How Demand Flexibility Can Help During Hot Weather Electricity Price Surges

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Originally published on RMI Outlet.
By Peter Bronski and Mark Dyson

The basic law of supply and demand says that as demand surges and/or as supply lags, prices go up. Nowhere have we seen that effect more acutely than with wholesale electricity prices through this exceptionally hot summer in the United States. From the Pacific Northwest to the Southwest to the Midwest to the East Coast, this summer—and especially August last month—was largely known for its widespread scorching heat.

In the Northeast, New York City recorded its third-hottest August on record. At the end of July and into August in the western part of the state, the mayor of Buffalo extended the open hours at the city’s public pools so thousands of residents could escape the stifling heat.

In Texas, a lengthy heat wave with extended triple-digit temperatures saw ERCOT, the state’s grid operator, set a new all-time record for hourly demand (ERCOT actually broke three demand records across two consecutive days in early August).

And in Southern California and Arizona the story was much the same. In early and mid August the region was squarely in Mother Nature’s stiflingly hot crosshairs. Officials issued an excessive heat watch for San Diego County, with temperatures in Borrego Springs forecasted to hit 116 degrees. Meanwhile, that same heat wave saw Phoenix hit its highest electricity demand of the year, while utility Salt River Project on consecutive days set and then broke its own all-time peak demand record.

Of course, all that heat and all the associated electricity demand came largely from one thing: air conditioning (AC). People were using it. A lot.

When rising temps equal rising prices

As it turned out, when the summer heat kicked in and the AC units turned on, wholesale electricity prices proved the only thing spiking more severely than the mercury. This effect can be seen on any given summer afternoon, when wholesale prices climb above their long-term, off-peak average. But during the three August heat waves in question, the price spikes were especially severe.

Compared to “typical” wholesale electricity prices of $25–60 per megawatt-hour (MWh), in the New York ISO’s western region—including Buffalo—wholesale prices hit $1,100 to $1,200 per MWh. During the ERCOT peak demand record in Texas, the real-time price surpassed $600 per MWh, and a week later as the heat wave continued, the wholesale price was knocking on the door of $900 per MWh. And in the Southern California region of CAISO, where San Diegoans were sweltering, the real-time price broke through $1,200 (see figure below).


For utilities, wholesale price spikes like these are like taking a sucker punch in the gut. They’re paying through the nose during peak on the wholesale market, yet charging customers like you and us a much lower fixed retail price ($/kWh). Meanwhile, “surge pricing” like this is the key revenue source for certain generators that might only run a few dozen hours per year.

Curtailing demand vs. building more peaking plants

Faced with soaring demand—and, potentially, soaring wholesale electricity prices to match—one option has been to simply curtail that demand. That’s the principal behind traditional demand response programs. During a handful of particularly acute grid events each year, such as heat waves just like these, utilities and other grid operators can send a signal to certain participating customers to slash off the top of the demand peak. That’s exactly the idea behind utility Austin Energy’s partnership with Nest, using the smart thermostat to shave some of the AC-induced peak electricity demand for two-hour blocks 10–15 days per summer, and compensating customers for that ability.

Other than curtailing demand, the other option has been on the supply side: build more peaking plants to meet the surging demand. But that’s a costly proposition … both for utilities and their customers and for the planet’s climate. As the wholesale electricity markets demonstrate, they’re a significantly more-expensive source of electricity generation. And peaking plants are much more carbon-intensive than either renewables or traditional baseload generation. Peakers are not a good bet for anyone except those who profit from them, dependent on big electricity demand surges like those in NY, TX, and AZ/CA this summer.

The important role for demand flexibility

This is where RMI’s recent report on demand flexibility has an important role to play. Whether you curtail load through demand response or build and call upon peaking plants to ramp up supply, extreme summer peak electricity demand has all been predicated on one fact that has remained largely unavoidable: inelastic demand.

When the mercury climbs, people turn on their AC and the grid cries uncle. Demand response programs have grown up around just these types of acute grid events. But demand flexibility offers a far greater opportunity. With appropriate 24/7/365 price signals from the utility and automated control of certain loads—including the AC via smart thermostats—demand flexibility can take a huge bite out of summer peak demand. Imagine thus lopping off the top of the super-peak wholesale prices utilities pay. Doing so makes the grid lower cost and lower carbon, for the benefit of all.

