Utilities Embrace DR

Utilities from New York to Seattle and Florida to California are dipping their toes in the waters of DR. Regulators and utilities everywhere else are watching closely.

DR represents a first step in opening markets for energy, which will change how utilities make capital decisions. Utilities are beginning to think of DR as a savings account. Instead of building more infrastructure and producing more power to meet demand, they're experimenting with models for making money by selling less.

Rewards for Early Adopters

Early DR adopters will take advantage of initial incentives and cost savings. First, they'll gain the most from early enthusiasm. Utilities launching DR programs are most supportive of customers who pilot the new programs. The accompanying financial incentives are often generous, but not permanent.

Second, early adopters negotiate at the high point of the cost curve. The cost of power climbs as utilities max out their capacity. DR is a way for utilities to postpone or avoid big expenditures, thus flattening out the rise in retail power costs. Once DR goes mainstream, the supply of saved energy will bring down the value of a new DR customer. As that happens the enthusiasm, incentives and rate of return will decline.

DR by Choice or by Fate

Why do we think widespread DR will come faster than the industry's usual glacial pace? Two strong influences are pulling it: reliability and market pricing.

Utilities are mandated to deliver reliable power, a task whose costs mount as the infrastructure ages. Some electric customers are willing to risk an occasional power interruption, whether self-imposed or brought about by a failure in the system. For others, reliability is essential to their operations.

Increasingly, utilities and regulators are viewing these two classes of customers separately in terms of who should pay the cost of ensuring energy reliability. In this philosophy, when power supplies can't meet demands, the supply will go to those who are willing to pay a premium. Others are subject to utility-imposed load shedding. This is one form of DR, and accomplishing it gracefully requires sophisticated technology that's been in the works at National Laboratories and Bonneville Power Administration.

Rate reduction is a better form of DR: It can be implemented quickly and puts customers in control. Customers choose to consume less, rather than pay high market prices. Power regulations are designed to artificially overcome such market influences, but never fear -- deregulation is underway. When the retail price of a kilowatt can rise during periods of peak demand, DR will be a given.

ComEd rolled out a DR program and signed up tens of thousands of participants. Their DR savings account grew immediately -- ComEd managed to delay a transformer construction project. They began by convincing their regulators to treat large customers as a competitive market, instead of guaranteeing them flat-rate pricing. Large customers represent the most leverage for DR program development. At the smaller end of the scale, transaction costs and smaller loads complicate the equation.

Preparing for DR

DR requires demand-side management of power consumption, and that takes some infrastructure investment on the part of the user. On the surface it simply doesn't make sense to invest beyond potential savings in the current flat-rate pricing scenario.

However, businesses continually make capital improvements, and can make smart energy decisions that prepare them for DR. The payback might seem low (or negative) today, but consider how quickly that could change.

Logical shutdown-- Utilities are looking for DR customers to shed big loads on a day's notice or less. A large facility can shut down a manufacturing line or two and meet the requirement. For smaller operations, it's all or nothing. Either way, the shutdown must be done in a way that doesn't harm equipment or impair safety.

The shutdown sequence can be documented as a procedure to follow when shedding loads, and then that procedure can be automated if necessary. Automating the shutdown through an energy management system is essential in complex operations, where manual methods could take a shift to complete. With a few commands from a central computer, designated loads can be shut down quickly and safely.

Routine upgrades-- Most industrial equipment today is built with the remote monitoring and control capabilities needed for centralized management. Older equipment can often be upgraded. Take advantage of routine replacements to upgrade the big users of power -- motors, pumps, compressors, HVAC, lighting -- to be computer-friendly.

Upgrading might involve downsizing. For example, large motors often lose efficiency at less than a full load. Multiple smaller motors, pony motors, or variable-speed couplings give you more control and efficiency. Equipment upgrades that improve energy efficiency are sometimes eligible for rebates or grants.

Clean cutoffs-- The most logical place to shed loads is at the secondary switch. Beyond that, the power is distributed into dozens or hundreds of tertiary circuits, and controlling them renders diminishing returns. To shed loads at the secondary switch level means having clean cut-off points between lines.

For each secondary switch, determine what is powered by it, and whether it can be opened without causing problems elsewhere. That is, be sure that taking machine A offline won't also disable all the fire alarms. Re-feeding lines for clean cutoffs may be justified by the maintenance benefits alone.

Business practices-- Internal policy and contractual decisions also affect how easily you can take advantage of a DR program. Shedding loads for a day is an easy decision for a facility with a single shift. They can make up time in production more easily than a plant that runs 24/7 and has just a few scheduled maintenance days per year. Balancing costs with consequences becomes more complicated for businesses with backlogs, service level agreements, or labor contracts that prohibit such day-ahead decisions.

How Fast Is DR Coming?

The current estimates for the cost of upgrading the nation's electricity infrastructure run as high as $450 billion. Numbers that large get attention. Blackouts get attention, too. All this recent attention has expanded the awareness of smart energy as an alternative to spending on the status quo. Look at the impact of gas prices on transportation -- hybrid vehicles are out of the lab and on the market.

There is the risk that DR won't take off in your territory. Puget Sound Energy has a DR program, but hasn't needed to use it since the energy crisis of 2001. The Northwest's surplus of power insulates it somewhat from yearly market volatility. PSE anticipates needing DR every five to ten years. That's not the case in other parts of the US.

Given the forces behind it, DR seems to have a good chance of success. If DR doesn't become widespread in the next five years, something else will. That something else might be independent power merchants competing with utilities, or the acquisition of utilities by global companies who can afford to make the necessary investments.

DR gives utilities and customers more control over their destiny than most other scenarios. Rising energy prices and more frequent interruptions of service will bring customers together to force change, and they won't wait for slow utilities.

"Utilities will embrace smart energy," said a Bonneville Power Authority administrator, "or be victimized by it."