Demand Response and the Smart Grid

Energy University Course Transcript

Slide 1
Welcome to Demand Response and the Smart Grid.

Slide 2
For best viewing results, we recommend that you maximize your browser window now. The screen controls
allow you to navigate through the eLearning experience. Using your browser controls may disrupt the
normal play of the course. Click the Notes tab to read a transcript of the narration.

Slide 3
At the completion of this course, you will be able to:
 Define the challenges of electrical supply and demand
 Explain what demand response is and the role of traders and aggregators
 Identify how to use demand response to avoid investment in peak capacity
 List the benefits and costs of participating in a demand response program
 Identify the opportunity to use demand response payments to make energy efficiency investments
in an office or factory
 Describe the impact of regulations on demand response
 Discuss the concept of the smart grid

Slide 4
Electricity has become a critical element in modern human life. City, State, and country governments worry
about significant power disruptions especially during extreme weather conditions because it can truly impact
whether some people live or die.
Meanwhile, investment in electrical infrastructure has struggled to keep up with increased demand. We
have seen demand become so strong that it has triggered network failures.
For example, in August of 2003 tens of millions of people from Canada and the Northeastern United States
lost power. The scale of the blackout was tremendous and added to the growing discussion about how to
solve our energy problems.
As a result, the energy industry has become one of the most regulated industries in the world.

Slide 5
Demand response programs provide a simple way for facility managers to get paid for reducing
consumption and relieving load on the power grid when it is stressed. In effect they are returning capacity to
the grid and being paid for that asset.
The modern demand response market began with a pilot program at ISO (Independent System Operator)
New England in 2000. ISO New England is responsible for managing the power grid for 7 Northeastern US
states. In other countries, these entities are often referred to as TSOs, Transmission System Operators.
Since that pilot program in 2000, robust markets have developed at several ISOs and pilot projects are
underway at other ISOs and utilities.
During that period, the US government and various other organizations responsible for the electrical grid
repeatedly indicated their desire and support for more demand response. Their reasoning was based on the
fact that DR can improve grid efficiency and temper radical price swings. This need for change has been

©2011 Schneider Electric. All rights reserved. All trademarks provided are the property of their respective owners.
embraced by the United States government as well as the UK, Denmark, Finland, Sweden, France, Canada,
Australia, and others, and they are implementing policies to enact this change.

Slide 6
Demand response is an electricity market mechanism by which consumers reduce consumption in response
to energy price fluctuations, demand charges, or a direct request to reduce demand when the power grid
reaches critical levels. With demand response, facility managers have the ability to manage their electricity
consumption as an asset instead of an expense that must be paid every month.

A good way to understand this is to think of a plane. Imagine that a plane can hold 70 people but is
overbooked so 80 people show up for the flight. The airline will offer ten people free flight vouchers if they
are willing to take a later flight.

Now, compare the plane that carries 70 people to a power grid that has 70 MW of power. The people, the
consumers on the power grid in this scenario, are asking for 80 MW of power. In this case, the power grid
will pay consumers to reduce 10MW in order to balance the supply and demand.
Although this is not a perfect analogy, it provides an easy way to understand the general idea of demand
response.

Slide 7
Currently, there is a challenge to electric commodity suppliers in being able to supply the required amount of
electricity at any given time. For example, in the summertime, there are many places that get extremely hot,
prompting consumers to increase their electricity use for cooling devices. This increase creates a spike in
the need for electricity. The electricity company has to be able to provide enough electricity for these spikes
and must build the necessary infrastructure to do so.
Essentially this means that even though the electric commodity supplier will only need to supply this
increased amount of electricity for a relatively short period of time, the equipment needed to do it is present
year round. The suppliers, therefore, incur the expense of owning and maintaining this equipment. The cost
of this is passed onto consumers and increases their monthly charges.

