TODAY’S STUDY: How To Use All The New Energy Tools

Demand Flexibility; The Key To Enabling A Low-Cost, Low-Carbon Grid

Cara Goldenberg, Mark Dyson Boulder, and Harry Masters, February 2018 (Rocky Mountain Institute)

Highlights

• Wind and solar energy costs are at record lows and are forecast to keep falling, leading to greater adoption, but the mismatch of weather-driven resources and electricity demand can lead to lower revenues and higher risks of curtailment for renewable energy projects, potentially inhibiting new project investment.

• Using an hourly simulation of a future, highly-renewable Texas power system, we show how using demand flexibility in eight common end-use loads to shift demand into periods of high renewable availability can increase the value of renewable generation, raising revenues by 36% compared to a system with inflexible demand.

• Flexible demand of this magnitude could reduce renewable curtailment by 40%, lower peak demand net of renewables by 24%, and lower the average magnitude of multihour ramps (e.g., the “duck curve”) by 56%.

• Demand flexibility is cost-effective when compared with new gas-fired generation to balance renewables, avoiding approximately $1.9 billion of annual generator costs and 20% of total annual CO2 emissions in the modeled system.

• Policymakers, grid operators, and utility program designers need to incorporate demand flexibility as a core asset at all levels of system planning to unlock this value

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Introduction

The Merit-Order Effect, And The Opportunity For Demand Flexibility

More than half of the electricity generation capacity added to the U.S. grid in 2016 and 2017 came from renewable resources, largely driven by the precipitous price decline of wind and solar projects. While this scale of renewable generation has translated into millions of tons of avoided carbon emissions, this increase in supply also has implications for wholesale electricity markets. Because of its very low marginal costs, renewable generation displaces more-expensive producers, resulting in lower wholesale clearing prices, and in some circumstances leading to curtailment; i.e., forced reduction in power output. As the penetration of variable renewables increases and the risk of curtailment grows, new renewable capacity is exposed to lower prices. This value deflation can reduce the revenues of renewable projects, making the investment in and development of new renewable projects less attractive.

However, leveraging opportunities to shift load to better match the supply of renewables can mitigate the impacts of this value deflation. For years, utilities and market operators have used traditional demand response programs to send signals to consumers to reduce electricity consumption at times of high stress on the grid. Now, a new generation of communication and control technologies can enable “demand flexibility,” allowing major loads to continuously respond to changing renewable supply levels and other market signals.

Solar photovoltiacs’ (PV’s) impact on the grid most clearly illustrates the potential mismatch between renewable supply and end-use demand—and the opportunity for demand flexibility to address this mismatch. While solar generation reaches its peak around midday when the sun is high in the sky, peak demand usually occurs later in the afternoon and early evening as temperatures peak and families return home. To adjust this misalignment, demand flexibility technologies can shift electricity consumption from times of high load to hours with high renewable availability.

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This load shift reduces overgeneration, lowers peak demand, and mitigates the steep ramping needed to serve high midafternoon electricity needs as the sun goes down. Previous RMI work has shown that demand flexibility can result in significant benefits at the household level. Figure 1 illustrates how a simulated residential customer in Hawaii could shift household electricity consumption to the middle of the day when PV generation peaks by using a suite of technologies, including battery energy storage, managed electric vehicle charging, and smart air conditioning controls.

Figure 1’s two different load profiles show how using automated communication and control technologies can shift electricity use across hours of the day, without any significant impact on the quality of service that a customer would receive from those end-use loads, and without requiring that customers are at home in the middle of the day waiting to use their washing machine during opportune times. At the household level, these demand flexibility technologies can lead to increased self-balancing and retail bill savings between 10% and 40%; at the level of a regional grid, the same technologies can significantly mitigate the price impacts of renewable energy.

Figure 2 below uses a representative dispatch curve for ERCOT’s service territory to show both the regional impact of renewable energy on clearing price in the wholesale market, as well as the mitigating effects of demand flexibility. The long blue arrow shows the impact renewable energy has on the clearing price: variable renewable energy reduces load that must be met by thermal generators, and the marginal cost to meet load declines accordingly, causing generator revenue to fall. However, increasing demand at times of high renewable availability, as illustrated by the red arrow, can raise this price, increasing revenues for renewable generation.

