Demand response programs explained

A large portion of the cost of electricity comes from a very small portion of hours out of the year. As a result, utilities, electricity grid operators, and private companies alike are finding innovative solutions to these infrequent but substantial electricity costs. One product in particular that has already proven to be successful throughout the country is demand response.

The electricity grid becomes most stressed when there is high demand for electricity. In essence, high demand for electricity requires a higher supply of electricity, which both stresses the grid and results in higher prices for all energy users. Similar to other industries, the price of electricity is, at its core, a supply and demand equation. As such, there are two ways to reduce costs to consumers and stress on the grid: either build more power plants to provide a greater supply of electricity or reduce demand for electricity on the system at times when it would otherwise stress the grid.

Demand response is a way to reduce the stress on the grid and high electricity prices. By curtailing or reducing the demand for electricity during certain time periods, demand response programs are able to cut prices by reducing the need to run high-cost generators. Instead of supply, or power plants, turning on in response to higher demand, it is demand turning off in response to higher prices and stress on the system.

Perhaps the best way to explain demand response is with an example. Say you own a large widget manufacturing facility that consumes a consistent and predictable amount of electricity throughout the day. Your utility or a private company may approach you and offer to pay you not to run your manufacturing facility during certain hours of the year. Everyone on the electrical grid benefits by not having to turn on costly power plants and by reducing stress across the system, while you benefit by being paid as much (or nearly as much) as you would have made by producing widgets during the time that you are asked to shut down your manufacturing facility. For large manufacturers, this is also a great opportunity to perform required and preventative maintenance at your facility while being paid not to operate.

Generally speaking, demand response program requirements are very reasonable. For instance, a typical program may provide commercial customers with a day's notice of a demand response event, require the customer to curtail–or shut off–electricity consumption for between 4 and 6 hours, and will only call a maximum of 12 events per year, or fewer by season.

While large electricity consumers present the greatest opportunity for demand response, in some states, residential electricity consumers can participate in programs that aggregate the impact of individual consumers to have a larger impact. The most common type of program for residential consumers is called air conditioning cycling: during a demand response event, your AC unit will run for only 20 minutes per hour during each hour of the event. The program characteristics are typically the same in terms of the length of the event and the number of events per year or season, and these programs pay you for your participation while potentially resulting in a very slightly perceptible change in your comfort at home.

Demand response is primarily economic innovation. Companies discovered that they could make money by paying other companies not to operate so long as they did so at the right time of year and in the right markets. While the intricacies of electric power markets in deregulated states require more than a paragraph of explanation, suffice it to say that there is a financial benefit to utilities, grid operators, demand response providers, and you, the electric consumer, to reducing demand instead of increasing supply.

Beyond reducing everyone's annual electricity costs, though, demand response also has the co-benefit of reducing pollution. Often, demand response is called upon on the hottest or coldest days of the year, when the alternative is to run extremely dirty and very old, oil-fired power plants. In regions like the Northeast, running oil-fired power plants a dozen hours out of the year results in a sizeable chunk of the region's annual carbon emissions from the electric sector. Demand response reduces the need to run oil power plants and, as such, helps reduce emissions.

Another term that is often brought up in conjunction with demand response is demand side management or DSM. The two types of programs are similar in that they both are a reduction in electricity consumption; however, they differ in how and when the reductions occur.

Demand response is active. In other words, demand response programs actively curtail electricity consumption during specific time periods. DSM programs, on the other hand, are passive, meaning they are always reducing electricity load compared to the alternative. For instance, demand response is equivalent to turning off a light in your house, while DSM is the same as replacing that lightbulb with a higher-efficiency LED light. Both are ways to reduce your overall electricity consumption, but one is controllable (i.e., flipping off your light switch) while the other is just always occurring (i.e., using an LED instead of an incandescent).

This may seem like a small distinction to your monthly utility bill, but utilities and the grid operators care a lot about the difference. Both demand response and DSM programs can help to reduce the need for existing or new power plants on the system, but they do so in different ways and at different times of the year. This impacts how utilities plan the power plants that they need now and in the future.

Two of the largest demand response providers are CPower and EnerNOC. Both companies are known as "aggregators," meaning they approach and enter into contracts with a number of companies in a given utility service territory or electric region. Then, they aggregate these companies into a large block of curtailable demand, which increases the impact of their portfolio of contracts. Both CPower and EnerNOC focus on larger, commercial, or industrial electricity customers, as opposed to residential households: you would need hundreds or thousands of households to match the energy consumption of a single large industrial customer, so it's a more viable business model to target those larger customers.

CPower, acquired by LS Power in late 2018, calls itself a demand-side management services company. As explained above, this means that they offer demand conservation services as well as active demand response solutions to their customers. EnerNOC built their business as a player in deregulated electricity markets, where they successfully bid their aggregated demand response contracts as alternatives to traditional power plants. Acquired by Enel in 2017 and now functioning under the new name of Enel X, EnerNOC also provides energy intelligence services to their customers to help them understand their consumption habits and patterns.

If you are a residential electricity consumer interested in reducing your electricity costs, there are several options available to you. Many states have energy efficiency programs and incentives that allow you to install passive demand-side management solutions. Some states and utilities have demand response programs for residential consumers, which would allow you to take a more active role in reducing electricity costs. And last but not least, the best way to reduce your electricity costs is by going solar to produce your own clean electricity on your property. Check out the EnergySage Solar Calculator to get a free estimate of how much you can save by switching to solar. And register for the EnergySage Solar Marketplace to receive up to seven custom solar quotes from local, pre-screened solar installers.