This is part one of a two part series on Demand Response (DR). This post discusses how DR almost became the “killer app” of the smart grid. Part two will discuss how a recent FERC ruling (FERC 745) can give DR a second shot at the title.
Before going too far down the road on the “killer app” theme, I wanted to be sure that someone outside the category had used the terms “Demand Response” and “killer app” in the same sentence. I did a quick Google search and found that none other than current FERC chairman Jon Wellinghoff used the phrase in this January, 2009 Smart Electric News article:
“According to FERC Commissioner Jon Wellinghoff, who leads the Commission’s efforts in the Collaborative Dialogue on DR with the National Association of Regulatory Utility Commissioners, DR is clearly the ‘killer application’ for the smart grid.”
Interestingly, the reference was made in a report that pointed to potential obstacles for Demand Response as indicated in this excerpt from the same article:
“The report, 2008 Assessment of Demand Response and Advanced Metering, while notes progress on overcoming regulatory and financial hurdles over the past three years, also points to continuing obstacles – the limited number of retail customers on time-based rates, restrictions on customer access to meter data and the scale of financial investment necessary to deploy enabling technologies during an economic downturn – that could limit opportunities for continued growth in these programmes.”
Fast forward to 2011 and Chairman Wellinghoff had it right; DR was headed for obstacles:
- Leading DR companies traded at or near 52 week lows.
- Measurement practices were called into question in PJM, the countrys largest power pool.
- Customers loudly complained about curtailment programs.
- In PJM, for the first time ever, DR companies failed to deliver 100% of curtailment commitments.
As a DR company executive, I had a front row seat to its rise and fall. And, while the conclusions drawn in the report (i.e. inability to deploy enabling technologies and an economic downturn) may have been contributing factors, I believe the category suffered more from self-inflicted wounds.
Heres how I see it.
Demand Response started out as a win-win for power pools and customers alike. Customers were paid incentives for agreeing to stand ready to curtail energy for a relatively low number of hours during the summer months. Events were rarely called, but when they were larger institutional and industrial customers had diesel generators they could run to sustain normal operations. Back then DR was grounded in three fundamental competencies: power pool knowledge, on-site assets, and engineering expertise.
But then things started to change.
DR companies went public and stock prices were tied to total MWs under contract. Program participation requirements increased and DR companies effectively became recruitment tools for utilities and power pools. At the same time EPA guidelines restricted the use of diesel generators, prompting customers to increase their exposure with no safety net. This signaled a shift in DR company resources. The DR companies response was to hire more salespeople, instead of providing a deeper value proposition to energy end users.
Bottom line, the win-win proposition started to look more like a win-lose for energy customers.
My prediction is that economic difficulties for DR companies will force changes to the category landscape, but the good news is that interest in the basic model remains strong.
In PJM, the countrys largest power pool, the 2014/2015 RMP auction procured 149,974 megawatts (MW) of capacity resources including 14,118 MW of demand response (a 52-percent increase compared to last years auction results). The door is wide open for new DR models. Companies that can combine power pool expertise with engineering capability and clean, on-site energy assets can breathe new life into the win-win customer equation. The energy industry has always been a hands-on, asset based type of business.
Its time for DR companies to get their hands dirty.
If this post piqued your interest, stay tuned to On a Tangent for part 2, where Ill discuss how a recent FERC ruling (FERC 745) can give DR a second shot at the title.
