A blackout is a supply failure, so naturally people look for supply-side solutions: more transmission lines, high-tech system monitoring devices, building power plants closer to population centers, better grid planning and testing procedures. Few people consider how effectively demand response and active retail markets can help reduce strains on the grid and forestall future grid and plant construction. We can, and should, use market-based retail pricing to communicate customer demand into the grid, and one reason to do so is that it would enhance reliability.
First, to give credit where credit is due, note that the Task Force final report does, in fact, mention “demand response.” Twice. On page 149, in the discussion of recommendation 13 (DOE should expand its research programs on reliability-related tools and technologies), the report: (1) cites “demand response initiatives to slow or halt voltage collapse” as one aspect of research into ways to prevent cascading power outages; and (2) urges the “study of obstacles to the economic deployment of demand response capability and distributed generation.” In addition, with a little creativity, a role for demand response could be read into a few other recommendations.
For the most part, however, the report is about a supply failure and supply-side proposals. For 99+ percent of the blackout report, end-use consumers are simply the “load.” A passive burden that the supply side must go to great lengths to serve.
Consumers are the sleeping giant of electric reliability. The North American Electricity Reliability Council (NERC) divides reliability into two categories: security of operating reserves and adequacy of installed reserves. Security is more of a short-run operational issue, while adequacy relates to planning for system growth. Demand responsiveness can contribute to both kinds of reliability.
Retail electric choice puts more control in the hands of consumers and empowers them to make intelligent energy choices. Consumers could choose anything from a fixed price that incorporates an insurance premium to full real-time pricing, in which the customer bears the financial risk of price volatility, but could see electricity bills fall by shifting or reducing use. (See Eric Hirst, “The Financial and Physical Insurance Benefits of Price-Responsive Demand,” The Electricity Journal, May 2002.)
Dynamic pricing harnesses the dramatic improvements in information technology of the past decade to provide price signals that reflect variations in the actual costs of providing electricity at different times of the day. These same technological developments also give consumers a tool for managing their energy use. They can set electricity monitors to increase air conditioning temperatures if prices go above a certain amount, for example, or can shift manufacturing schedules to minimize electricity use during peak hours. Right now, with almost all U.S. consumers paying average prices (even many industrial and commercial consumers), consumers have little incentive to manage their consumption and shift it away from peak hours during the day.
That inelastic demand leads to more capital investment in power plants and transmission lines than would occur if consumers could make choices based on their preferences. Reducing peak use contributes to greater operational security, as fewer reserves are necessary to maintain reliability, and eases stress on adequacy planning, as the need for system expansion to support ever greater system peak loads is diminished.
Both historical experience and laboratory experiments show that electricity customers do respond to price changes, and that both suppliers and customers are better off from doing so. (On experience: Google electricity and “elasticity of demand”; on Experiments, see “Rassenti, Smith, and Wilson.”) This option does not currently exist for most customers in most places.
Another approach to enabling consumers to contribute directly to reliability comes from efforts to turn demand response into a tool that transmission system operators can call on in their efforts to keep supply and demand constantly in balance. Research by Brandon Kirby and John Kueck, Oak Ridge National Laboratory, showed that a significant portion of the California Independent System Operator’s spinning reserve requirement could be supplied from the California Department of Water Resources pumping load. The CDWR could stop pumps for brief intervals in response to specific short-term transmission system needs. Another scheme would enable controllable air conditioning units to be cycled off for brief periods when the system is stressed. (See reports here. The research was supported in part by the DOE’s current research program in transmission reliability.)
Consumer demand is the sleeping giant of electric reliability, and retail rate regulation is what put the giant to sleep. Consumers, it is time to wake up! Retail pricing is a crucial component of a healthy, dynamic electricity industry. Offering consumers service choices in a range of prices would make diverse consumers better off, and bolster system reliability. This approach, though, is a novel value proposition in this historically regulated, vertically integrated industry with its “one size fits all” approach of regulated, fixed, average rates. Customers, regulators, and the electricity industry itself will increasingly recognize the range of value propositions that the electricity industry can profitably present to consumers, and we’ll all be better of for it.