Slide 8
Demand response programs provide an alternative. When a spike period is detected, participants in the
program receive a curtailment request (1) which generally comes from the Independent System Operator
(also known as Transmission System Operator). The request will be based on a previously agreed contract
and will specify how much load has to be reduced and for how long. The format of the curtailment request
varies: it may be an email, a phone call, a pager message or an automatic signal direct to the building
management system.
(2) The participants evaluate the request and decide whether to accept it. Some programs include only
voluntary requests, where the participant has the option to accept or refuse any curtailment. Other
programs include mandatory requests, where the participant is obliged by contract to comply.

Slide 9
(3) The participants turn off non-essential loads, and bring down the height of the spike to a level that the
electricity company can provide.
(4) Finally the participants communicate back to the ISO to confirm a successful curtailment.

©2011 Schneider Electric. All rights reserved. All trademarks provided are the property of their respective owners.
In this way the electricity company avoids the investment required for peaking power plant. The most
common type of equipment used for peak power is a natural gas combustion turbine. These are powerful
generators that can start up on a moment’s notice. However, they tend to cost about $800/kW to build,
whereas a similarly robust demand response solution can be built for less than $400/kW. This translates
into lower charges for customers.

In addition, given that the demand response solution is, at its core, power reduction instead of power
generation, it is a zero emission generator, the cleanest power possible.

Slide 10
Demand response aggregators can be the electricity supplier or third party, outside of the supplier and
customer, sometimes called a Curtailment Service Provider (CSP). Aggregators provide demand response
products from which customers can choose. The aggregator monitors energy usage on the electric grid and
can reduce usage during peak periods of demand by calling on participants to switch off non-essential loads.

A demand response aggregator can be responsible for all the necessary administrative duties including
setting up the required metering and ensuring that wholesale power market and/or utility regulations are
followed. Due to the activities of these third parties, the utility company can focus on what they do well and
do not necessarily have to be involved. In this was they can avoid getting bogged down with the extra work.

The aggregator makes money from the Wholesale Power Market and/or the utility for achieving the required
reduction at peak times. In turn, the aggregator pays the participants for helping achieve the required
reduction.

Slide 11
As we have seen, the idea behind demand response is for customers to get paid to manage their energy.

By reducing consumption and relieving load on the power grid when it is stressed, participants return
capacity to the grid. In effect each curtailment is an asset that has a financial value.

Slide 12
Program participants can expect to earn back 5-25% of their annual energy costs. The earnings vary based
on speed, location, and willingness to participate. For example, the ability to curtail consumption in
Manhattan may have much greater value than in another city. These factors can mean the difference in
hundreds of thousands versus tens of thousands of dollars in savings.
The revenue generated from demand response participation is often used for capital investments such as
equipment upgrades. Therefore demand response can be a way to fund other improvements such as
lighting or HVAC control, which further increases the total savings gained from energy efficiency.

Now let’s look at what it takes to participate effectively.

Slide 13
Obviously, to participate in a demand response program, you must have ways of reducing your load in
answer to a curtailment request. Curtailment requests can vary greatly in their timing and duration, from a
few minutes to a few hours. In general you can expect the total curtailment hours in a year to be from 20
hours to 100 hours depending on the chosen demand response product.

©2011 Schneider Electric. All rights reserved. All trademarks provided are the property of their respective owners.
One way to achieve curtailment is to turn off any non-essential equipment. This could include any lighting
that is surplus to minimum requirements or which is purely decorative, and pumps that are driving water
features such as fountains. Any facility which has air conditioning may be able to temporarily change the set
points to reduce consumption while still keeping comfort at an acceptable level. Facilities with multiple
elevators or escalators may be able to turn some of them off and direct users to the ones which are still
active.

Slide 14
Other actions can involve shifting the load to a different time of day. Dishwashing, laundry and ice
production can be rescheduled after the curtailment period is over. So can battery charging, compacting
scrap and waste, and baling. Environments that incorporate batch production may be able to delay
manufacture of the next batch and turn off any pumps that are not currently essential.

