the bread and butter of the regulated part of the electricity industry – rates and cost recovery. Without policymakers, time-based rates will not be put in place, and without cost recovery assurance there will be continued reluctance on the part of regulated electricity players to invest in the technology they and their customers need for demand response.

Figure 1

That brings us to the final driver – the demand response technology industry being a driver for public policy. There are a multitude of issues, both good and bad, that compete for a policymaker’s time, energy and support. Also, demand response is a new energy discipline and issue area where policy makers need help in understanding what it is, what its benefits are and what the options are for putting it in place.

By engaging in education and outreach efforts aimed at policymakers, and providing information, ideas and proposals which encourage and help them to do their job, and doing this in a way that is constructive and fair with respect to all the many other stakeholders in the policy process, those in the demand response industry can help to ensure that demand response happens.

August 14th added tremendous focus – many would say pressure – for the electricity industry and energy policymakers to take steps to modernise and upgrade the electricity grid. Demand response and its enabling technologies are on the list of options that can be used to achieve this, but so are a lot of other things – in particular the more conventional responses to reliability and capacity threats, e.g. building more transmission and generation. So what the big blackout really created for the demand response industry is an opportunity. Seizing that opportunity to help shape the new energy policy and new energy investments that will be made in response to the great blackout is something that the demand response industry should carefully consider.