Mar 25, 2015
A new report by energy industry policy expert Paul Centolella provides regulators and utilities with timely recommendations on how to promote technology and more accurate pricing to achieve deeper savings for energy customers. This blog provides background for the report and briefly summarizes its recommendations.
We are paying more for energy than necessary
The prices utilities pay to procure electricity for customers follow simple rules of supply and demand – during “peak” periods (like a hot July afternoon when people crank up their air conditioners en masse), there is more demand for electricity and wholesale prices are high. During a moderate spring or fall afternoon, the lack of heating and cooling needs reduces demand and therefore wholesale prices. However, these variations in wholesale prices do not typically flow through to customers like us. Most residential customers pay a flat rate that incorporates the higher costs from peak periods without providing the opportunity to avoid incurring these costs. Even where variable pricing is available, most of us haven’t adopted technologies that help optimize power usage.
There are other problems (and ultimately, customer costs) associated with ensuring our energy supply is sufficient to meet relatively few periods of peak demand throughout the year. Energy companies pay to maintain “lower tier” or last-in-line, infrequently run power plants that hang around only for use during peak periods. These plants tend to be the most expensive to run, least efficient, and often most polluting. The new report notes that the generation capacity cost of only a one percent change in U.S. peak demand is in excess of one billion dollars per year. Further, utilities and other energy companies have to build out the distribution and transmission system to meet peak periods – and these costs are passed through to customers.
But it doesn’t have to be this way. Through variable pricing, automation, and price responsive demand, utilities have the ability to provide customers with tools to reduce peak energy use and lower energy use overall and thus reduce our energy bills.
A fix: power TO the people
Variable Pricing: Utilities can offer customers the ability to pay varying rates for electricity use during different times of the day, so that they can take advantage of off-peak periods and, say, pre-cool their home mid-morning before the heat kicks in and afternoon demand increases. Assuming effective program design that includes some sort of insurance against high prices, these programs can result in significant electric bill savings.
Automation: Smart thermostats and other smart devices can save customers money and reduce overall energy. The devices can automatically manage and optimize use, taking account customer preferences, weather forecasts, and anticipated power costs. Customers barely have to think about it. Smart devices can also take advantage of the ability of refrigeration, buildings and water heater tanks to retain heat and cooling, and flexibility in the timing of energy use for appliances and charging electric vehicles. This “thermal inertia” and flexibility can serve as a form of energy storage, an important complement to the integration of rooftop or larger-scale clean renewable energy.
Smart devices can both facilitate reductions in peak demand and help avoid wasting energy. An estimated 39 percent of residential energy use is wasted, mostly associated with heating and cooling unoccupied spaces. A smart thermostat can adjust controls in unoccupied areas of homes and automatically turn the air conditioning or heat back up when a customer with a smart phone or connected vehicle is on their way home.
Price responsive demand: With variable pricing programs and/or automation in place, utilities and other suppliers can take it one step further and establish price responsive demand programs. Centolella’s report considers price responsive demand “demand that predictably responds to changes in wholesale prices.” By forecasting when customer demand will decrease in response to higher prices, utilities and grid operators can reduce the need for costly power plants and unnecessary transmission. Consumers then reap the savings through lower electricity bills.
If price responsive demand is so great, why isn’t it happening?
First, it is starting to happen. There are already millions of homes with smart thermostats, many of which can respond to utility call events. However, there are significant, primarily regulatory barriers to more utilities and customers taking advantage of smart technology and the variable pricing that such technology helps enable to achieve the benefits of price responsive demand.
Centolella’s report provides recommendations to address regulatory barriers to the next generation of responsive demand. The recommendations are wonky and technical, and involve changes that utilities, grid operators and state and federal regulators can make to set the stage for making the most of price responsive demand.
Some of the changes regulators and grid operators can make to facilitate price responsive demand include:
- Incorporating predictable demand reductions from responsive demand programs in long- and short-term demand forecasts;
- Using these lower forecasts in planning and setting resource requirements to avoid purchasing too much generation capacity or building out too much transmission; and
- Ensuring that attendant savings to flow back to the customers in one of several ways, including but not limited to variable pricing.
Otherwise, the savings achievable through avoiding overbuild will not be realized, and customers will continue to pay for unnecessary capacity and infrastructure.
Remember, price responsive demand is not a substitute for demand response in wholesale energy markets
In light of the pending Electric Power Supply Association litigation at the Supreme Court (EPSA), it’s worth noting that price responsive demand is not a substitute for the demand response at issue in EPSA. EPSA involves demand response in wholesale energy markets, which provides important consumer, environmental, and grid reliability benefits separate from price responsive demand. In contrast to wholesale demand response, price responsive demand reductions are not dispatched by grid operators – customers retain control over whether they reduce energy consumption under these programs. If the Supreme Court allows the wrongly-decided lower court decision in EPSA to stand, we could lose an important tool for balancing wholesale supply and demand, lowering energy prices, and maintaining grid reliability.