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In electricity grids, demand response (DR) is similar to dynamic demand mechanisms to manage customer consumption of electricity in response to supply conditions, for example, having electricity customers reduce their consumption at critical times or in response to market prices. The difference is that demand response mechanisms respond to explicit requests to shut off, whereas dynamic demand devices passively shut off when stress in the grid is sensed. Demand response can involve actually curtailing power used or by starting on site generation which may or may not be connected in parallel with the grid.This is a quite different concept from energy efficiency, which means using less power to perform the same tasks, on a continuous basis or whenever that task is performed. Current demand response schemes are implemented with large and small commercial as well as residential customers, often through the use of dedicated control systems to shed loads in response to a request by a utility or market price conditions. Services (lights, machines, air conditioning) are reduced according to a preplanned load prioritization scheme during the critical timeframes. An alternative to load shedding is on-site generation of electricity to supplement the power grid. Under conditions of tight electricity supply, demand response can significantly reduce the peak price and, in general, electricity price volatility.

Demand response is generally used to refer to mechanisms used to encourage consumers to reduce demand, thereby reducing the peak demand for electricity. Since electrical systems are generally sized to correspond to peak demand (plus margin for error and unforeseen events), lowering peak demand reduces overall plant and capital cost requirements. Depending on the configuration of generation capacity, however, demand response may also be used to increase demand (load) at times of high production and low demand. Some systems may thereby encourage energy storage to arbitrage between periods of low and high demand (or low and high prices).

There are two types of demand response - emergency demand response and economic demand response . Emergency demand response is primarily needed to avoid outages. Economic demand response is used to help utilities manage daily system peaks.

Smart grid application

Smart grid applications improve the ability of electricity producers and consumers to communicate with one another and make decisions about how and when to produce and consume kWh. This emerging technology will allow customers to shift from an event based demand response where the utility requests the shedding of load, towards a more 24/7 based demand response where the customer sees incentives for controlling load all the time. Although this back and forth dialogue increases the opportunities for demand response, customers are still largely influenced by economic incentives and are reluctant to relinquish total control of their assets to utility companies.

One advantage of a smart grid application is time-based pricing. Customers who traditionally pay a fixed rate for kWh and kW/month can set their threshold and adjust their usage to take advantage of fluctuating prices. This may require the use of an energy management system to control appliances and equipment and can involve economies of scale. Another advantage, mainly for large customers with generation, is being able to closely monitor, shift, and balance load in a way that allows the customer to shave peak load and not only save on kWh and kW/month but be able to trade what they have saved in an energy market. Again this involves sophisticated energy management systems, incentives, and a viable trading market.

Smart grid applications increase the opportunities for demand response by providing real time data to producers and consumers, but the economic and environmental incentives remain the driving force behind the practice.

Electricity pricing

In many electric systems, some or all consumers pay a fixed price per unit of electricity independent of the cost of production at the time of consumption. The consumer price may be established by the government, a regulator, or represent an average cost per unit of production over a given timeframe (for example, a year). Consumption therefore is not sensitive to the cost of production in the short term. In economic terms, consumers' consumption of electricity is inelastic in short time frames since they do not face the "real" price of production; if consumers were to face actual prices in short periods, they would (presumably) increase and decrease their use of electricity in reaction to price signals.

Electricity producers, however, are (implicitly or explicitly) paid according to a system intended to encourage priority usage of lower-cost sources of generation (in terms of marginal cost). In many systems that use market-based pricing, the wholesale cost will vary according to demand and available supply. The variation in pricing can be significant: for example, in Ontario between August and September 2006, wholesale prices paid to producers ranged from a peak of C$318 per MW·h to a minimum of negative $C3.10 per MW·h,; in the latter case, the negative price indicates that producers were being charged to provide electricity to the grid (and consumers paying real-time pricing may have actually received a rebate for consuming electricity during this period). Variations in price within a 24-hour period of two to five times are not unusual, due to daily demand cycles.

In cases where consumers do not face actual market prices, they have little or no incentive to reduce consumption (or defer consumption to later periods) during times when production costs are significantly higher. Since costs may be substantially higher at these times, the potential for savings should not be overlooked.

Two Carnegie Mellonmarker studies in 2006 looked at the importance of demand response for the electricity industry in general terms and with specific application of real-time pricing for consumers for the PJM Interconnection Regional Transmission authority. The latter study found that even small shifts in peak demand would have a large effect on savings to consumers and avoided costs for additional peak capacity: a 1% shift in peak demand would result in savings of 3.9%, billions of dollars at the system level. An approximately 10% reduction in peak demand (achievable depending on the elasticity of demand) would result in systems savings of between $8 to $28 billion.

