Electric Demand Response – Revenue Opportunities for Facilities
By Jeffrey T. Hunt, P.E., C.E.M, G.B.E, CxA
Facility Engineering Associates
Potential financial opportunities are currently available for facilities that are able and willing to utilize, and/or simply prepare to utilize, their existing equipment to reduce electrical peak demand for short periods of time, typically 15 to 30 minutes each for an average of three to five times per year. Demand Response is fully endorsed by the Federal Energy Regulatory Commission (FERC). It is considered an important component of our nation's energy plan. Demand Response aids in the prevention of power outages due to an overload of the electrical grid and minimizes the number of additional power plants constructed to meet future growing demand. Any facility can sign up with a certified Demand Response provider to assist in administering the Demand Response Program.
Overview of Program
Demand Response involves reducing the use of electricity (demand) to meet a power grid need, rather than increasing generation (supply) from the utility company. Customers, who offer to reduce or shift their electricity usage OR utilize on-site generation, are paid the current market value of electricity not consumed. For some facilities, this usage shift is comparable to delaying a cell phone call or flying when commercial airline prices are lower.
Those facilities that pay for electricity at time-of-use or hourly rates can also use the Demand Response Program. Efficiencies are achieved by shifting load and reducing demand during high hourly rates, consequently minimizing demand charges and basic generation service cost. Participating facilities benefit financially in two ways: by receiving payments for participation in the program and through receiving reduced electric rates from reduction in peak load on the utility system grid. Discontinuing operation of older or less-efficient generators in stand-by mode for fear of a sudden capacity shortage, allows for utilities to be better equipped to meet peak system demands. In addition, transmission congestion, a common issue in highly populated regions, can also be eased. Examples of when shortages may occur include: an over-stressed electrical delivery system demand during a summer heat wave or when a power plant unexpectedly trips offline.
The Demand Response Program provides an opportunity for facilities to turn their existing assets into a new revenue stream, while at the same time, providing environmental benefits. These assets are valuable resources to a wholesale grid operator attempting to ensure an adequate, steady electricity supply. In addition, facilities can also be paid the real-time price of electricity for the actual load reduced. Examples of ways a facility can reduce load include:
• operation of existing on-site emergency generators in conjunction with market signals, typically when electric grids experience peak loads; (operation of generators must comply with federal, state, and local environmental regulations);
• use of an existing thermal energy storage system;
• pre-cooling or pre-heating spaces;
• demand-side reduction/peak shaving through load shedding or duty cycling of equipment (i.e. temporary temperature setback, dimming of lights, etc.)
Improving Efficiency of Existing Electrical Utility System - One Facility at a Time
For over 40 years, large generators have been required by law to be in “spinning reserve” mode and available to prevent power outages due to
• unscheduled shutdown of other generators or failure of a transmission line serving the grid;
• actual electrical loads peaking above the capacity of generating systems online; and
• excessive congestion on transmission lines during periods of peak demand.
Because the utility generators in “spinning reserve” typically consume energy without providing any electricity to the grid system, system inefficiencies such as higher electric rates and excessive air pollution result. Generators must remain in constant “spinning reserve” mode since they require a significant amount of time to ramp up before they begin supplying to the grid. In fact, only approximately 4 percent of power generation is used for meeting actual peak load.
Transmission line losses between the power plant and buildings also add to inefficiencies of the electrical distribution system, thus increasing the cost of operation. Overall, most current electrical systems operate with an efficiency of approximately 35 percent, since there are losses both during generation of electricity at the power plant and in the transmission to the facilities. Utilizing onsite generation can boost overall system efficiencies as high as 80 percent, resulting in less overall air pollution while providing additional electrical capacity that can be started quickly when needed. The vision of GridWise TM , a consortium of experts assembled from various fields, is to create a system which integrates the infrastructure processes, devices, information and market structure such that energy can be generated, distributed, and consumed more efficiently and cost-effectively.
