Electric power industry deregulation that has occurred over the past decade has wrought many changes, both positive and negative. It also has exposed some vulnerabilities within the electric power system – namely that increasing demand, coupled with a decreased focus on energy efficiency and conservation, has created added pressure to an aging infrastructure and has made it more vulnerable to failure, particularly during peak demand periods. With the advent of new technology, it is time for the electric power industry to recognize and embrace the vital role that demand side management, particularly energy efficiency and demand response programs, can and should play in enhancing system reliability.
Three major factors – customer load, utility infrastructure, and demand response – together comprise what those of us in the industry should see as the three legs that impact the reliability of the power grid here in the United States – a “Reliability Tripod,” so to speak. To remain steady, each leg of the tripod must stay in proportion relative to the other two or the system becomes unbalanced and failure will occur.
With changes that have come about in the past decade, the net effect is that some aspects of each of the legs in the reliability tripod have been neglected to varying degrees and the tripod is now unsteady.
Load Growth
Load has grown significantly and the growth rate continues to accelerate. Total electricity demand grew from approximately 200 gigawatts in 1978 to 330 gigawatts in 2001. This breakneck growth pattern is continuing, with the Department of Energy projecting that electricity demand will reach 709.6 gigawatts in 2004, while the Energy Information Administration (EIA) projects that electricity use will increase an additional 22 percent by 2010, placing further demands on the transmission grid.
The transmission grid of approximately 160,000 miles of high voltage transmission lines has become a “super highway” for electric utilities to buy and sell power. Congestion from the increased flow of electricity over great distances is now a reality.
Infrastructure Investments Lagging and Difficult
The core United States’ electric generation and transmission system is 70 years old and is primarily based on technologies from the 1950’s. While load growth has been increasing rapidly, investments in the infrastructure have not kept pace.
According to Edison Electric Institute data, transmission investment has been declining for the last 25 years at an average rate of $120 million a year (in constant, inflation-adjusted 1999 dollars).
“Transmission investment in 1999 was less than half of what it had been 20 years earlier,” stated Eric Hirst and Brendan Kirby in the June 2001 report “Transmission Planning for a Restructuring U.S. Electricity Industry”.
According to Edison Electric Institute: “Between 1979 and 1989, transmission capacity grew at a slightly faster rate than the demand for electricity during peak periods. But in the subsequent years, infrastructure needs did not keep up with that demand. To handle the requirements that the transmission system expects over the next 10 years, about 27,000 gigawatt-miles are required, however, only 6,000 gigawatt-miles are planned.”
Lagging additions to the transmission infrastructure are not only due to a changing risk profile of the investment (in an era of deregulation), but these investments are also made increasingly difficult due to NIMBY (Not in My Back Yard) concerns. Numerous transmission additions have been blocked across the U.S. by NIMBY groups. As a result, utility operators are placed in an interesting corner between consumers who want service at all times and the same consumer NIMBY groups who do not want high voltage lines passing near their homes.
Demand Side Management Programs Reduced
In the ‘80s, energy efficiency and demand management were key components in a utility’s Integrated Resource Plan. Nearly all utilities sponsored demand side management (DSM) programs, which generally included energy efficiency, peak demand reduction/demandresponse, load shaping and/or load building components. These strategies were significantly affected as the electric utility industry restructured (unbundling of generation, transmission, and distribution).
Many confuse energy efficiency and demand response programs. However, the two programs share some similarities, but are not interchangeable. Energy efficiency programs reduce energy use, both during peak and off-peak periods, typically without affecting the quality of services provided. Such programs substitute technologically more advanced equipment to produce the same (or a higher) level of end-use services (e.g., lighting, heating, cooling, drive power, or building shell) with less electricity. Demand response programs entail load management via direct control at peak periods, interruptible load tariffs, and economic response.
As the electric utility industry moved through deregulation and restructuring to competitive markets, many utility-sponsored DSM programs were dropped in the mid ‘90s. When utilities moved from being vertically integrated to separating generation from T&D, T&D no longer had the pressure from its sister generation companies for demand reduction. T&D’s revenues are tied directly to their electricity throughput. Therefore, deregulation effectively quashed any incentive for T&Ds to sponsor DSM programs. And, since the generation companies no longer had a conduit via the T&Ds to the consumers, they no longer had the means to efficiently encourage or implement DSM programs.
