California's Demand Response Revolution

California is moving another step closer to strengthening its grid through a new mechanism to provide compensation for demand response.

The Demand Response Auction Mechanism (DRAM) is a program which allows demand response providers – including those in solar storage, behind-the-meter batteries, load control, and EV charging – to get compensation for providing services to the grid.

This is good news for a number of California demand-side players including Tesla, SolarCity, Stem, Green Charge Networks, Advanced Microgrid Solutions, EnerNOC and Comverge, to name a handful.

Providers have two ways of getting paid.

First, the California Public Utilities Commission (CPUC) has called on California’s three large investor-owned utilities to collectively procure 22 megawatts of capacity through demand response. The idea is that by having control of resources that can cut down on load during peak times, ratepayers benefit from reduced capital expenditures and the elimination of emissions from gas peaker plants.

Second, demand response will soon be allowed to bid into the wholesale market on a much wider scale. DRAM allows demand response providers to pool together portfolios of EV chargers, smart thermostats, behind-the-meter storage and more, and bid these resources into the wholesale market as an alternative to traditional generation.

Let’s look more closely at these two opportunities.

Capacity payments

In California, electricity retailers are required to demonstrate that they have procured enough generation capacity to meet projected peak loads. Traditionally, this capacity requirement has been met primarily through bilateral contracts with generators.

But since 2014, the California Public Utilities Commission has examined ways of expanding the role of distributed demand response. DRAM introduces a bidding process, allowing any demand response providers who can meet certain requirements to make their assets available to help the utilities meet their capacity requirements. In exchange, utilities pay these demand response providers a capacity fee based on the number of kilowatts they can provide to reduce peak load when the grid needs it.

In the DRAM capacity auction, demand response providers are called on to offer a price for their capacity. Providers are keeping these prices secret, as the market is highly competitive.

The 22-megawatt procurement is a minimum amount set by the utilities commission, so there is the possibility that utilities will procure more. In an effort to drive up residential demand response, the utilities commission has required that at least 20% of the procured capacity should come from the residential sector.

Utilities will select the winners of this procurement at the end of the month.

Wholesale market

Beginning next June, approved demand response resources will be able to bid into California’s wholesale electricity market.

In this system, the wholesale prices paid to these demand response providers will vary depending on their location. Due to the fact that some regions are grid-constrained or may have imbalances in supply and demand throughout the day, the wholesale price of electricity also changes. Using these price signals, demand response providers can choose where to focus their efforts, and then bid their assets into the day-ahead wholesale market.

The first step in the wholesale market process begins in February, and we won't see demand response on the market until June. In the meantime, demand response providers will be tested to make sure they can deliver the load curtailment they say they can. In case they fail to deliver when they hit the market, the providers will have to pay for the load curtailment they fail to provide.

The DRAM program also promises to make changes to how California’s grid looks for solutions to ramping problems caused by California’s rapidly growing solar generation base. This is a topic we will cover in a future piece.

Demand Response in Shanghai

On 28 July 2015, the Natural Resources Defense Council (NRDC) held a conference announcing their latest research results in partnership with the University of Oxford, “The Potential and Benefits of Demand Response in Shanghai,” and shared their experiences establishing demand response markets in China and abroad.

In the summer of 2014, Shanghai hosted China’s first demand response pilot program. Early results pointed to the great hidden potential of demand response in the electricity system. In April 2015, the National Development and Reform Commission (NDRC) published policies promoting reform in China’s power sector, mandating the establishment of demand-side management pilot programs in Beijing, Tangshan, Suzhou, and Foshan. Using lessons learned from the Shanghai pilot and international experience, these cities will implement demand response programs and establish long-term market mechanisms.

In this context, NRDC and Oxford worked together to produce a special report to summarize years of experience in demand response project operations, examine the policies and regulatory frameworks necessary to promote demand response, and evaluate the market potential and value of demand response in Shanghai.

Because the power sectors in China, the United Kingdom, and the United States are different, this report offers recommendations and potential directions in future research. In their conference, the research team from NRDC and Oxford described NRDC’s work in demand-side management and energy efficiency and summarized the content of the report. They also discussed the future of demand response in China.

Shanghai’s demand response market potential

Their research predicted the market potential for demand side response up to 2030 via two programs. One program focuses on a direct air conditioning control program aimed at homeowners and commercial and industrial SMEs. The second program focuses on load reduction for commercial and industrial users. Figure 1 shows the market potential of demand response in 2020, 2025, and 2030.

The data show that 64-73% of demand response market potential lies in load reduction programs for Shanghai commercial and industrial users. Under different circumstances, it is predicted to contribute 43%-59% of total demand response market potential. Although the contribution from air conditioning direct load reduction for SMEs was limited, under certain conditions, AC direct load control programs for homeowners accounted for 23-33% of market potential for demand response.

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Figure 1 – Estimated value of Shanghai demand response market potential

Value of avoided costs in Shanghai’s demand response programs

Avoided costs from demand response in Shanghai include avoided expenditures from gas power plants, such as capacity, energy, CO2 emissions, and T&D investment. This report supposed that market potential in demand response could rely on peak shaving, rather than peak shifting or backup generation, to achieve results. Figure 2 shows expected avoided costs in 2020, 2025, and 2030.