In the four scenarios we analyzed in The Economics of Demand Flexibility, AC was always either the first or second load called upon, and it always penciled out below the cost-effective break even point. In the case of a hypothetical Salt River Power customer in Arizona, such demand flexibility enabled an average 48 percent reduction in monthly peak demand. Scaled up nationally, demand flexibility among residential customers alone could reduce total U.S. peak demand by 8 percent. Combined with grid-interactive water heaters, AC could thus avoid approximately $9 billion per year in forecasted grid investment.

With a late-summer heat wave currently gripping the East Coast from DC to New York, big numbers like these should be on the minds of customers, utilities, and regulators alike as a way to keep cool and keep demand, grid costs, and customer bills lower, even as the mercury climbs.

Reprinted with permission.

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35 thoughts on “How Demand Flexibility Can Help During Hot Weather Electricity Price Surges

  • ideal application of battery energy storage.

    • Yes, three possibilities: Residential battery, large utility battery, or better insulation. The residential “battery” could be simply ice battery or chemical battery. A home lithium battery like Tesla’s has the advantage of being useable for other electrical demands. Ice is cheaper but can only be used for cooling. Likewise hot water. Although, hot water is a daily large demand throughout the year and so is a more economical than electric battery.

      • Yes, a fourth possibility is to build up massive solar PV panels + grid battery storage enough for at least the energy demand during the peak demand hours at dusk to 12 am for the summers, WITHOUT using much of peaking plants.

        At the same time, build up massive numbers of wind turbines for use in winters’ high power demand times, and use those grid battery storage above for short-term matching of winters’ power supply and demand.

        Then, during the springs and the falls, the massive excess output of those solar PV panels and wind turbines can be used to make transportation fuels that can be stored and used throughout the year.
        This will permit near 100% renewable energy development for both the power grid and for transportation simultaneously.

        • Why not just use that transportation fuel (H2 because that is what you mean by transportation fuel) at the power plants to produce power again on low wind and light times. That would still give us the use being 100% RE plus no need to build out a trillion+ infrastructure (ie H2 stations).

          • Because Natural Gas is 5 x cheaper per kWh thermal than petroleum. Synthetic fuel from RE is a long way from being cost competitive with NG used by the power plants, while synthetic fuel is now BARELY competitive in cost on per-mile basis to petroleum retail prices at the pump.

            Cars running on synthetic fuel from RE has 2.5 x higher thermal efficiency than cars running on petroleum fuel, meaning that even if the cost of synthetic fuel is 2.5 x higher per kWh thermal basis than petroleum, cars running from synthetic fuel from RE would be still cost competitive on per-mile basis.

            The trillion+ infrastructure that you are referring for a new synthetic fuel system will NOT require any extra expenditure from the cost allotted for replacing worn-out petroleum infrastructures and cost allotted for further oil and gas exploration. Artic oil and deep-sea oil drilling aren’t cheap, you know!

            In other words, just spend the money allocated for replacing existing gas stations, oil pipelines, oil and gas tankers, oil refineries, and drilling and fracking new oil wells…etc… to gradually building out new synthetic fuel infrastructures and new solar and wind farms, over the next 30-50 years. The modern solar and wind farms will be the equivalent of oil, gas and coal fields of the past. Which of those would you like to have around?

          • Or just stop wasting money on liquid fuels and move to EVs.

            Most of the infrastructure is in place. Efficiency is very high. Cost per mile is very low.

          • Of course, EV’s, or rather PHEV’s.
            In Springs and Falls, there will be a lot of surplus Solar and Wind energies to charge the PHEV’s for high-efficiency and low-cost daily driving.
            In Summers and Winters, grid power demand will be high, and electric rates will be higher, so use the synthetic fuel made from those two other seasons in order to ease the demand on the already-stressed-out grid.

          • PHEVs are, at best, a future niche product. As battery capacity grows there will be less and less need to haul around an old fashioned ICE for ‘once in awhile’ use.

            The Sun shines a lot in the summer. The wind blows a lot and rain falls a lot in the winter. Just build enough wind, hydro and solar capacity to cover demand. It won’t make sense to build and maintain a synthetic fuel system considering the very low cost of wind and solar.

            As wind and solar drop to 3c/kWh the delivered price should drop to around 8c/kWh. Even if it were necessary to install solar that would get used only one season a year the price of that electricity, delivered, would rise to about 17c/kWh, about 5c/mile and far less than what would be possible with synthetic fuel.

            The grid won’t be stressed. Already the grid could charge 70% of all US cars and light trucks were they electric.

          • I’m sceptical that synthetic fuel will win out over batteries, pumped hydro, and CAES as energy storage. That said, I shared lab space at Murdoch U in 1996 with Dr Touma Issa who was doing zinc bromide flow battery research for ZBB and they still don’t have a competitive battery all these years later.