Steadying the Wobbly Reliability Tripod
Since load growth cannot be easily influenced, we are essentially limited to having an impact on only two of the three factors in the Reliability Tripod: infrastructure investment and demand side management.
There are many obstacles to infrastructure investments. Chiefly, grid and capacity expansion is an extremely expensive proposition, fraught with long regulatory approval processes and public hearings that must be completed. Even if the project is able to overcome the initial NIMBY public sentiment, the ensuing engineering and construction cycle is extremely long before any positive impact to the system is realized. And, very often the industry faces a final round of NIMBY battles after the formal process has been completed and shovels are about to go into the ground. The entire situation is extremely unpredictable.
Demand Side Management — particularly new demand response technologies that are reliable, measurable, competitive, transparent to end-users and fully-dispatchable to a utility — are the quickest, most cost-effective and reliable way to relieve pressure on our aging electrical infrastructure and re-steady the reliability tripod.
“Until the grid is upgraded, energy efficiency is key,” Susan Coakley, Executive Director of Northeast Energy Efficiency Partnerships, Inc. stated in a September 22, 2003 Energy Pulse article. “The problems with our electricity system didn’t develop overnight, and they won’t be solved overnight. But until they are, energy efficiency can and should play a vital role in addressing both the short- and long-term issues of system reliability.”
Recognizing that no single energy source or demand side management program can meet our nation’s growing energy needs, energy efficiency and demand response technologies can give the nation time to rebuild and modernize the electric transmission infrastructure.
Demand Response/Energy Efficiency Innovations
For demand response programs to be seriously considered as timely and effective tools to relieve pressure on the electrical infrastructure, they must be reliable, measurable and verifiable. Very recent, technological advancements have enabled the creation of new demand response and energy efficiency systems that meet all these criteria.
Previously, a key drawback was that demand response programs weren’t able to dump largescale, aggregated loads immediately and reliably. Curtailment programs, which relied upon customer action, were oftentimes unreliable because, when called upon for curtailment, customers had to deploy staff to manually turn off equipment and, depending upon staff availability, load shed didn’t occur immediately and the amount of load shed wasn’t guaranteed. Also, electric energy savings and load reductions could not actually be measured by metering and, therefore, had to be estimated. Verification was very difficult and time consuming. This history has led to deep suspicion of demand response on the part of utility and ISO operators.
Now, computer network-enabled automation and measurement allows various elements of electrical systems in facilities to be controlled and monitored remotely with the click of a mouse for measurable and verifiable steady state savings, as well as immediate, measurable and guaranteed load shed during peak demand periods. An added bonus is that it requires minimal effort or staff involvement from the participants.
To encourage adoption, demand response systems should be able to trade head-to-head against supply and be on an equal footing against wholesale supply prices. This would have a two-fold effect.
First, it would encourage end users to participate in the reduction of peak-period demand. There has always been a disconnect between the wholesale price of electricity and the retail price. Although peak power is more expensive to generate than off-peak power, in regulated retail markets, end-users are never exposed to the cost of producing power on a real time basis. If end users were hit with the real cost of peak period energy, they would be much more open to utilizing demand response systems to reduce peak period demand.
Secondly, the advanced demand response technologies that enable guaranteed, aggregated load shed would allow participants to take aggregated load reduction and trade it into the market – if no utilitysponsored program exists. The net effect is that peak demand would be reduced and participating companies could be rewarded financially for their efforts. For open trading to occur, several barriers to entry (developed as a holdover of industry suspicion of DSM) would need to be removed at the utility, ISO and RTO levels. If the energy market was truly open to developers and traders of this “Negative Power”, technology growth and customer participation would reach levels never seen before in the industry.
Encouraging Demand Side Management
Seeing Green — Many DSM programs are viewed as resources because they capture cost-effective energy savings that would not otherwise be achieved. However, there is no legislative language that recognizes demand response or energy efficiency as a renewable resource – yet.
