In the last several years, deployments of demand response (DR) in the U.S. electricity market have matured and now have the opportunity to bid directly against generation in many regions. However, these programs also have fallen under greater scrutiny at the same time. As DR becomes a larger portion of the resource base, regulators and other market participants are calling for tighter requirements to ensure reliable operations and efficient markets.
Economic market factors such as low natural gas prices and coal and nuclear plant retirements also affect the growth path of DR. Navigant Research’s report “Demand Response” examines the lessons to be learned from the more established markets as new DR markets emerge and develop around the world.
DR Market Drivers and Barriers
Several drivers point toward increased DR adoption in North America and other regions. The changing resource mix in electric grids globally is creating more potential for DR to play a pivotal role. As coal and nuclear plants retire, power suppliers need low-carbon replacements that can be built in short time frames. Conversely, as large-scale intermittent renewable resources like wind and solar power fill in this gap, they require backup solutions when the wind is not blowing and the sun is not shining. The recent draft rule from the U.S. Environmental Protection Agency regulating carbon emissions is a current example of policies that will provide incentives for demand-side solutions to energy problems.
New market types such as spinning reserves, frequency regulation and other ancillary services are opening up to DR. The modernization of the grid calls for new models of how the power grid should be designed and how power will be transmitted, distributed and optimized. New York has launched a program called “Reforming the Energy Vision” that aims to make the existing utility grid a platform from which third-party energy service providers can launch offerings.
Barriers to DR development also exist. There are several examples of market rule changes that attempt to standardize rules between DR and generation, which may put more requirements on DR and increase the risks of deployments. The greater a portion of the resource mix that DR becomes, the more it will be relied upon. Thus, DR providers must guard against customer fatigue, brought on by more frequent DR events, to maintain reliability and prevent customer attrition. The U.S. Court of Appeals’ recent overturn of FERC Order 745 on DR compensation will take a while to play out and may have long-term benefits for DR, but in the short term, it throws uncertainty and risk in the market.
Technology Evolution in the DR Market
Existing technology is sufficient to accomplish DR, for the most part. The next step is a period of refinement and application building. Standards are being developed, protocols and capabilities will be designed, and more efficient communications from the control room to the customer will be enabled. The Open Automated Demand Response (OpenADR) protocol appears poised to lead the way to an international standard for DR communications, which would streamline program development and reduce cost of deployment.
New two-way communicating thermostats can change the business model for utility residential DR programs. Today customers can buy the thermostats at retail stores, where the utility can promote programs or offer rebates. If the customer decides to enroll in a program, the system can remotely update the device and enroll the customer. This “bring your own thermostat” model can reduce program acquisition costs and improve customer satisfaction since the customers are choosing their own devices and initiating the participation process.
Both startup companies and established corporations have begun to offer utilities and grid operators software as a service (SaaS) for DR management systems. This solution means less investment from the utility, fewer internal systems to try to integrate and quicker deployment times. Combined with OpenADR, SaaS models provide a more straightforward business case than previous systems and proprietary software.
DR Market Size and Forecast
Currently, almost all of the DR activity still takes place in the United States. This leadership position will erode over the next 10 years as other regions continue or start the pilot phase of DR and then build out full-scale markets and programs. The largest growth will occur in Asia-Pacific, which will approach North America in terms of DR capacity and spending by 2023. Regional markets in Asia-Pacific, such as Australia/New Zealand, Southeast Asia, China and Japan, each have distinct drivers for DR growth. DR in Europe will not expand as rapidly as in Asia-Pacific, but it will outpace North America as new market opportunities open.
Brett Feldman ([email protected]) is a senior research analyst at Navigant Research.