Manufacturers Increasingly Turn to Demand Response as a Revenue Stream
July 10, 2013
In its current state, the U.S. electrical grid does not have energy storage backup capacity to compensate for peak load demand. As such, the supply of energy generated by power plants needs to match the demand for it in real-time. Managing that supply and demand is tricky for grid operators.
When demand is high, utility companies have several choices. They can bring all their generation capacity online, firing up only occasionally used and less efficient plants or generators. Another option is to temporarily reduce demand, a process called “demand response.”
Inducing utility customers to use less electricity during peak hours isn’t a new concept; it is, however, an increasingly relevant one. Rather than generate additional electricity, many grid operators are finding it cheaper to simply pay customers to reduce their consumption during peak hours. Customers can briefly shut down energy-intensive tasks and return to them when demand declines or off-peak rates begin, and in exchange receive a check for their efforts.
Industrial businesses can come off the grid altogether for short periods by switching to on-site electricity generation. Many organizations that participate in demand response programs only curtail usage a few hours each year, and yet the payments they receive are substantial. In addition, these companies get advance warning of unstable conditions on the grid, enabling them to take action to prevent or minimize downtime.
To make it easier for industrial companies to participate in demand response, grid operators are introducing new programs that make the prospect more compelling. They allow customers to effectively bid their power reductions into the energy markets in real time whenever they have extra capacity or simply want to earn some extra money.
Thanks to heightened awareness of aging grids and the influence of sustainability mandates, participation in demand response programs is becoming more common. In a recent research report, analyst group Navigant Research estimates that there are more than 57,000 industrial facilities in the world today participating in demand response programs and 32,600 demand-response-enabled industrial sites in North America alone. The compound annual growth rate (CAGR) for enrollment in demand response programs among industrial customers is expected to be 13.6 percent from 2013 through 2020. Annual revenues, in the form of curtailment payments to industrial customers, will reach $4.3 billion by 2019.
Navigant’s senior research analyst, Marianne Hedin, told IMT that, in terms of actual load curtailment, the industrial sector is expected to contribute approximately 30,000 MW of load curtailment worldwide. In North America, the total load curtailed from industrial sites participating in various demand response programs is expected to exceed 20,000 MW this year.
“You'll notice that North America represents the lion's share of both industrial [demand response] participation and [demand response] load curtailment,” said Hedin.
Some of this growth in the U.S. has been stimulated by recent federal legislation. Two years ago, the Federal Energy Regulatory Commission (FERC) issued Order No. 745, which ruled that demand response must be paid at full wholesale price (when it’s above the net benefits threshold). Prior to that, participants were paid only the difference between the wholesale price and the retail price for generation and transmission. In short, it’s simply more lucrative to participate in demand response today.
One major demand response player is PJM, a regional transmission organization (RTO) that coordinates wholesale electricity in 13 states and Washington, D.C. In PJM’s energy market, end-use customers participate in demand response by reducing their electricity use either during an emergency event or when locational marginal prices are high. Industrial customers participate in demand response with PJM through curtailment service providers (CSPs), which act as agents for the customers.
Sheila Volinsky, a PJM spokesperson, told IMT that a broad range of businesses from specialty steel producers to big box stores participate in its demand response programs. End-user companies can participate by, for example, running air conditioning in facilities only 45 minutes each hour during peak times or on the hottest day of the year, for example.
The CSPs aggregate the load reduction capabilities of demand response participants and sell the extra energy to PJM’s energy, capacity and ancillary services markets.
One example of how industrial businesses can integrate demand response into their infrastructure, according to Volinsky, is by incorporating variable speed drive motors into select pieces of equipment. These motors can then be coordinated with PJM’s frequency regulation signal.
“End-use customer sites can move electric usage up and down by small amounts at PJM direction to maintain grid frequency at 60 hertz,” she said. This allows for load balancing without the need to shut down process equipment completely.
Some companies are large and sophisticated enough to serve as their own curtailment service provider. Fort Worth, Texas-based Leggett & Platt does just that. Leggett & Platt manufactures a variety of products, including support structures for automotive seating, steel wires, and tubing, as well as office furniture and carpet padding. The company partnered with Boston-based EnerNoc, an energy management solutions provider for demand response applications.
Through curtailment, Leggett & Platt delivers more than 12 MW of load reduction by cutting back on lighting, several manufacturing sub-operations, and targeted high-horsepower motors at its Texas plant. For its rod mill operation in Sterling, Ill., the company simply shuts all operations down briefly and uses the time to perform maintenance and cleaning tasks. In return, the company receives annual payments of approximately $400,000 from EnerNOC.
Ultimately, the result is reliable power at the lowest possible cost of production for utilities. Going forward, demand response is likely to become a significant tool in reducing national energy usage and dealing with our aging grids. Moreover, companies that might not have shown interest in curtailing power usage for ecological reasons may be more willing to do so for extra cash.