from the Grid
By Joel L. Shain
League Energy Deregulation Counsel
Demand Response works by helping power grid operators accommodate spikes in usage, such as those that occur on hot summer days.
How would you like to discover a source of immediate revenue for your municipality— a way to get paid for not using electricity? Does it sound too good to be true? It isn’t.
It is called Demand Response, and with it you can turn your facilities into virtual efficiency power plants and make money doing it.
Last year, I wrote an article advocating the need for Energy Master Plans at the local level. However, most local government leaders have not accepted the benefits of developing an Energy Master Plan. Is it inertia? Or is it because they do not see immediate ready cash for their efforts?
As rising energy costs are placing increased constraints on already tight budgets, it may seem like an imprudent time to spend money developing an Energy Master Plan.
This year, Governor Corzine has taken the initiative to promote a state Energy Master Plan. It is my hope that it will establish flexible standards and guidelines for local municipalities. In the meantime, there’s another route to savings.
Demand Response works by helping power grid operators accommodate spikes in usage, such as those that occur on hot summer days. It involves curtailing the use of electricity instead of boosting generation. Simply put, customers offer to reduce their consumption of electricity—during certain times—in return for being paid the market value of the electricity they don’t consume.
Keeping the Lights On
For the past two years, New England and New York have successfully implemented this practice to address the lack of generating assets and capacity in highly congested regions of their electric grids. Demand Response, which includes the practice of reducing customer demand in response to a call for help by the grid operator, has kept the lights on in Manhattan and New England by reducing peak demand and meeting capacity shortfalls. Demand Response is a great way for participants to make money to fund other energy efficiency and clean energy projects, without cost or risk.
In fact, just last year, Jeanne M. Fox, President of the New Jersey Board of Public Utilities (BPU), wrote a letter to the state’s largest electric consumers endorsing the Demand Response Programs run by our wholesale grid operator, PJM Interconnection (PJM). The program was touted because it generates a revenue stream for the customer participant, and provides a new power resource for the grid operator. But the value is even greater than these benefits.
New Jersey has its own struggles with rising electric rates and localized power outages. We are all aware of the problems that electricity provider JCP&L has had with the reliability of its Northwest and Jersey Shore regions – most notably two peak seasonal outages over successive Fourth of July weekends. Likewise, PSE&G has had transformer issues that have produced repeated local outages.
In August of 2003, parts of our state experienced the largest blackout in U.S. history. That blackout coincided with the elimination of caps on New Jersey’s electric rates. Since then, rates have increased 30 percent or more, and the trend is likely to continue.
Demand Response is a great way for participants to make money to fund other energy efficiency and clean energy projects, without cost or risk.
The Birth of Demand Response
It was with this backdrop of increased electric rates and decreased grid reliability that the Federal Energy Regulatory Commission (the “Commission”) completed its study of the wholesale electric grid. The Commission concluded that Demand Response would play a critical role in meeting the growing demand for electricity, reducing the market power of a small group of power generation owners, and would, at the same time, place downward pressure on wholesale electric prices. The Commission encouraged each of the independent wholesale grid operators across the United States to develop Demand Response Programs. As the Commission noted, without a demand response mechanism, the grid operator is forced to work under the assumption that all customers have an inelastic demand for energy and will pay any price for power. This reality has resulted in a demand far exceeding available resources.
Recently, the United States Department of Energy stated that the demand for electricity was growing well beyond its projections and that 2007 will present the greatest likelihood in U.S. history for power blackouts in the Northeast. Demand has been growing steadily, but the supply system has not. New gas-fired generating units are insufficient to meet demand. And, there have been no significant new transmission lines or power plants built.
But, Demand Response can help local governments alleviate potential catastrophe and make money.
With Demand Response the end user reduces its electricity usage (“demand”) in response to either (1) a rapid increase in price, (2) an emergency event called by the grid operator to maintain grid reliability or (3) at contractually agreed upon intervals. It is a resource for the grid operator to help alleviate peak transmission congestion, peak demand or to offset the loss of a major generating unit.
It may also be used to maintain the balance of supply and demand on a real time basis (by acting like a spinning reserve unit). A spinning reserve unit is a power plant that is running but is not placing any electricity into the grid.
It is only running on standby so that it can be available just in case another power plant trips out, or there is a downed transmission line. These spinning reserve plants run day and night and contribute to the price of electricity. Demand Response can replace these inefficient spinning reserve plants with an as needed instantaneous load reduction to maintain the grid balance. Demand Response improves the efficiency and reliability of the transmission grid while participants reap measurable financial benefits.
Payments of Up to $100,000
Payments from the grid operator can be as high as $100,000 per megawatt of load reduction per year and are paid whether or not an emergency event is called. These moneys could be earmarked for energy efficiency projects, which would create further savings and environmental benefits.