Demand response and energy efficiency programs are truly renewable resources, and should be recognized as such by industry and government, particularly in light of the existing regulatory pressures regarding green energy. The greenest megawatt is the one that is not produced. Given their ability to reduce the demand for additional electrical generation, demandresponse and energy efficiency should be on equal footing with other renewable energy generation resources, such as wind, solar, biomass, and hydro, when it comes to funding, investment tax credits and accelerated depreciation.
In its report “The Need for a Balanced National Energy Policy,” the National Energy Policy Council of the Association of Energy Engineers in September 2003 recommended that regulatory agencies should require energy suppliers to promote energy efficiency improvements to their customers, as well as require utilities, Independent System Operators (ISO) and Regional Transmission Operators (RTO) to create and implement load management and demand response programs and provide incentives to customers to shed load.
Energy Efficiency Incentives — Utility regulators must provide incentives in order for distribution companies to promote energy efficiency. Since throughput (the amount of power transmitted across the grid) is directly proportional to the distribution companies’ revenues, distribution companies need to have a powerful incentive to counteract reduced revenues and profits as a result of consumers using energy more efficiently. Some state commissions address this problem by using: (1) net lost revenue adjustment mechanisms that allow utilities to recover revenues lost as a result of conservation programs net of any cost savings; (2) revenue decoupling that separates utilities’ profitability from the levels of actual sales; or (3) DSM performance incentives that are paid to utilities based on the savings achieved.
There is no question that reliability tripod is unsteady. While the solutions to restore stability and reliability aren’t easy or quick, the questions today are:
About the Author
John Mitola is CEO of Electric City, a leading developer, manufacturer and integrator of energy savings technologies and developer of “Negative” Power Systems. Formerly he was VP and General Manager at Exelon Thermal and prior to that Director of New Business Ventures for Commonwealth Edison. Electric City is backed by Cinergy, Morgan Stanley, CIT and several other industry-leading strategic investors.
Mitola has put Electric City at the forefront of innovative energy conservation efforts nationwide with its innovative Virtual Negawatt Power Plan, which will provide large-scale energy demand reduction for utilities and corporations. Illinois Governor Rod Blagojevich, recently appointed Mitola to the state’s new Special Task Force on the Illinois Energy Infrastructure and as chair of the Illinois State Toll Highway Authority. For further information on Electric City: e-mail: sales@elccorp.com or visit the web site: www.elccorp.com
Three major factors – customer load, utility infrastructure, and demand response – together comprise what those of us in the industry should see as the three legs that impact the reliability of the power grid here in the United States – a “Reliability Tripod,” so to speak. To remain steady, each leg of the tripod must stay in proportion relative to the other two or the system becomes unbalanced and failure will occur.
With changes that have come about in the past decade, the net effect is that some aspects of each of the legs in the reliability tripod have been neglected to varying degrees and the tripod is now unsteady.
Load Growth
Load has grown significantly and the growth rate continues to accelerate. Total electricity demand grew from approximately 200 gigawatts in 1978 to 330 gigawatts in 2001. This breakneck growth pattern is continuing, with the Department of Energy projecting that electricity demand will reach 709.6 gigawatts in 2004, while the Energy Information Administration (EIA) projects that electricity use will increase an additional 22 percent by 2010, placing further demands on the transmission grid.
The transmission grid of approximately 160,000 miles of high voltage transmission lines has become a “super highway” for electric utilities to buy and sell power. Congestion from the increased flow of electricity over great distances is now a reality.
Infrastructure Investments Lagging and Difficult
The core United States’ electric generation and transmission system is 70 years old and is primarily based on technologies from the 1950’s. While load growth has been increasing rapidly, investments in the infrastructure have not kept pace.
According to Edison Electric Institute data, transmission investment has been declining for the last 25 years at an average rate of $120 million a year (in constant, inflation-adjusted 1999 dollars).
“Transmission investment in 1999 was less than half of what it had been 20 years earlier,” stated Eric Hirst and Brendan Kirby in the June 2001 report “Transmission Planning for a Restructuring U.S. Electricity Industry”.
According to Edison Electric Institute: “Between 1979 and 1989, transmission capacity grew at a slightly faster rate than the demand for electricity during peak periods. But in the subsequent years, infrastructure needs did not keep up with that demand. To handle the requirements that the transmission system expects over the next 10 years, about 27,000 gigawatt-miles are required, however, only 6,000 gigawatt-miles are planned.”
