January 2011

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Making Money From Demand Response

The ultimate goal is to maximize the attainment of energy reduction, while minimizing the effect on occupants and building performance.
Jim Sinopoli PE, RCDD, LEED AP
Managing Principal,
Smart Buildings LLC

Contributing Editor
“The next raging bull market could be companies dealing in energy conservation.
But the "real money" is in the demand response business.”
Jim Cramer, host of CNBC's Mad Money, co-founder and chairman of TheStreet.com, Inc

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Markets are created in supply and demand of goods and services. For electric utilities to meet periodic peak demand for their services the choices are two: make the capital investments in power generation and “supply” sufficient capacity to meet the peak demand or simply lower peak demand and undercut the need for the extra capacity investment. Demand response is the “lower demand” strategy that pays users for reducing their demand rather than having the utilities invest in peak generation that may often sit idle. Note that the opposite is true as well – that lower energy pricing can assist the supplier to sell more power in times of low demand.

Demand response (DR) is a great strategy from several aspects; economically, environmentally and socially. It is the most visible of numerous strategies where the utility grid and a building with its related assets (such as on-site power generation or storage) are communicating to optimize the supply, demand, costs and prices. It’s the option with the most immediate potential and most likely the one that the Smart Grid will best be known for.

Estimated Commercial Demand ResponseFor building owners demand response is a real opportunity to generate small or modest revenue. DR payments vary widely based on region, a building’s load profile, the ability to curtail, etc., however, owners can expect payments in the range of $20-45K per MW curtailed each year.

DR also forces building owners to think about how exactly they can reduce energy consumption which is beneficial even when there isn’t a demand response event. However, don’t expect to sit back and just collect checks or credits from your utility. To take advantage of demand response building owners will need to do a number of things:

It is in the development of the details for the curtailment plans, the M&V process and the automation of the response that provide the key for building managers to unlock the potential of DR.

Curtailment Plans

Curtailment Plans Curtailment plans for building owners are more than just about energy; they must take into consideration business operations, priorities within the organization, critical systems and spaces, and occupant comfort and productivity. The ultimate goal is to maximize the attainment of energy reduction, while minimizing the effect on occupants and building performance.

Different building uses require different approaches to curtailment. For example, a hospital or other healthcare facility may have a curtailment plan that turns off all non-essential lighting, delays the use of dishwashing or laundry and reduces the number of usable elevators and escalators. The curtailment plan in an office building may involve resetting the temperature for air conditioning, slowing fan speeds, reducing overhead lighting, turning off all non-critical or unused equipment and doing so only in non-executive areas. Educational facilities may curtail the use of cafeteria and kitchen equipment, reset thermostats or delay the use of laboratories.  The point is that each building owner or manager needs to develop varied detailed curtailments for different levels of reduction. This is challenging and requires the input and cooperation of numerous constituencies and communication with all affected.

Financial Aspects

The contract a building owner will enter into regarding demand response will have several critical elements. Initially, there is an eligibility threshold; the building must consume a minimum level of energy and then typically through an energy audit will also demonstrate that it can reduce energy and meet minimum curtailment goals.

Assuming the building is eligible the building owner can make money from a typical demand response contract in two ways: (1) participation in the program and (2) performance or level of energy reduction – it’s somewhat analogous to a professional athletic getting paid a base salary for playing and then bonuses for performance.

Energy performance is determined by comparison based on the building’s baseline. Since demand response is likely to occur during the summer months, a baseline is typically the average peak demand of the building during the most recent summer. An energy audit can provide the target for energy reduction during events that the building owner will commit to. They would then commit to a certain kWh reduction for a certain price per kWh and get paid based on actual performance.

Building owners also can be compensated for their participation in the program. This strategy is based on a price per kW that takes into account the building owner’s commitment to the number of DR events over a predetermined time period. Note that there may be financial penalties associated with shortfalls to the curtailment commitment. Here’s an example from MPower of the possible payments:

Financial Aspects

In the above example, participation payments are $45.00 per pledged kW with a commitment of 10 curtailment events over 5 years. Payments for each event are $0.35 per pledged kWh reduced during an event. The higher payments are for a 5 year commitment with payments slightly decreased for shorter terms.

[an error occurred while processing this directive] Building owners or an owner of a portfolio of buildings will deal or contract with a utility or an aggregator depending on the total energy consumption and the potential for curtailment. They will enter into a contract with the utility or aggregator addressing the curtailment events they want to participate in, the term of the agreement, minimum amounts of curtailment, how the curtailment will be verified, etc. Curtailments are likely to be seasonal, restricted to weekdays, targeted to a time window reflecting peak hours and have limited duration. Usually energy reductions have to be at least 15% of the building’s baseline. DR events are usually triggered by high temperatures or by system emergencies and market-price conditions within the grid and power industry. Customers are generally given 24-hour notice of an event.

Users are stratified and offered programs based on their size or under-lying industry. Typically large businesses or high demand customers are those with monthly demand of at least 200kW, while Small/Medium size customers have monthly demand below 200kW. Some building uses such as government, subsidized housing, hospitals, universities, etc. may not need to meet all eligibility requirements in order to still participate.

Here are some examples of what specific companies and buildings are receiving from participating in DR:

The market for this type of scenario and the interactions between consumers and suppliers is rapidly evolving.  The programs and pricing models available encompass many variations and user requirements including:

This review of Demand Response takes a general overview and provides an impetus for us to at least make decisions for our homes and possibly for our small businesses. This overall interaction of suppliers and users is fast growing, rapidly evolving and involves many emerging organizations and programs. One could expect the automation of building and grid communication and the automation of the financial and energy marketplace to develop in parallel resulting in the whole process being automated, something analogous to software tools use in other markets and exchanges to optimize supply, demand and pricing.

For more information, write us at info@smart-buildings.com


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