Demand Response Market Continues to Evolve as Summer 2016 Season Begins

Thus far, June has been a much less newsworthy month than May for the demand-side management (DSM) industry. But, it does represent the traditional start of the summer demand response (DR) season, so we will see if it becomes a busy DR season or a light one like the last few years.

Meanwhile, there are macro-level factors that act as both drivers and barriers for the global growth of DR. California, for example, continues to offer new opportunities for DR participation. The most recent case is the California Public Utilities Commission approving a decision that allows Southern California Edison to spend an additional $8.7 million on DR programs this summer to mitigate potential natural gas shortages stemming from the Aliso Canyon natural gas leak.

There are some new business models and technology and software uses that will be key enablers of future DR growth:

Bring Your Own Device DR: Bring Your Own Device/Thermostat (BYOD/T) refers to programs that allow customers to purchase their own device from preselected vendors and participate in DR programs managed through the utility or electricity supplier. Today’s consumers want to choose how they participate in DR programs—they want to select a device so that it has the features they desire.

Behavioral and analytical DSM: Utilities are looking to expand their DSM programs through non-hardware-based methods in order to more cost-effectively engage a larger percentage of their customer bases. With increased access to advanced metering infrastructure (AMI) data, electronic communications methods, and software-based tools, many companies are designing ways to use behavioral and analytical concepts in the energy industry that have been successfully implemented in other industry sectors.

  • Integrated/targeted DSM: Integrated DSM (IDSM) has been a topic among DSM professionals and utilities in the United States for a decade. However, integrating energy efficiency and DR into utility programs has been challenging, and little progress has been made. Traditionally, energy efficiency and DR have been siloed within utilities, with misaligned goals and barriers for transferring funds between programs. Yet, the integration of DSM programs has become increasingly popular, especially in places such as California, where the combination of these programs has been used as a fundamental part of the state’s energy planning and strategy.

Outside of the United States, there are several markets becoming more open and attractive for DR resources. From Canada to Europe to Asia, market structures are being reformed to allow DR to compete against generators for revenue. In Ontario, the Independent Electricity System Operator plans to launch a capacity market where DR will be able to compete with generation and other resources. Two of Europe’s largest electricity markets—France and the United Kingdom—plan to open capacity markets by 2017 that would allow DR participation. South Korea now allows DR to compete equally with generators in the electricity market.

However, specific barriers to DR development still exist due to environmental and reliability concerns. The amount of DR capacity available for this summer was reduced due to the expiration of the U.S. Environmental Protection Agency’s (EPA’s) rules for emergency generators (EGs) for DR purposes. Last year, the U.S. Court of Appeals overturned an EPA rule that allowed 100 hours of EG use for emergency DR programs. It granted the EPA a 1-year stay, which expired on May 1, 2016. The EPA has no plans to make changes to the rule, meaning that the court’s ruling will remain intact, affecting upward of 20% of DR resources in some markets. 

The recent PJM capacity auction cleared less DR capacity than the previous year, mostly due to lower prices. But in the longer term, PJM is phasing out its summer DR categories in favor of annual participation requirements. Industrial customers may have fairly flat load profiles throughout the year, but many commercial customers rely on air conditioning (AC) measures to respond to DR events. On a portfolio level, it will come down to a risk/reward calculation. Residential DR that gets bid into the PJM market by utilities running their own DR programs are almost exclusively focused on summer-focused loads like air conditioning and pool pumps. These programs offer virtually no winter DR capability and would not be eligible under the new rules unless they could combine a bid with a winter  resource.

Navigant Research expects DR capacity to reach nearly 39 GW globally in 2016. As the chart below shows, growth is estimated to be relatively robust during the forecast period. By 2025, it is anticipated there will be approximately 144 GW of DR capacity around the globe. The region of greatest adoption is expected to be North America (primarily centered in the United States), reaching 49 GW in 2025. Navigant Research expects this trend to hold true throughout the forecast period, even though other regions are expected to start to implement DR programs and markets.

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