For municipalities that have large energy consuming facilities, such as waste treatment and water utilities, schools, housing authorities and large office complexes, the Demand Response program is a path to a new revenue stream. One example of a Demand Response resource can be found in our local schools. More of our schools have installed air conditioners, controlled by automated systems. These systems can be easily switched off for a period of 15 to 30 minutes during the summer peak season while schools are not in session. By enrolling in the Demand Response program and agreeing to reduce the air conditioning loads when the grid needs it – typically for 15 minutes, each facility can earn $5,000 per year or more depending on its size. Likewise, a typical water or waste treatment plant may use its back up generation to take its load off the grid and get paid $50,000 or more per year while helping to keep the lights on in its region.
Demand Response is a load reduction on the grid in response to a signal – either the customer responds to a market signal (high prices) and reduces its demand in order to be paid the market price for the load reduction, or the customer responds to the grid operator’s call signal and gets paid either a premium payment for an emergency call or a recurring payment for being on call like a spinning reserve plant. Typical methods used to respond include onsite or back up generation to displace demand on the grid, the synchronization of building automation systems to reduce heating or cooling loads, current peak shaving practices (dimming the lights) and the utilization of a building’s internal thermal storage by pre-cooling or pre-heating. These flexible processes and practices turn your facilities into virtual efficiency power plants. To the grid operator, a megawatt of Demand Response is equal to a megawatt of generation in helping to balance the grid.
By signing up to help balance the demands of the power grid, towns can earn money to fund energy savings plans.
How to Get Hooked Up
PJM is the wholesale grid operator and the wholesale electric market manager for our region. It is not in the business of building relationships with retail customers such as municipalities. Instead, PJM reaches retail customers through companies known as “Curtailment Service Providers.” Companies like Enernoc, Consumer Powerline and New Jersey-based North America Power Partners manage the transactions between the customer and the grid operator. They track the myriad of electric market data, including hourly locational prices, grid congestion, capacity prices, plant maintenance schedules and outages, and provide market forecasts of prices. They provide notification of any emergency event called by the grid operator. Notifications may be as short as 10 minutes for the spinning reserves market and 24 hours in the day-ahead energy market. These service providers place bids on their customers’ behalf, just as large corporate generators bid into the energy, capacity and reserve markets.
They install meters and track usage data in order to establish baselines and to verify the load reduction in a format and process approved by the grid operator. They invoice for payments and process all of these transactions. They perform all of these services behind the scenes to make participation in the program easy and uncomplicated. Typically, their fees are a percentage of the grid operator’s payments, so there are no up-front fees to enroll and participate. According to Laurie Wiegand-Jackson, President of the International Association of Energy Engineers and Chief Executive Officer of North America Power Partners, “municipalities should be aware that in some cases, there may be penalties for non-performance—but this risk should be passed on to the Curtailment Service Provider, not borne by the municipality. Through our services, Demand Response is a totally voluntary and risk free way to generate a recurring revenue stream to help offset the rising cost of energy and perhaps fund some much needed energy efficiency initiatives.”
Avoid the Risk of Real Time Pricing
In addition to the recurring revenue, Demand Response mitigates the risk associated with real time pricing. Most of the mid-sized to large municipalities already have facilities that are on real time pricing. For example, in Middlesex County, towns such as New Brunswick, East Brunswick, Sayreville, Old Bridge and Woodbridge all have large real time pricing electric accounts. Demand Response allows these municipalities not only to avoid high hourly rates, but to benefit from them and reduce retail supply and utility distribution rates as well. Participating in Demand Response eliminates high retail hourly rates by shifting load and reducing demand during high peak hours. The Curtailment Service Provider forecasts and provides real time notification of high energy prices so that the customer is aware in time to actually do something to reduce usage at those times, thereby reducing their overall cost for energy. Thus, Demand Response becomes a hedge against high hourly electric prices. The customer’s basic generation service cost is also lowered by reducing the grid operator’s capacity and transmission obligations. Also, the utility demand charges may be lowered as a result of reduced peak hour usage.
Demand Response resources provide a considerable environmental benefit by eliminating line losses and displacing oil and coal-fired plants with zero emission load reduction. The State of Pennsylvania qualified Demand Response for renewable energy credits, which provides an additional benefit and potential revenue stream. The BPU should follow suit and provide certification of Demand Response for credits similar to those for solar and wind systems.
In New York and New England, the state regulators have approved the use of state funds to offset the cost of installing metering, a relatively small cost (typically $2,000 to $5,000 per meter), but one that might prevent smaller municipalities from participating in the program. They also have provided incentives for onsite generation and associated switch gear to promote the installation of cleaner natural gas or biofuel-fired distributed generation as a viable solution to the growing demand for electricity.
With these incentives and the grid operator’s Demand Response payments, these regions are transforming the electric wholesale markets to achieve economies of scale that will mitigate the increasing pressure on electric rates. The BPU should use the funds that are raised by the retail adder surcharge on large users, which include many of our local municipalities and county governments, to promote these Demand Response resources.
Finally, hats off to President Fox and the BPU for promoting Demand Response—a risk-free energy program for New Jersey. It is a simple process. When asked, turn off your lights and get paid.
For further information and a list of approved Energy Service Providers see www.state.nj.us/bpu or call the New Jersey Board of Public Utilities, Division of Customer Assistance at (800) 624-0241.
Article published in February 2007, New Jersey Municipalities