Electric utilities are evolving their demand response (DR) program design, rate design, and grid operations in the face of changing customer energy management technologies and regulatory expectations.

By: Jeff Smith and Chris Timberg

This article explores several recent themes that West Monroe observes at the intersection of electric utilities and their Customer Energy Management practices. Not surprisingly, these changes can be traced to the rapid advancements in technology and communications deployed at the grid- and customer-level.  Below, we take a closer look at how some utilities are adapting their customer programs, rate design, and grid operations to improve their market position and stakeholder expectations.

Theme #1: Utilities are treating demand response (DR) as a grid resource, more than just occasional emergency and economic dispatching.

This shift has not come easily or quickly. Traditionally, a utility's role has been to deliver energy and maintain a flexible resource pool that it can dispatch to serve its demand requirements. Utilities have been deploying residential direct demand control programs since the 1970's to reduce peak demands during supply shortfalls and high market prices. While utilities and regulators have preferred the device-driven control approach for its predictability, the challenge has been limited customer adoption.

Here are several key trends leading the next generation of DR programs:

  1. Rate designs are an effective tool to align customer and utility interests
    • Default time-of-use rates and real-time pricing mechanisms will tend to educate customers and empower them to independently make cost-saving energy shifts
    • Applying supply and delivery capacity charges to more customer classes (including residential) can motivate customers to contribute to utility and regional system peak reductions
  1. Advanced Metering Infrastructure deployment allows utilities to provide wide-reaching, low cost DR offerings to serve multiple objectives
    • Notification-based peak time rebates and incentives will provide customers with the flexibility to participate in peak events on their own terms, with savings calculated using customer's interval data baseline profile
    • Success Example: BGE's Smart Energy Rewards program has seen high customer satisfaction scores and over 200 MW of demand reduction. Right now, West Monroe is working with several utilities to deploy similar peak time savings programs that leverage AMI interval data, not additional devices, to measure DR events participation.
  1. New technologies are directly enabling customers to manage their energy consumption
    • At the auditing and savings verification level, commissions should provide flexibility for utilities to demonstrate savings using multiple methods
    • At the program level, utilities should be inclusive to a wide number of technology options (the "bring your own everything" approach)

Theme #2: DR is just one of many Distributed Energy Resources that is adding resource value to grid operators

Electric Utilities are being forced to widen their focus to address customer-based energy resources confronting the distribution grid, not just DR. Collectively, these 'behind-the-meter' activities are referred to as Distributed Energy Resources (DER for short) and most notably include distributed generation - mainly rooftop solar, but also includes fuel cells, CHP, and other standby generation resources - and energy storage technologies.

The rise of variable DERs, such as distributed renewables and energy storage, presents a significant challenge to utilities. Grid operators must account for DERs and how they modify the ‘net’ load shaping of service territories on a real-time and planning basis. The good news is that with the right price signals and utility coordination, DERs have the capability to complement and compensate for each other to deliver maximum value to grid operators. Examples of DER interplay include:

  • DR programs complementing distributed renewables, like rooftop solar, during the late-afternoon summer demand peaks as the system output capability diminishes
  • Energy storage compensating for the adverse load profile challenges created in areas with high penetration renewables (for more info, read about California's dreaded 'duck curve' here)

Theme #3:  Utilities are recognizing that changes to their rates framework will directly impact the business case of customer DER investments, future and present

Despite some utilities moving toward a Value of Solar (VoS) methodology – a tariff that compensates customer’s system output at a distinct rate – the majority of utility customers rely on net metering revenues when evaluating their decision to ‘go solar.’ In most parts of the US, the lifetime savings of electricity purchases represent the single largest contributor to the solar business case. As a result, utilities and regulatory stakeholders are becoming more aware of this cause-and-effect relationship between customer rates and DER investments. 

Recently, a client asked West Monroe to evaluate how shifts in their rate design structure to a demand-based methodology would impact the business case of DERs going forward – specifically, the rooftop solar PV market.  In this situation, the utility client was treating would-be customer DER owners as an ‘affected class’ in bringing its rate justifications to the public utility commission.

WMP leveraged our Solar PV Business Case Tool to demonstrate how rate design changes to the fixed ($/month) and variable ($/kW, $kWh) charges in electrical service would impact a customer’s solar return on investment (ROI). What we found was that moving to a demand-based methodology has a larger ROI impact on the avoided supply charges for customers. Weighing various peak demand times, the solar system peak was highest during the Independent System Operator’s peak, yet the individual customer classes’ monthly peak hour occurred when solar was only contributing <10% of nameplate capacity. A West facing system had a greater peak system output while the annual power production for a South facing system was greater.

What are Utilities doing to embrace the next generation of Customer Energy Management practices?

The pace of technology adoption is bringing the customer closer to the utility. In response, utilities are building up their capabilities to embrace and manage the modern grid in the following ways:

  • Infrastructure – deploying modern grid technologies, communications and supporting applications
  • Incentives – Developing a balance of customer programs and rates to encourage involvement in reliable and cost-effective grid operations
  • Insights – Leveraging real-time demand and DER data to create actionable operations decisions

At West Monroe Partners we realize that this isn’t an overnight solution. Proper planning is vital – as we like to say: “Think strategically, and carry a detailed roadmap.” Utilities have to develop a coordinated approach to deploy new technology and programs in the field. Successful customer energy management programs align the information technology (IT), operating technologies (OT) and frontline staff to make these programs successful. Once in production, utilities will have the tools, processes and operational metrics that drive smart decisions to interact with the customer.