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Figure 2 – Annual avoided costs between 2020 and 2030

Future research

The report also looked ahead at valuable research trends in the future:

• Strengthening load curve research
• Establishing a stronger evidence basis for participation rates and load reduction from demand response
• Analyzing and evaluating the 2015 Shanghai demand response pilot program
• Analyze the potential of different demand response strategies
• Further defining demand response products
• Strengthening long term peak use demand forecasting
• Formulating a user communication and marketing strategy
• Acquiring better system cost information to better evaluate system benefits
• Assessing demand response project costs
• Considering adding other environmental externalities

Demand Response in China

In April 2015, following the Power Reform Policy No. 9,  NDRC released Notice on Improving Demand Side Management Pilots through Emergency Power Mechanisms, continuing to strengthen emphasis on demand side management and demand response. This article will analyze the status of demand response and its prospects in China.

Demand Response (DR) Overview

In 2012, FERC (Federal Energy Regulatory Commission) defined demand response as follows: Changes in electric usage by demand-side resources from their normal consumption patterns in response to changes in the price of electricity over time, or to incentive payments designed to induce lower electricity use at times of high wholesale market prices or when system reliability is jeopardized.

Demand response must be distinguished from demand side management (DSM). DSM refers to when the government, through policy measures, pricing mechanisms, and other measures to guide the users and change electricity usage behavior, thus lowering peak usage, improving the efficiency of the power supply, and optimizing other electricity usage aspects. DSM includes energy efficiency, permanent load reduction, and incentives for temporary load reduction. DR is a type of DSM, as shown in the figure below.

DSM Implementation Methods

The US has some of the best developed DR, and will thus be taken as an example in introducing DSM implementation methods. In the US market, DR is mainly divided into price-based DR and incentive-based DR.

Price-based DR resources are generally from residential users whose participation is completely voluntarily and thus cannot be dispatched. As it cannot be dispatched, it is difficult for the grid to accurately determine DR capacity. But as smart metering has popularized, this type of DR resource has shown new developments. With dispersed users aggregated as one, and with the allocation of ES devices, this creates an aggregate dispatchable resource which can via contracted electricity prices or other logical price signals giving direction and paying returns.

Incentive-based DR resources are generally commercial and industrial users, and can be publically transacted on electricity markets. Grid dispatchers can arrange electricity usage plans with participants in advance, and can be thusly dispatched. This type of DR resource will generally have an ES device such as a battery, thermal storage, or ice storage air conditioning.

In the above basic DR implementation measures, each power company in the US has its own particulars, equipment, and provide a great many DR projects for users to choose from to participate in. PG&E has programs for small business DR: smart air conditioning, and business and residential interconnection projects; and programs for large to medium businesses: business incentive programs, aggregate party programs, and subsidy programs.

DR in China’s electricity market

In November 2010, China's NDRC released the <Demand Side Management Methods>, formally beginning China's DSM efforts. Following, the government released related policies, such as 2011's Guidelines on Industrial Zone Demand Side Management, 2012's Interim Methods For Demand Side Management City Pilot Project Central Financial Incentive Fund Management, and 2015's Notice on Improving Demand Side Management Pilots through Emergency Power Mechanisms, promoting the development of DSM efforts.

The above documents differentiate between DSM-type permanent load reductions and temporary DR and differentiate set incentive mechanisms, but up to now, DSM has mainly been carried out via administrative means, load control devices, and energy efficiency, with non-ideal results. Meanwhile, pricing and other market mechanisms for directing users in voluntary participation DR have had quite limited development due to greatly limited peak pricing and subsidy incentive mechanisms.

 (Note: Price compensation mechanisms for DSM facilities: Energy efficient power plants and peak shifting/peak shaving technology and other permanent load reductions: 440 CNY/kWh in east China, 550 CNY/kWh in central and west China. Demand Response temporary peak load reductions: 100 CNY/kWh.)

Background of China’s DR electricity market

Although DR is very limited in China's electricity market, its importance is already taking shape in China's energy strategy and the new round of electricity reforms. Beijing, Shanghai, and other DSM pilot cities have been testing DR projects since 2014. The data shows that DR will gain great development space in China.

•        More reasonable, improved peak pricing mechanisms will incentivize DR development

The newest policy published this April, makes a call "to incentivize active user participation in peak [super peak] load usage reduction and voluntary participation in DR, improved peak pricing and seasonal pricing can be set... to be set and implemented before the end of June 2015." The coverage scope and regional use of peak pricing will expand, and price-type DR will gain more incentives.

•        Electric service company participation, strengthening an active market

Allowing more types of retail entities to enter the end user retail market is one of the new reforms. For DR, last April's Notice also states that it will "incentivize and support the development of electric service companies, attracting the participation of top national and even global electric service companies in pilot projects."  As the market opens, participating entities and competition will increase. This could result in the emergence of more innovative projects and products, driving DR development.

However, China's present DR market still has many barriers. Participation by grid companies is very low, grid operation data is still held closely by grid companies, and there is a lack of public channels. For non-grid companies, providing DR lacks the data for economic operation analysis. For users, as they lack real-time electricity usage data analysis, it is very difficult to build enthusiasm for DR participation.

CNESA acts as a primary integrated unit of the Beijing NDRC, actively participating in Beijing's DR pilot efforts, and is currently managing the establishment of a DR management platform, which will organize under certain conditions the participation of user groups in DR in the NDRC's pilot projects. CNESA hopes to advance the continued improvement of related policies through the efforts and coordination of many parties, creating even more space for energy storage to develop.