Emerging energy, up-to-date information technologies and advanced communications have the potential to radically improve our nation's energy efficiency by coordinating supply and demand. As a result, the electrical power system will be smarter, efficient, secure, and reliable. Creation of a collaborative network, including market conditions, can greatly enhance opportunities for Demand Response. Certain customer appliances and equipment can be configured to automatically cycle back or turn off for short periods of time in response to peaks on the grid. For example, some utilities today have implemented programs that provide special thermostats to homeowners in return for allowing the utility company to “duty cycle” (briefly turn off) their cooling system via a wireless signal for short periods of time (typically only 15 minutes) during peak load periods.
Demand Response Programs are currently available in 26 states. Key market areas of participation include the District of Columbia , Massa chusetts , Virginia , Maryland , Pennsylvania , New York, New Jersey, Conn ecticut , Maine , New Hampshire , Rho de Island , Vermont, Delaware, Kentucky, Ohio, Michigan, Illinois, Indiana, and Tennessee. Demand response programs can be successfully implemented at various types of facilities including: colleges/universities, manufacturing plants, airports, hospitals, municipalities, hotels/resorts, office complexes, large retailers/malls, etc. Many different types of facilities can participate including single large energy-intensive facilities, or the aggregation of many mid-size or smaller facilities with load reductions as low as 100 kW. Generally, facilities that have large emergency generator capacity installed (either as a result of complying with code requirements or for business reasons) are ideal candidates to benefit from Demand Response. Facilities that typically may have reduced schedules during the warmer summer months, such as colleges/universities or other facilities with varying production or occupancy, stand to benefit even more from Demand Response.
How It Works
To participate in the Demand Response Program, the facility operator selects particular days and hours to be on stand-by response. Notifications in most markets are ten minutes prior to action and contact is usually to a cell phone, PDA, e-mail or control room. Demand Response is typically required for an average 15 minutes a month, approximately three to five times a year. This could vary, however, for some Independent System Operators (ISOs) such as New York or New England .
A certified Demand Response provider can guide the facility operator through the process, including assisting them in initializing automatic response controls if required by the grid operator. The Demand Response provider typically utilizes a management system based on algorithms that have been modeled on a broad mix of facilities, and may install near real time metering at select locations. Today's World Wide Web and remote control technologies make it much easier to administer the Demand Response Program. Near real time metering can also provide important data for better monitoring and managing of a facility's electrical use.
Facilities stand to benefit in various ways, including receiving a monthly payment simply for shutting down or transferring a portion of their electrical load to existing under-utilized, on-site backup equipment such as emergency generators. The generators should be operated at least monthly for testing to confirm the equipment will work in an emergency. Most buildings do not transfer building emergency load to this equipment while testing, and therefore, are not providing manufacturer's recommended periodic operation under load. Consequently, operating these generators under a load can provide both a financial benefit as well as address improved operation/maintenance practices.
In addition to the “spinning reserves” program, the facility can also benefit financially by shedding load and/or operating select generators at any time throughout the year (referred to as “self-scheduling”). This can occur during planned shutdowns, schedule changes, or back-up generator tests to provide additional revenue without changing normal operations. The opportunities for selective demand reduction are dictated by the facility, but payments are higher during peak hours.
Following is an overview of the typical Demand Response process.
Potential Financial Benefits
Revenue generated from Demand Response is paid by the ISO serving the region where the facility is located, total payments are shared between the facility and the Demand Response provider and/or an agent and currently can be as high as $100,000 to $130,000 per megawatt of load reduced per year. Facilities can typically receive 5 to 15 percent of their total annual electrical cost for reducing usage and utilizing back-up capacity. The financial benefits occur monthly and is guaranteed regardless of if the facility actually reduces its demand. The facility has the opportunity to periodically opt out of the Demand Response Program and also may dictate the size of electrical load they are willing to shed, as well as the particular days and times they wish to participate.
All facilities within the ISO service area where Demand Response is implemented stand to benefit by a reduction in future electric rates, since the power grid has more available resources to meet potential future loads. This avoids various costs including construction of additional power plants and transmission lines, and operation of outdated and inefficient generating equipment.
Following is a list of financial benefits possible:
All participation by the facility is voluntary. Without risk or penalty, the participant may or may not elect to participate in the Demand Response Program.