A study carried out in 2007 by The Brattle Group [183803] for the United States showed that even a 5 percent drop in peak demand would yield substantial savings in generation, transmission, and distribution costs – enough to eliminate the need for installing and running some 625 infrequently used peaking power plants and associated power delivery infrastructure. This would yield an annual savings of $3 billion which translates into a present value of $35 billion over the next two decades.

In Ontario, Canada, the Independent Electricity System Operator has noted that in 2006, peak demand exceeded 25,000 megawatts during only 32 system hours (less than 0.4% of the time), while maximum demand during the year was just over 27,000 megawatts. The ability to "shave" peak demand based on reliable commitments would therefore allow the province to reduce built capacity by approximately 2,000 megawatts.

Electricity grids and peak demand response

In an electricity grid, electricity consumption and production must balance at all times; any significant imbalance could cause grid instability or severe voltage fluctuations, and cause failures within the grid. Total generation capacity is therefore sized to correspond to total peak demand with some margin of error and allowance for contingencies (such as plants being off-line during peak demand periods). Operators will generally plan to use the least expensive generating capacity (in terms of marginal cost) at any given period, and use additional capacity from more expensive plants as demand increases. Demand response in most cases is targeted at reducing peak demand to reduce the risk of potential disturbances, avoid additional capital cost requirements for additional plant, and avoid use of more expensive and/or less efficient operating plant. Consumers of electricity will also pay lower prices if generation capacity that would have been used is from a higher-cost source of power generation.

Demand response may also be used to increase demand during periods of high supply and/or low demand. Some types of generating plant must be run at close to full capacity (such as nuclear), while other types may produce at negligible marginal cost (such as wind and solar). Since there is usually limited capacity to store energy, demand response may attempt to increase load during these periods to maintain grid stability. For example, in the province of Ontario in September 2006, there was a short period of time when electricity prices were negative for certain users. Energy storage such as Pumped-storage hydroelectricity is a way to increase load during periods of low demand for use during later periods. Use of demand response to increase load is less common, but may be necessary or efficient in systems where there are large amounts of generating capacity that cannot be easily cycled down.

Some grids may use pricing mechanisms that are not real-time, but easier to implement (users pay higher prices during the day and lower prices at night, for example) to provide some of the benefits of the demand response mechanism with less demanding technological requirements. For example, in 2006 Ontario began implementing a "Smart Meter" program that implements "Time-of-Use" (TOU) pricing, which tiers pricing according to on-peak, mid-peak and off-peak schedules. During the winter, on-peak is defined as morning and early evening, mid-peak as mid-day to late afternoon, and off-peak as night-time; during the summer, the on-peak and mid-peak periods are reversed, reflecting air conditioning as the driver of summer demand. In 2007, prices during the off-peak were C$0.034 per KWh and C$0.097 during the on-peak demand period, or just less than three times as expensive. As of 2007, few utilities had the meters and systems capability to implement TOU pricing, however, and most customers are not expected to get smart meters until 2008-2010. Eventually, the TOU pricing (or real-time pricing) is expected to be mandatory for most customers in the province.

Incentives to shed loads

Energy consumers need some incentive to respond to such a request from a Demand Response Provider (see list of Providers below). Demand Response incentives can be formal or informal. For example, the utility might create a tariff-based incentive by passing along short-term increases in the price of electricity. Or they might impose mandatory cutbacks during a heat wave for selected high-volume users, who are compensated for their participation. Other users may receive a rebate or other incentive based on firm commitments to reduce power during periods of high demand , sometimes referred to as negawatts.

Commercial and industrial power users might impose load shedding on themselves, without a request from the utility. Some businesses generate their own power and wish to stay within their energy production capacity to avoid buying power from the grid. Some utilities have commercial tariff structures that set a customer's power costs for the month based on the customer's moment of highest use, or peak demand. This encourages users to flatten their demand for energy, known as energy demand management, which sometimes requires cutting back services temporarily.

Smart metering has been implemented in some jurisdictions to provide real-time pricing for all types of users, as opposed to fixed-rate pricing throughout the demand period. In this application, users have a direct incentive to reduce their use at high-demand, high-price periods. Many users may not be able to effectively reduce their demand at various times, or the peak prices may be lower than the level required to induce a change in demand during short time periods (users have low price sensitivity, or elasticity of demand is low). Automated control systems exist, which, although effective, may be too expensive to be feasible for some applications.

