In my last post, I described what I believed Demand Response is, and isn’t. I described Demand Response as being where a third party, such as a Utility, has a need for a consumer to reduce their electricity during a specified period.
In this post, I explore why you should consider having a Demand Response capability. I ask that you put to one side any views you have as to whether what I am suggesting is technically or commercially feasible in your operating environment. I will discuss that in a future post.
Here I am suggesting that someone is either already building a demand response capability or is planning to do so for your customer base or in your geographic area. Given how fast this space is evolving, assuming someone else is not thinking about entering your market is high-risk, regardless of your regulatory environment.
Not too many years ago automated demand response was synonymous with commercial and industrial customers because the costs to connect the utility with the energy consumer was very high. With the increasing adoption of distributed generation and storage, electric vehicles, and in-home technologies such as smart thermostats, and smart air conditioners, this is all changing. To avoid people thinking I am recommending any particular vendors I will not give examples. However, there are an increasing number of solutions available that connect all of the above into an aggregated load that can be used to reduce peak demand where lead times to despatch are in minutes, and where location can be very targeted.
Why you want a Demand Response capability
Why you want a Demand Response capability will vary depending on your organization’s role within the energy industry. The drivers for such a capability given below can be used to come up with any number of value propositions. Don’t just look at this from the perspective of trying to see the direct value to your organization. Also, consider the impact should you not build such a capability, and a competitor does. Remember the quote from Steve Ballmer in 2007 when he said, “There’s no chance that the iPhone is going to get any significant market share.”
Avoid or defer generation investments
Historically, utilities had to ensure they could generate enough supply to meet demand. Demand was considered uncontrollable, and so Utilities built enough generation capacity to cover the highest possible peak demand in a year, along with additional supply, known as reserve margin, to manage unforeseen events. A lot of expensive generation assets would sit idle for long periods of time.
Demand Response helps to minimize the need for such capital-intensive investments by reducing energy demand during critical peak times.
Utilities today face a dilemma. Many still make a return on the capital invested in generation assets. At the same time they no longer have certainty that their generation assets will provide a long-term return on investment and they must consider:
- The political landscape. Building more generation is not popular with the community. Just staying with this traditional approach to meeting demand may fast-track the opening of the market, forcing the adoption of Demand Response.
- The rapid growth in distributed generation and storage may result in generation plants sitting idle for longer periods
- Changing regulations may place greater value on reducing demand over new generation
- New entrants may deliver Demand Response capacity into the market even if a Utility chooses not to
Avoid or defer network investments
The same reasons as described above also applies to the transmission and distribution networks. With automated demand response you can now target very specific locations to reduce peak demand.
In evolving areas such as microgrids and embedded networks this becomes interesting as demand response can be coupled with distributed generation and storage to reduce the need for services from network businesses.
Bid Demand Response capacity into the wholesale energy market
Using Demand Response capacity to bid into wholesale energy markets is a fascinating area to watch. It is one that offers an opportunity for market disruption. Where Demand Response capacity can bid into the market against traditional generation capacity.
There have been some exciting developments in the Californian market with the introduction of the Demand Response Auction Mechanism (DRAM). Such a mechanism could be used to disrupt existing wholesale markets as well as create new ones in countries where wholesale markets do not exist today.
Capture, maintain, and cross-sell to high-value customers
Initially, offering Demand Response services to small and medium business as well as residential customers may not appear to offer attractive returns. Each household will only return a fraction of the capacity required during an event.
Building sufficient Demand Response capacity can take years to develop. Today these services will likely be used by early adopters. Those who invest in distributed generation and solar along with in-home technologies. These are high-value customers.
Securing these customers may not only minimize their potential to churn in the future but allow you to learn and improve your services as this market matures beyond the early adopter stage.
Think of five years plus, don’t think about today
If you analyze the demand response market today, you may conclude you do not need this capability. I would recommend you think of the following points:
- Remotely controllable load at a mass market level due to distributed storage, electric vehicles, and in-home technologies is likely to become commonplace within the next decade
- It takes years to develop sufficient Demand Response capacity. Aside from choosing the right partners or investing in the right technologies, it takes time to educate customers, gain their trust and get them excited about these services.
Remember, you are no longer just up against other Utilities. You are up against start-ups, Telcos, GAFA (Google, Apple, Facebook, Amazon), Building Automation providers, etc. Many of whom are far more savvy in deploying these technologies and far more mature in areas such as customer engagement and analytics.
You may decide developing a Demand Response capability is not for you. That is fine. I just ask you don’t make that decision on the assumption Demand Response won’t play a significant role in balancing supply and demand in your area over the next five to ten years.