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The Evolving Role Of Demand Flexibility

Utilities and system operators have decades of experience in deploying demand flexibility technologies to provide value to the grid, and increasingly to integrate variable renewable energy. Over 600 utilities have already deployed rate structures that reflect a more granular value of consumption, allowing customers that adopt flexibility technologies (e.g., smart thermostats) to realize sizeable bill savings as well as cost benefits at the system level.

Utilities across the U.S. are now considering demand flexibility as an important component of “non-wires alternatives” that can defer large infrastructure investments. For example, Central Hudson’s CenHub Peak Perks program compensates customers residing in key geographic areas to reduce energy use during times of peak demand using a Wi Fi-enabled smart thermostat or a program efficiency switch. Both Southern California Edison (SCE) and Pacific Gas & Electric (PG&E) in California have initiated a number of projects focused on non-wires alternatives to support distribution system reliability and to address natural gas leaks, retirement of nuclear power plants, and particular areas of significant load growth. In Washington, Bonneville Power Authority recently gave up a long-term effort to build over $1 billion worth of new transmission and will be addressing this need with procurement of non-wires alternatives instead.

Table 1 describes a number of programs that have leveraged the capabilities of demand flexibility technologies to bring value to the grid. These offerings differ from traditional demand response programs as they are not designed to simply curtail consumption during times of high load; rather, the objective of these programs is to explicitly shift consumption to different times of the day, while maintaining the same level of daily electricity use…

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Implications And Conclusions

Our analysis suggests that demand flexibility can play an important role in a low-cost, low-carbon grid. Near-term action in five areas can lay the groundwork for fully capturing this value:

• Include demand flexibility as a core resource in grid planning to avoid stranded generator investment. Demand flexibility can avoid significant investment and operational costs that would otherwise be spent on natural gas-fired generation to meet peak loads and balance renewable variability. However, without proactive planning that includes demand flexibility, there is a significant risk of duplicative investment in natural-gas power plants that may become stranded as demand flexibility becomes more cost-effective and commonplace. Utility planners, system operators, and regulators can mitigate this risk by improving planning processes and utilizing software tools that fully reflect the capabilities and value of demand flexibility.

• Account for demand flexibility when setting targets for highly renewable supply mixes. Many studies of highly renewable grids find a limit for renewable adoption, above which the marginal value of new renewable resources falls below their investment costs. Our analysis demonstrates that demand flexibility can significantly improve the revenue and system-level value of renewable energy, and suggests that the limit to renewable energy adoption is not fixed, and can rise dramatically if demand flexibility strategies are taken into account during planning and system operation. Policymakers, regulators, and utilities should carefully consider the potential of demand flexibility to help meet renewable energy-adoption targets of 50% and higher across the U.S.

• Pursue portfolios of renewables and demand flexibility to improve project economics. In some areas of the U.S, including California and the Midwest, revenues realized by renewable generation are already falling due to rising renewable adoption, grid congestion, and the inflexibility of other generators. Project developers and/or off-takers thus face price risks, and are increasingly bundling battery energy storage with renewables projects to mitigate exposure and increase value. Our analysis suggests that demand flexibility, as part of a broader resource portfolio, can also address these same price risks. Project developers and utilities should carefully evaluate the economics of resource portfolios composed of renewables and demand flexibility in order to optimize system value.

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• Adjust utility earnings opportunities to encourage noncapital investments. Traditional cost-ofservice regulation rewards utilities for investments in capital they can include in their rate base. However, new regulatory tools, such as performance-based ratemaking, can allow utilities to still earn returns when using lower-cost and/or third party-owned demand flexibility as a grid resource. By addressing the incentives driving the utility business model, policymakers have the opportunity to significantly expand the role of demand flexibility in utility procurement decisions.

• Create customer incentives to increase flexibility-technology adoption and influence electricity consumption. The deployment of demand flexibility technologies depends on customer purchasing decisions and willingness to participate in new utility programs. Creating the right incentives, such as rebates or bill savings through time-varying rates, will be key to encouraging customer involvement in demand flexibility programs. Increased use of automation and control technologies and programs that promote participation of aggregated resources can improve the customer experience, providing nonmonetary incentives for customer participation.

Demand flexibility can be an important grid resource in the long run, cost-effectively balancing renewable energy to ease the transition to a low-carbon grid. Near-term action can lay the groundwork for scaled deployment of demand flexibility technologies in a future highly renewable grid, and address the uncertainties around technology costs and performance that are critical to planning for a reliable, low-cost, and low-carbon grid.

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