Lagging additions to the transmission infrastructure are not only due to a changing risk profile of the investment (in an era of deregulation), but these investments are also made increasingly difficult due to NIMBY (Not in My Back Yard) concerns. Numerous transmission additions have been blocked across the U.S. by NIMBY groups. As a result, utility operators are placed in an interesting corner between consumers who want service at all times and the same consumer NIMBY groups who do not want high voltage lines passing near their homes.
Demand Side Management Programs Reduced
In the ‘80s, energy efficiency and demand management were key components in a utility’s Integrated Resource Plan. Nearly all utilities sponsored demand side management (DSM) programs, which generally included energy efficiency, peak demand reduction/demandresponse, load shaping and/or load building components. These strategies were significantly affected as the electric utility industry restructured (unbundling of generation, transmission, and distribution).
Many confuse energy efficiency and demand response programs. However, the two programs share some similarities, but are not interchangeable. Energy efficiency programs reduce energy use, both during peak and off-peak periods, typically without affecting the quality of services provided. Such programs substitute technologically more advanced equipment to produce the same (or a higher) level of end-use services (e.g., lighting, heating, cooling, drive power, or building shell) with less electricity. Demand response programs entail load management via direct control at peak periods, interruptible load tariffs, and economic response.
As the electric utility industry moved through deregulation and restructuring to competitive markets, many utility-sponsored DSM programs were dropped in the mid ‘90s. When utilities moved from being vertically integrated to separating generation from T&D, T&D no longer had the pressure from its sister generation companies for demand reduction. T&D’s revenues are tied directly to their electricity throughput. Therefore, deregulation effectively quashed any incentive for T&Ds to sponsor DSM programs. And, since the generation companies no longer had a conduit via the T&Ds to the consumers, they no longer had the means to efficiently encourage or implement DSM programs.
Steadying the Wobbly Reliability Tripod
Since load growth cannot be easily influenced, we are essentially limited to having an impact on only two of the three factors in the Reliability Tripod: infrastructure investment and demand side management.
There are many obstacles to infrastructure investments. Chiefly, grid and capacity expansion is an extremely expensive proposition, fraught with long regulatory approval processes and public hearings that must be completed. Even if the project is able to overcome the initial NIMBY public sentiment, the ensuing engineering and construction cycle is extremely long before any positive impact to the system is realized. And, very often the industry faces a final round of NIMBY battles after the formal process has been completed and shovels are about to go into the ground. The entire situation is extremely unpredictable.
Demand Side Management — particularly new demand response technologies that are reliable, measurable, competitive, transparent to end-users and fully-dispatchable to a utility — are the quickest, most cost-effective and reliable way to relieve pressure on our aging electrical infrastructure and re-steady the reliability tripod.
“Until the grid is upgraded, energy efficiency is key,” Susan Coakley, Executive Director of Northeast Energy Efficiency Partnerships, Inc. stated in a September 22, 2003 Energy Pulse article. “The problems with our electricity system didn’t develop overnight, and they won’t be solved overnight. But until they are, energy efficiency can and should play a vital role in addressing both the short- and long-term issues of system reliability.”
Recognizing that no single energy source or demand side management program can meet our nation’s growing energy needs, energy efficiency and demand response technologies can give the nation time to rebuild and modernize the electric transmission infrastructure.
Demand Response/Energy Efficiency Innovations
For demand response programs to be seriously considered as timely and effective tools to relieve pressure on the electrical infrastructure, they must be reliable, measurable and verifiable. Very recent, technological advancements have enabled the creation of new demand response and energy efficiency systems that meet all these criteria.
Previously, a key drawback was that demand response programs weren’t able to dump largescale, aggregated loads immediately and reliably. Curtailment programs, which relied upon customer action, were oftentimes unreliable because, when called upon for curtailment, customers had to deploy staff to manually turn off equipment and, depending upon staff availability, load shed didn’t occur immediately and the amount of load shed wasn’t guaranteed. Also, electric energy savings and load reductions could not actually be measured by metering and, therefore, had to be estimated. Verification was very difficult and time consuming. This history has led to deep suspicion of demand response on the part of utility and ISO operators.