Technologies for demand reduction

Technologies are available, and more are under development, to automate the process of demand response. Such technologies detect the need for load shedding, communicate the demand to participating users, automate load shedding, and verify compliance with demand-response programs. GridWise and EnergyWeb are two major federal initiatives in the United States to develop these technologies. Universities and private industry (including EnergyConnect, Inc., Energy Curtailment Specialists, North America Power Partners, EnerNOC, Inc., CPower, Inc., Site-Controls, LLC., Powerit Solutions, RTP Controls, Inc and Energy Optimizers Ltd (Plogg)) are also doing research and development in this arena. Scalable and comprehensive software solutions for DR (such as platforms by Ziphany, LLC and Convia, Inc./A Herman Miller Company) enable business and industry growth.

Some utilities are considering and testing automated systems connected to industrial, commercial and residential users that can reduce consumption at times of peak demand, essentially delaying draw marginally. Although the amount of demand delayed may be small, the implications for the grid (including financial) may be substantial, since system stability planning often involves building capacity for extreme peak demand events, plus a margin of safety in reserve. Such events may only occur a few times per year.

The process may involve turning down or off certain appliances or sinks (and, when demand is unexpectedly low, potentially increasing usage). For example, heating may be turned down or air conditioning or refrigeration may be turned up (turning up to a higher temperature uses less electricity), delaying slightly the draw until a peak in usage has passed. In the city of Toronto, certain residential users can participate in a program (Peaksaver AC) whereby the system operator can automatically control air conditioning during peak demand; the grid benefits by delaying peak demand (allowing peaking plants time to cycle up or avoiding peak events), and the participant benefits by delaying consumption until after peak demand periods, when pricing should be lower. Although this is an experimental program, at scale these solutions have the potential to reduce peak demand considerably. The success of such programs depends on the development of appropriate technology, a suitable pricing system for electricity, and the cost of the underlying technology. Bonneville Power experimented with direct-control technologies in Washington and Oregon residences, and found that the avoided transmission investment would justify the cost of the technology.

Other methods to implementing demand response approach the issue of subtlely reducing duty cycles rather than implementing thermostat setbacks. These can be implemented using customized building automation systems programming, or through swarm-logic methods coordinating multiple loads in a facility (e.g. REGEN Energy's EnviroGrid controllers).

It was recently announced that electric refrigerators will be sold in the UK fitted with a frequency sensing device which will delay or advance the cooling cycle based on monitoring grid frequency.

Short-term inconvenience for long-term benefits

Shedding loads during peak demand is important because it reduces the need for new power plants. To respond to high peak demand, utilities build very capital-intensive power plants and lines. Peak demand happens just a few times a year, so those assets run at a mere fraction of their capacity. Electric users pay for those idle "non-spinning reserves" with rate hikes. DR is a way for utilities to avoid large capital expenditures, and thus keep rates lower overall.

Importance for the operation of electricity markets

It is estimated that a 5% lowering of demand would have resulted in a 50% price reduction during the peak hours of the California electricity crisis in 2000/2001. With consumers facing peak pricing and reducing their demand, the market should become more resilient to intentional withdrawal of offers from the supply side.

Residential and commercial electricity use often vary drastically during the day, and demand response attempts to reduce the variability based on pricing signals. There are three underlying tenets to these programs:
  1. Unused electrical production facilities represent a less efficient use of capital (little revenue is earned when not operating).
  2. Electric systems and grids typically scale total potential production to meet projected peak demand (with sufficient spare capacity to deal with unanticipated events).
  3. By "smoothing" demand to reduce peaks, less investment in operational reserve will be required, and existing facilities will operate more frequently.
In addition, significant peaks may only occur rarely, such as two or three times per year, requiring significant capital investments to meet infrequent events.

Initiative of the US Energy Policy Act of 2005

The USmarker Energy Policy Act of 2005 has mandated the Secretary of Energy to submit to the US Congress "a report that identifies and quantifies the national benefits of demand response and makes a recommendation on achieving specific levels of suchbenefits by January 1, 2007." Such a report was published in February 2006 .

The report estimates that in 2004 potential demand response capability equaled about 20,500 megawatts (MW), 3% of total U.S. peak demand, while actual delivered peak demand reduction was about 9,000 MW (1.3% of peak), leaving ample margin for improvement. It is further estimated that load management capability has fallen by 32% since 1996. Factorsaffecting this trend include fewer utilities offering load management services,declining enrollment in existing programs, the changing role and responsibility ofutilities, and changing supply/demand balance.

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