Manya Ranjan, Strategy Head – Sterlite Power
I had introduced the concept of Demand Response in my previous piece – let’s look at this topic in more detail in the current article. As I had mentioned in my previous post, Demand Response can really change the demand trajectory for Indian power sector – let’s see how, by answering a series of questions:
What is DR?
Supply and demand has to match at every moment for a power grid to be stable. Historically, supply side has been tinkered most often when trying to match supply and demand on the power grid. However, demand side management has really picked up in sophistication in the last 10 years and it’s proving to be the cheaper resource to be altered to meet supply.
Demand response, in principle, is a change in power consumption by customers based on certain price signals. The premise is that if we try to optimize across supply and demand, there are situations where it might be cheaper to reduce demand rather than increase supply. However, the pricing signals have to be sizable to incentivize this phenomenon to work. The nudge theory, thanks to the Nobel Prize in Economics, has greater importance here.
How does DR work?
To be sure, managing demand is not new as a phenomenon. Demand has been managed in the past, albeit in an absolute sense, in two ways: energy efficiency and load curtailment, or load shedding. Both these measures have reduced total demand and in an absolute sense. They don’t allow demand to be smart around market prices.
When power markets reach peak prices, the grid operator has 2 choices: increase generation on the grid to meet demand or reduce demand by incentivizing users to reduce their consumption. The most typical of responses could be office buildings shutting down their ACs or heating, or manufacturing plants shutting down operations. As you can imagine, both of these responses have to be incentivized appropriately to be effective. How these price signals are given, in terms of quantity, frequency and advance notice, determines the success of such programs.
Why is DR important?
DR is expected to grow by 10 times in the next 10 years globally to become a multi-billion dollar market, an impressive growth for a phenomenon that rides on the back of multiple customers. At present, more than 80% of the market is cornered in the US but it’s only a matter of time before Asia takes over the market as favourable policies take shape.
The dominance in the US is based on an order by the Federal Regulatory Energy Commission (FERC Order 745) that allows DR resources to be compensated in the wholesale energy markets at the same rate as any supply side resources. So, a MW of load reduced from the grid at peak hours gets compensated the same as a MW of generation from a gas plant (typically). As you can imagine, it’s so much cheaper to reduce demand than to get the additional MW of generation from a gas power plant.
Navigant research shows demand response resources delivered an estimated 72,000 MW of load reductions across the U.S. in 2011, or about 9.2% of peak demand. A FERC report in 2013 estimated that over 32,000 MW of those 2011 DR reductions may have come from efforts in the wholesale markets, showing the predominance of that order on the growth of the market.
When can we see DR in action in India?
The smart DR takes a sophisticated approach to make it actionable – the distribution utility has to be smart to know how to get a customer to respond to pricing signals in the required time. It’s not very prevalent yet but some DISCOMs are pushing the envelope, like the pilots initiated by Tata Power in Delhi and Mumbai. It’s not long before demand becomes the resource of choice of grid operators.
Why does it matter, in the end?
The need for greater investment in the power sector has historically been predicated on increasing power demand in any rapidly growing economy, like India. This conventional notion allows for increasing electricity rates, which allows electric utilities to earn increasing returns on their investments. This makes the entire utility operation relatively simple, since as long as the demand is growing up, returns are guaranteed so investments are not overly scrutinized for prudence.
Now, if the power demand is not as monolithic and starts to vary, or go down, any utility has to really justify their investments on the grid to get returns. This changes the entire business model on its head and forces the utility to be more innovative with their investments.
Finally, the most exciting aspect of DR is the fact that consumers get control over the prices they wish to pay for their electricity. This, in a way, is the true democratization of the electricity sector and I can’t wait to see this in action in India soon!