Slide 15
Another strategy uses on-site generation to provide energy to allow equipment to continue functioning
during the curtailment period. This is feasible provided the rewards of participating in the curtailment
outweigh the fuel and operating costs of the on-site generator. If the generator is already required on site to
provide emergency power, this may be a way to obtain more benefits from that asset. However in some
areas there may be restrictions, such as emissions regulations, that have impact on the fuels that can be
used and the duration of generating periods.

One more approach can be feasible if the participant has multiple locations under their control; for example,
a data center may be able to move some load to another data center in an area not affected by the
curtailment.

Slide 16
In a study of Energy Systems Integration for Demand Response performed by the California Energy
Commission the importance of communications and controls in successful demand response programs is
highlighted.

Demand response requires monitoring and communication of real time pricing to the aggregators and
customers. Modern communication systems, like the internet, make it easy for consumers to obtain
wholesale energy pricing in real time. There are also software tools that correlate the wholesale electric
price with the consumer’s real time electric consumption. These tools enable the consumer to decide if they
should continue consuming electricity or reduce their consumption and sell it back to the power market.

©2011 Schneider Electric. All rights reserved. All trademarks provided are the property of their respective owners.
Slide 17
The issue of controls is a very important one in the consideration of demand response. While demand
response can work if a participating building is manually responding, controls have been shown to improve
performance when monitoring the ebb and flow of electricity coming into and going out of a building. In
many cases, automated systems for shedding load can improve participation levels and yield greater
financial benefit. It reduces effort compared to manually turning off loads in a building or factory. Another
key benefit is that automation can be done with fine precision so that it limits the impact on building
occupants. It can be akin to the difference of an on/off light switch and a dimmer switch.

Slide 18
This figure is a scatter plot of the average percent load shed for 75 participants in one of the Pacific Gas &
Electricity demand response programs during 2007. 16 of those participants had automatic controls and 59
did not. Across a variety of different building types, and in different locations, the sites that were enabled
with automatic control equipment tended to yield a higher average load reduction. The average shed for
automated customers was 8.1% while the average shed for non-automated customers was -0.93%. This
analysis provides strong evidence to support the theory that automation improves the performance of
demand response program participants.

Slide 19
Since the US is the first country where demand response schemes have emerged, let’s look at how the
market has been influenced and regulated there.

In 2005, the US Congress stated the following:

“It is the policy of the United States that time-based pricing and other forms of DR [Demand Response],
whereby electricity customers are provided with electricity price signals and the ability to benefit by

©2011 Schneider Electric. All rights reserved. All trademarks provided are the property of their respective owners.
responding to them, shall be encouraged, the deployment of such technology and devices that enable
electricity customers to participate in such pricing and DR systems shall be facilitated, and unnecessary
barriers to DR participation in energy, capacity and ancillary service markets shall be eliminated.” [EPACT
2005] (review of US DR Opportunities)

This means that in areas where an Independent System Operator or ISO exists, any consumer can sell
demand response to the wholesale market, essentially bypassing the utility, unless the state Public Utilities
Commission (PUC) or Legislature specifically prohibits it. This would be unlikely because it would potentially
have negative political implications.

Slide 20
Order 890 from US Government essentially gives demand response the same weight as other resources
used for reliability, efficiency, and the expansion of electrical transmission systems. It is believed by the
Peak Load Management Alliance that this order will give demand response the backing it needs in order to
be more widely implemented in the United States.

This order requires ISOs to allow demand response to bid into the wholesale market for every service that a
generator can bid into today. This makes demand response as valuable as a generator. It also means that it
is possible for demand response to sell into higher value wholesale products and opens the market in more
parts of the country.

