Why Stick To Analog Utility Rates In A Digital World?
By Doug Staker, Demand Energy*
They say anything can happen in a New York minute. Could one of these minutes change the way we look at demand management, though? After all, from an energy standpoint, not all New York minutes are the same. Depending on the time of day, electricity in New York can vary significantly in price. It’s hardly surprising: at certain times, Con Edison, the utility serving New York City, has massive energy needs, peaking at around 13 GW. That’s nearly a third of typical peak demand in the entire state of California.
At the same time, baseload production capacity is threatened by the possible closure of the Indian Point Energy Center nuclear plant. New York Governor Andrew Cuomo’s laudable aim is to replace nuclear fission at Indian Point with nuclear fusion … from the sun. Cuomo is putting $1 billion into installing 3 GW of solar power across New York State by 2022. Solar is good for jobs, the environment, and, thanks to cheap panels, the economy. But while it’s a great source of energy, it’s not a consistent source of power.
Grid operators need to make sure the speed at which the grid delivers energy matches the demand in any given minute. Demand fluctuates from a low at 4:00 am to a peak typically in the late afternoon or early evening. But in some parts of New York City, the peak may occur between 7:00 and 11:00 pm. It costs more to serve customers at these times, and, conversely, large system cost savings are possible if peak demand can be reduced. So utilities look to reduce peaks by imposing demand charges, which are essentially like a speeding ticket. A commercial user is charged a monthly ‘mileage’ fee for energy usage (in kWh), with a kind of ‘speeding ticket’ added based on the fastest rate that they use energy (in kW).
These speeding tickets don’t really address local conditions, though. Con Edison has a system-wide peak that occurs between 2:00 pm and 6:00 pm. But if you look across the utility’s more than 50 networks, different areas peak at different times. Downtown peaks between 11:00 am and 3:00 pm, midtown peaks from 2:00 pm to 6:00 pm, and many residential areas from 7:00 pm to 11:00 pm.
These differences are not factored into demand charges — or even New York City’s Demand Management Plan (DMP), which incents customers to provide bulk load reductions during the system peak of 2:00 pm to 6:00 pm. Participating in the DMP may benefit the Con Edison network overall, but it doesn’t encourage customers to reduce their demand outside of the afternoon system peak. And it doesn’t provide for targeted reductions if the area load peaks at a different time, as it does in the Brooklyn/Queens residential neighborhoods.
Hence, while the DMP is effective in some regards, it remains an analog, one-size-fits-all approach in a digital world. As we build a smarter grid that can leverage high-speed communications, distributed generation, and intelligent energy storage, we can do more to align demand with supply. New York’s commercial customers can already take advantage of day-ahead hourly pricing for their energy supply. Why not do something similar with demand charges?
Demand charges based upon hourly costs would do a better job of aligning load reductions with system value. While some believe ‘real-time pricing’ to be overly complex, it has been the model for electricity supply for years.
A move to more granular demand charges would help deal with solar resources peaking between 10:00 am and 2:00 pm. Very few grids have peaks that occur midday; most peak in the afternoon and evening. The cost of supplying power during the peak hours is not only more expensive than off-peak, it’s also when line losses are the highest. By using a battery system to absorb solar production during the morning and time shifting that capacity to when it can offset expensive peaking power, users can create tremendous value. And policymakers can drive more solar installations by commercial customers that currently cannot take advantage of demand charge reductions due to solar’s inability to create firm power.
A final issue is grid resilience. Reducing system demand by a few hundred kilowatts may not be a big deal at midday when the sun is shining and all of New York’s solar panels are working flat out. But those same kilowatts could be really valuable if the grid is close to capacity. This benefit isn’t factored into the DMP.
Today’s technology can use market signals to provide much greater grid benefits and customer value. Given enough information about the market, intelligently managed storage systems can be charged and later dispatch energy to suit almost any set of circumstances, efficiently and automatically. That would enable them to react instantly to local grid conditions and keep loads within reasonable limits on an hour-by-hour or even minute-by-minute basis. All that is needed is for the system to know the value of each kilowatt at a given location and point in time. Admittedly, getting that level of information is challenging, but today’s technology is more than up to the task.
Distribution utilities tend to think that their system costs are fixed. They have to build to meet the peak capacity. When a system is forecasted to become overloaded, they have to develop programs like DMP to reduce loads at peak or build new infrastructure, even though in New York City the uppermost 2 GW of peaking demand occurs for a mere 156 hours (or about 0.018% of) a year.
It’s clearly not a very efficient model. By adding storage, New York can have a managed inventory capable of moving energy around and helping to build a more efficient delivery system. By developing innovative rates that will align price with variable costs, commercial customers can be encouraged to deliver load reduction or self-generated power during peak periods.
If these innovative rates were to be voluntary, limited to weekdays between 8:00 am and 11:00 pm, and commercial users received savings beyond the current demand charge methodology, then that could provide a big incentive for users to install storage. Such a move would let New York City produce and use a much greater level of renewable energy without stressing the grid.
This is not just a New York problem. Grids around the world are facing the same challenge, making the evolution of New York’s demand charge structure an area of global interest. As another saying goes: “If you can make it here, you can make it anywhere.”
About the Author: Doug Staker is Vice President of Global Sales and a co-founder of Demand Energy Networks Inc., a distributed energy management and energy storage company. Doug has been a pioneer in the world of smart grid technologies with a focus on smart metering and intelligent energy storage.
*This article has been kindly sponsored by Demand Energy. That said, we don’t run sponsored posts unless we think they are helpful and worth sharing.
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