Now, computer network-enabled automation and measurement allows various elements of electrical systems in facilities to be controlled and monitored remotely with the click of a mouse for measurable and verifiable steady state savings, as well as immediate, measurable and guaranteed load shed during peak demand periods. An added bonus is that it requires minimal effort or staff involvement from the participants.
To encourage adoption, demand response systems should be able to trade head-to-head against supply and be on an equal footing against wholesale supply prices. This would have a two-fold effect.
First, it would encourage end users to participate in the reduction of peak-period demand. There has always been a disconnect between the wholesale price of electricity and the retail price. Although peak power is more expensive to generate than off-peak power, in regulated retail markets, end-users are never exposed to the cost of producing power on a real time basis. If end users were hit with the real cost of peak period energy, they would be much more open to utilizing demand response systems to reduce peak period demand.
Secondly, the advanced demand response technologies that enable guaranteed, aggregated load shed would allow participants to take aggregated load reduction and trade it into the market – if no utilitysponsored program exists. The net effect is that peak demand would be reduced and participating companies could be rewarded financially for their efforts. For open trading to occur, several barriers to entry (developed as a holdover of industry suspicion of DSM) would need to be removed at the utility, ISO and RTO levels. If the energy market was truly open to developers and traders of this “Negative Power”, technology growth and customer participation would reach levels never seen before in the industry.
Encouraging Demand Side Management
Seeing Green — Many DSM programs are viewed as resources because they capture cost-effective energy savings that would not otherwise be achieved. However, there is no legislative language that recognizes demand response or energy efficiency as a renewable resource – yet.
Demand response and energy efficiency programs are truly renewable resources, and should be recognized as such by industry and government, particularly in light of the existing regulatory pressures regarding green energy. The greenest megawatt is the one that is not produced. Given their ability to reduce the demand for additional electrical generation, demandresponse and energy efficiency should be on equal footing with other renewable energy generation resources, such as wind, solar, biomass, and hydro, when it comes to funding, investment tax credits and accelerated depreciation.
In its report “The Need for a Balanced National Energy Policy,” the National Energy Policy Council of the Association of Energy Engineers in September 2003 recommended that regulatory agencies should require energy suppliers to promote energy efficiency improvements to their customers, as well as require utilities, Independent System Operators (ISO) and Regional Transmission Operators (RTO) to create and implement load management and demand response programs and provide incentives to customers to shed load.
Energy Efficiency Incentives — Utility regulators must provide incentives in order for distribution companies to promote energy efficiency. Since throughput (the amount of power transmitted across the grid) is directly proportional to the distribution companies’ revenues, distribution companies need to have a powerful incentive to counteract reduced revenues and profits as a result of consumers using energy more efficiently. Some state commissions address this problem by using: (1) net lost revenue adjustment mechanisms that allow utilities to recover revenues lost as a result of conservation programs net of any cost savings; (2) revenue decoupling that separates utilities’ profitability from the levels of actual sales; or (3) DSM performance incentives that are paid to utilities based on the savings achieved.
There is no question that reliability tripod is unsteady. While the solutions to restore stability and reliability aren’t easy or quick, the questions today are:
- When will utilities, regulators and end users truly embrace advanced energy efficiency and demand response programs as a means to ease the demands on the power grid until infrastructure upgrades are implemented?
And - When will they accept them as renewable resources that can help preserve our environment and reduce our nation’s dependence upon foreign oil and its associated economic costs?
About the Author
John Mitola is CEO of Electric City, a leading developer, manufacturer and integrator of energy savings technologies and developer of “Negative” Power Systems. Formerly he was VP and General Manager at Exelon Thermal and prior to that Director of New Business Ventures for Commonwealth Edison. Electric City is backed by Cinergy, Morgan Stanley, CIT and several other industry-leading strategic investors.
Mitola has put Electric City at the forefront of innovative energy conservation efforts nationwide with its innovative Virtual Negawatt Power Plan, which will provide large-scale energy demand reduction for utilities and corporations. Illinois Governor Rod Blagojevich, recently appointed Mitola to the state’s new Special Task Force on the Illinois Energy Infrastructure and as chair of the Illinois State Toll Highway Authority. For further information on Electric City: e-mail: sales@elccorp.com or visit the web site: www.elccorp.com
