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Demand Response: What you need to know, and why it is important.
What is it?
Demand Response is when customers lower their electrical usage from their normal usage patterns, in response to price signals from grid operators.
Why does it matter?
This practice both saves consumers a lot of money (consumers avoid high wholesale market power prices) and helps ensure grid reliability (since it can be utilized at times when the grid is most stressed).
It’s a little bit complicated, but here’s a little background:
Grid operators acquire power from the grid through auctions from many different generators. Essentially, every generator gets paid the same price, which is equal to the price of the last unit of power to be acquired. The rules are set up in a way that cheaper sources of energy are utilized initially, and then more and more expensive energy is procured as demand goes up. Because of the way this process works, when there is a lot of demand, the power we consume is very expensive. As a result, reducing the demand for power slightly, for a short period of time, can save a lot of money – this is where demand response comes in.
Individuals and businesses can agree to let the grid operator to reduce the amount of power they are consuming during peak times in return for a cash rebate. For a household, this might mean having the air conditioning run a little less and increase the indoor temperature by a degree or two.
This is demand response in a nutshell – instead of paying an extremely high price for power during times of peak demand, some customers use slightly less electricity for a short period of time in order to “shave” off the demand peak.
Why should you care?
Demand response is good for consumers and for the grid. It saves money, both in terms of the electricity people and businesses don’t have to buy, but much more so because of additional infrastructure and power investments that we don’t need to make as a result of the demand response.
Without demand response, there are some plants that just sit around most of the time waiting for periods of peak demand. Because they only produce energy when demand is very high, they charge very high prices to recoup their costs. If you don’t use those really expensive power plants during times of peak demand, not only do you not need to pay for the power – you don’t need to build those expensive plants in the first place!
As Amy Francetic, CEO of Clean Energy Trust, recently noted, “Reductions in peak demand through demand response programs save Illinois businesses and consumers money and strengthen grid reliability.”
Where do things stand currently?
Believe it or not, demand response is currently a hot-button issue in the energy sector. Companies that sell power tend to oppose demand response because it competes with their business.
It’s important to remember that the energy and utility sector is a highly regulated environment with intersecting and overlapping areas of jurisdiction. Many of these rules were set up for the power the 20th century power system, when local fossil fuel plants supplied power within a single state. As we move towards a 21st century power system, there are many factors influencing the grid, and technologies are changing the way it operates: the advent of smart meters and advanced controls has also made demand response even easier to implement.
Innovative businesses that provide demand response services are growing rapidly and are increasingly seen as a threat by companies that sell power. As a result, the manner in which demand response is allowed to participate in energy markets is currently the subject of a lawsuit that was recently heard by the Supreme Court.
Whatever is ultimately decided by the courts, it is important that structures and processes are set up to allow for demand response programs to continue and expand. Although the details can be confusing, the bottom line is that demand response saves us all money and helps our grid operate more efficiently.