This is part two of my two part series on Demand Response (DR). Part One discussed how DR almost became the “killer app” of the smart grid. Part two discusses why a recent FERC ruling (FERC 745) could give DR a second shot at the title.
“An ounce of prevention is worth a pound of cure.”
Two years before organizing the nations first volunteer fire company, Ben Franklin coined the above expression in an anonymous letter to his own newspaper. On February 4, 1735 the Philadelphia Gazette published a letter from an “old citizen” about fire safety that read in part:
“In the first Place, as an Ounce of Prevention is worth a Pound of Cure, I would advise ’em to take care how they suffer living Coals in a full Shovel”…you may be forced, (as I once was) to leap out of your Windows, and hazard your Necks to avoid being oven-roasted”
Its instructive that the founder of one of our most critical emergency response institutions also provided such enduring advice on the merits of a proactive vs. reactive outlook.
This month, Demand Response (DR), which has become the emergency response resource for our nations energy grid, now has a more proactive counterpart.
On April 1, PJM Interconnection – the regional transmission organization that coordinates the movement of wholesale electricity in Pennsylvania, all or part of 12 other states and D.C. – became the first power pool to comply with the Federal Energy Regulatory Commissions (FERC) 745 order to open an economic market for Demand Response.
Other regions asked for more time to work out implementation details and will open similar markets in the near future.
Demand Response is an incentive program offered by PJM, and other power pools that provides financial incentives to customers that agree to reduce power consumption.
Until April, DR was more or less defined by the capacity market, where customers are compensated for being prepared to reduce energy usage by pre-determined levels when called upon to do so. The goal of capacity DR is to avoid dangerous system overloads that could lead to outages.
Intermediary companies called Curtailment Service Providers (CSPs) administer the DR programs for the power pools by recruiting customers, providing notifications and processing payments.
Economic DR also compensates customers for reducing energy usage but unlike capacity Demand Response, which reacts to grid emergencies by curtailing large amounts of energy (a pound of cure), economic Demand Response allows customers to respond to pricing opportunities and encourages smaller, more frequent reductions that provide ongoing corrections to demand on the grid (an ounce of prevention).
The key provision of FERC 745 that made economic DR attractive to customers was setting the price of “negawatts” equal to “megawatts.” A “negawatt” is an unofficial measurement of the amount of energy consumption reduced from the grid by customers.
FERC 745 and economic DR are good news, especially for C&I energy customers, because they give companies more control over the timing and level of DR participation.
Instead of being blindsided by crippling curtailment commitments that were made up to a year in advance and called with as little as one-hour of notice; economic Demand Response features customer-determined energy curtailment levels with 24-hour lead times. As capacity DR events are being called more frequently, these distinctions are important to maintaining normal business operations.
In addition to benefiting energy customers, economic DR is also helpful to utilities and power pools because it encourages practices that reduce the risk of grid emergencies.
Think of capacity Demand Response as grid insurance that is underwritten by customers. Most of the time, the underwriter is paid a “premium” for standing ready to reduce energy in response to a grid emergency. Unless an actual emergency event occurs, the underwriter/customer profits but actual grid conditions remain unchanged. On the other hand, economic Demand Response acts more like energy grid maintenance by rewarding customers for providing on-going relief to the energy grid.
The opening of economic Demand Response markets will have a positive impact on the industry, and make DR an even more useful smart grid resource. But, it will also mean change. Strategies and skill sets needed for success in the capacity DR market are different than those needed by economic DR providers.
Whereas the former deploys a large marketing and sales effort to amass stockpiles of megawatts that may never be called into use; the latter requires engineers and certified energy managers to regularly dispatch customer load in the market. Leading CSPs that built their businesses based on the capacity DR model will have to retool their organizations to participate successfully in these new markets.
There will always be a need for an emergency response mechanism on the grid, just like there will always be a need for fire departments.
But as the energy industry continues to embrace a proactive approach, look for new DR providers who focus less on imposing curtailment burdens on Demand Response customers and more on empowering customers to demand responsibly.