Slide 21
With individual states continually increasing their required renewable energy portfolio standards (RPS),
which require states to supply a percentage of their energy through renewable resources, there is a strong
reliance on renewable energy to be available and reliable when necessary. Because we are at the mercy of
the elements for renewable energy sources such as wind and solar power, the consistency of the energy
supplied through these resources cannot always be relied upon. Therefore, it is necessary to have some
sort of reliable back up for these in the event that there is a large gap in meeting the demand for energy at a
given time. The options for filling this gap are to either supply the energy through use of non-renewable
resources or through implementing demand response programs.
Now that we have a better understanding of some of the demands on demand response, let take a look at
the Smart Grid.

Slide 22
In order to understand why the smart grid is beneficial, we need to understand how it works. The energy
market or local electric utility closely follows the market conditions and then based on that information, they
will dispatch a “virtual green generator”. The virtual green generator is triggered to start when a signal is
sent to the control boxes inside buildings participating in the smart grid program. The Building Automation
System and Electrical Distribution systems in the participating buildings have pre-designed routines they will
follow in the event that they receive one of these signals. Following these routines will work to reduce
electrical demands.

Demand Response is the primary driver for the Smart Grid. The Smart Grid has been set up to self optimize
as well as restore itself automatically. The grid could be utilized in a number of ways including for Demand
Side Management/Real Time Pricing (RTP). Another benefit of the SmartGrid is that it has the ability to
provide some information to the utility companies including real time data.

©2011 Schneider Electric. All rights reserved. All trademarks provided are the property of their respective owners.
Slide 23
The Smart Grid is all about presenting the information to the right people at the right time. In terms of
demand response, this means letting consumers know the price for power relative to their consumption in
real time. This gives the information that has previously been kept private and that most have not seen
before. This information allows them to decide if they should continue to consume or not. In general, most
automatic metering business cases will say that simply providing this information will make about 60% of
their case. The other 40% of their value proposition comes from transmission and distribution management

Finally, some of the impacts that can be seen from SmartGrid implementation are potentially reduced overall
costs, more energy efficiency and better alignment with green initiatives, higher reliability, and the
opportunity to have more information regarding your electrical service.

Slide 24
Let’s review what we have covered in this course.

 Demand Response Programs are a simple way to get paid for reducing consumption. These
programs relieve the load on a grid when it is stressed.
 Demand fluctuates from season to season and even hour to hour. Regardless of how much
demand there is at any given time, the utility companies must be prepared to meet peak demands
at all times, which is very costly. This cost gets passed on to customers.
 Demand response provides an opportunity for participating customers to make a choice about
whether they want to reduce their electricity consumption in times of peak demand in order to
return energy to the utility. The customer is notified by the utility provider that there is a need for
energy and then decides whether or not they are able to curtail their energy consumption at that
time. Once the participant turns off any non-essential load they notify the ISO to confirm that they
have curtailed their usage.
 In order to keep track of demand response, utilities would need to track a lot of information which
would take them away from focusing on providing the utility. Rather than do this, utilities use
Demand Response Aggregators as a third party curtailment provider.
 There are a number of benefits to customers for using demand response including earning back 5-
25% of their annual energy costs
 Implementing DR requires monitoring and communication. While demand response can be done
manually, it is better to use the available software tools to ensure optimal demand response.
 Regulatory Impact on DR gives it the same weight as other resources as well as the backing for
wider implementation.
 The Smart Grid is when an energy market or local electric utility closely follows the market
conditions and then based on that information, they dispatch a virtual green generator that is
triggered to start when a signal is sent to the control boxes inside buildings participating in the
smart grid program.
 Demand Response is the primary driver for the Smart Grid. Some of the impacts that can be seen
from SmartGrid implementation are potentially reduced overall costs, more energy efficiency and
better alignment with green initiatives, higher reliability, and the opportunity to have more
information regarding your electric service.

Slide 25
Thank you for participating in this course.

©2011 Schneider Electric. All rights reserved. All trademarks provided are the property of their respective owners.