Environmental Benefits
In addition to providing a revenue stream, the Demand Response Program provides significant environmental benefits. Electrical generation is becoming the leading industrial source of air pollution, which results in acid rain, smog, and haze, and significant negative health impacts. Major pollutants include sulfur dioxide, nitrogen oxide, and carbon dioxide.
In the near future, there is a strong likelihood that carbon emissions will be restricted by the federal government, leading to reduced productivity of older and inefficient power plants. Participants in Demand Response Programs may begin receiving environmental credits for avoided pollution. Environmental credits, expected to be adopted in a majority of states soon, are already available in Pennsylvania . These credits have financial value and can be readily traded among companies.
Examples to Date
Allegheny Power and Dominion Virginia Power reportedly plan to construct a 240-mile, 50,000-volt transmission line from Pennsylvania to Northern Virginia , where demand is expected to grow 8 percent by 2011. Some environmental groups oppose construction, preferring other alternatives such as promoting energy conservation and alternative energy sources and building power plants closer to customers to minimize unsightly transmission lines. Because transmission lines are sometimes overloaded, Dominion actually had to cut voltage during a 2005 hot spell just to supply enough power to meet demand.
An example of the amount of money that is being generated through Demand Response Programs occurred on August 2, 2006 . Voluntary reductions from these programs in a 13-state region resulted in price reductions equivalent to more than $230 million in payments for energy and essentially prevented major power outages. During this period, participants were paid more than $300 per megawatt-hour for reducing their draw from the electrical grid. Demand Response payments during this week totaled $5 million. To illustrate the potential, the PJM Interconnection, a regional grid operator, reported actual demand response has been less than 1 percent of use during peak hours, while a 3 percent reduction for each utility would have reduced energy market prices by $8 to $25 per megawatt-hour.
According to the head of the North American Electric Reliability Council, New England and Texas are the regions of the country most likely to face severe power grid problems and possible blackouts in the next few years. They estimate that total consumer electricity demand is expected to grow by 19 percent in the next decade, while power capacity is on pace to increase only 6 percent. It is estimated in the U.S. , approximately 138 power plants are below requirements. Other areas of concern include the Midwest , Rocky Mountains , and Mid-Atlantic regions.
Summary
It is well-documented that peak demand for electricity will continue to rise across the U.S. Inadequate investment in upgrading infrastructure is expected to create shortfalls in the ability of some regional power markets to deliver electricity, thus increasing the need for companies to participate and take advantage of the financial benefits of Demand Response Programs. It is a “win-win” situation for facilities, utilities, and the environment. Facilities get paid for participating in Demand Response Programs while also keeping electric rates for everyone low, and improving the reliability of power supplied from the grid. Utility companies benefit by not investing in the construction of additional power plants and transmission lines. Environmental laws must be modified in some regions to eliminate barriers of on-site distributed generation, which will result in less overall pollution when compared with the standard method of generating power at the source utility power plant.
Demand Response Programs are based strictly on a facilities' level of comfort and ability to reduce electrical demand. Programs can be tailored to provide a recurring revenue stream by reducing peak electrical demand without jeopardizing a facilities' ability to meet its needs at any given time. The evolution of new technologies is expected to make Demand Response available for far more end users of electricity.
Jeffrey T. Hunt, P.E., C.E.M, G.B.E, CxA is a Senior Project Manager for Facility Engineering Associates (FEA) in its Dallas , TX office. Mr. Hunt has over 26 years of professional Energy Management experience gained within diversified capacities, including Corporate Energy Manager, Chief Engineer, Energy Manager, Consultant, and Design Engineer. Jeffrey Hunt has extensive experience in identifying, analyzing, designing, specifying, operating and managing energy cost-saving projects and preventative maintenance programs. His projects have demonstrated ability to establish/upgrade energy management programs and implement cost saving strategies with 0-4 year paybacks in both new and existing facilities.
Facility Engineering Associates, P.C., 2611 Westgrove Drive, Suite 113, Carrollton , TX 75006, (972) 759-4406, jeff.hunt@feapc.com