Several decades ago the term “negawatt” gained notoriety; however, as deregulated markets have developed and with the rise of Demand Response (DR) programs, the concept of reducing energy spend through the deployment of more energy efficient technologies has evolved into something larger. The negawatt concept has expanded from its foundation with the growth in utility and Independent System Operator (ISO) DR programs. Another important, and more recent, development has been the growth of economic price response, which is the ability to add capacity to the grid or shed load when real-time market conditions create financial incentives. The combination of flexible distributed generation, access to real-time price data, and ”structural incentives” in deregulated markets have enabled end-users to profit from these programs andactivities. In ERCOT for example, these incentives include price scarcity mechanisms (Operating Reserve Demand Curve) and system-wide offer caps that will increase to $9,000/MWh on June 1, 2015. Aside from generating revenues for end-users, these measures will contribute to improve balance between supply and demand, and support overall grid reliability.
In order to appreciate this market shift, one must first understand what the meaning of a negawatt. A negawatt is a megawatt saved by a reduction of consumption or an increase in efficiency. In other words, it is electricity that does not have to be generated as the result of increased energy efficiency or other eliminated electricity demand. Demand response can be described as the voluntary change in electric usage that an end-user makes from normal consumption patterns in response to electricity grid conditions. These conditions might be dictated by market prices or grid reliability.
When an energy end-user participates in a “load curtailment” demand response program they are agreeing to provide negawatts when they are called upon as part of the program. Essentially, the end use customer is agreeing to change their operating procedures in some method to consume less energy. This provides the following benefits:
To the End-User:
- Payment for not consuming energy. Demand response programs pay consumers to reduce their consumption at certain times, typically when energy usage is at its highest due to weather conditions or when there is a near emergency situation on the electrical grid.
- Reduced overall energy costs. Since the total bill for energy consumption is based on the amount of electricity consumed multiplied by a per unit price, it makes sense that the fewer units consumed, the lower the overall costs. This concept becomes material when an end-user curtails load and can liquidate their hedge in the market at a price higher than their contract price or if capacity can be exported to the grid with back-up generation.
- Reduced capacity costs. In many energy markets, such as those in PJM, customers pay for capacity, which is the ability of a power plant to generate energy, if needed. Capacity costs are based on the demand that a specific customer has for electricity at peak times. Meaning, customers who can shed load during peak consumption periods are using less electricity from the grid, thereby reducing their overall capacity costs.
- Reduced costs for transmission (e.g. 4-Coincident Peaks (4CP) in Texas). While transmission and distribution rates are regulated by state utility commissions, components of these overall costs are based on the demand for electricity for a consumer at given point in time, typically the times when the electrical grid is at peak consumption. By shedding load during these periods, customers can reduce this regulated cost going forward, producing considerable savings.
To the Grid:
- Increased reliability. At times of peak power consumption, many electrical grids are stretched to at or near their capacity to meet the demand for energy consumption. Through the use of demand response, the amount of power being transmitted on the electrical grid is decreased, lowering the strain on the system and reducing the potential for blackouts.
While load curtailment DR programs can produce significant cost savings to end-users, they also have the potential to lower environmental costs. Specifically, by reducing the amount of electricity consumed, one can argue that the result is less production from fossil fuel-fired generators. While renewable generation has grown significantly over the past decade, the majority of electricity supplied to end use consumers in the U.S. comes from fossil fueled power plants, including natural gas and coal. Natural gas plants emit less pollution than coal plants and all fossil fueled power plants produce some level of emissions. Moreover, power plants that generate power only during peak hours (so-called peaker plants) typically tend to generate high levels of pollutants as the result of their less efficient design.
As markets have evolved, incentives to participate in demand response programs or economic price response has never been as attractive as it is today. An understanding of the requirements, risks and rewards of these programs is critical as part of a comprehensive energy management strategy. Moreover, the use of back-up generation has to be considered and included in the planning in order to maximize revenues from these endeavors. In addition to the economic benefits for end-users, demand response provides substantial reliability benefits in all electric markets, including ERCOT and PJM.