          • Do like we have done with coal plants for 100 years. Over build wind, PV, and hydro, throw in some extra storage (battery, pump hydro, CAES) to smooth the bumps. EV control charging to take the extra power power also.

            With the massive price spikes above I can’t believe that someone hasn’t set up some big batteries in those area. At $1k-$1.3K per MWh it doesn’t take a lot to pay for the batteries. Then use “simply” software to chart the price swings each day and using weather data from next day you can pick the best time to buy/sell the power.

            Looking at EIA data, even with low NG prices this year I see daily swings of $20-$50 are common and $200 not rare.

          • You’re wrong Bob. Fact is, more than 90% of the time, the extra kWh Tesla batteries are dead weight for most of the trips. Your argument is that wrong to conclude that in PHEV like the Volt that its generator set is a dead weight. Same argument.

          • I’m so glad you know I’m wrong.

            Take a look at what McKinsey analysis has to say. Their math says that PHEVs (and hybrids) quit being competitive once battery pack prices drop below ~$320/kWh.

            Tesla is now apparently around $240/kWh. With the Gigafactory running at speed batter pack prices are expected to reach somewhere into the $130 – $160/kWh range.

            Now, is hauling around the batteries, is that a bad idea? Tesla thinks not. The extra capacity not only means the ability to drive long distances when desired, it also spreads the load on batteries. Tesla expects the ModS batteries to easily last 200,000 miles.

          • >>>>>>”Now, is hauling around the batteries, is that a bad idea? “

            Tesla’s battery can last at least 3,000 cycles at 70% Depth of Discharge (DoD). This means that 1 kWh of battery can provide 3,000 x 0.70 = 2100 kWh. A 20-kWh Tesla’s battery pack will provide 42,000 kWh, and at 3 mi per kWh = 126,000 miles. That’s 10 years’ worth of driving.

            A 90-kWh battery pack will provide 126,000 /20 x 90 = 567,000 miles, or 10 yrs /20 x 90 = 45 yrs worth of driving. However, the battery will age at around 15 years, and 2/3rd of the battery’s capacity will be loss thru calendar aging.

            However, for the wealthy people who prefer the best in handling and performance, Tesla Model S P90D is second to none! THE ABSOLUTE BEST that money can buy! There will be no comparison, and no substitution to a large Tesla battery pack when it comes to the absolute best in handling and performance in motorcars!

            However, for more frugal people who would like to squeeze the most out of the battery pack, a PHEV with a 20-kWh battery would be more sensible for them.

            Alternatively, a Model S or X with 3 modular battery packs of 30 kWh each, can be sold with ONE single 30-kWh pack, good for over 100-120-mi of daily driving. When go on a long trip a few times a year, the other two modular packs can be rented at, for example, PepBoy, Goodyear, Firestone, etc…Those with frequent long trips may wanna buy and kept all 3 modular packs installed all the time.

            Diffferent strokes for different folks!

          • I suspect Tesla is on the right track. Install a battery pack that allows at least 200 miles of driving.

            Modular batteries, swappable batteries are ideas, but not likely ideas that will catch on. It’s more likely dropping battery prices and rising capacity will mean that we’ll pay a bit less for an EV than a same-model ICEV and drive that set of batteries until the rest of the car is used up.

          • Here we go again with that worn out gas station bull again.

            As I have said before:
            If a station in Chicago, Dallas, Miami, Grand Rapids, then those stations should be made to H2 stations. No!
            An H2 station will only replace a gas station if there is an overwhelming number of HFCV’s over ICEV’s. If there is 100,000 ICEV’s and 1000 HFCV’s why would they replace a gas station with a H2 station?

            Answer those questions with real answers.

            So now lets spend trillions more to try to make a synthetic fuel, and then trillions more for an infrastructure, for cars that cost to much to buy and to much to use.
            Good idea. NOT!

          • Of course, the continual challenge is for the Automakers to build New Energy vehicles at cost comparable with current ICEV. When this will happen, then we will be able to use the funds allocated for replacing worn-out petroleum infrastructures to build New-Energy infrastructures, for a gradual and economically-sustainable transition.

          • Whatever.
            Won’t work.
            You just don’t get the full picture.

          • It will take about 50-100 years before we will be able to replace a large percentage of combustion-engined vehicles of today. Have patience, grasshopper! This means that we must get started TODAY if we are going to get there in 50-100 years.

          • Wow, Roger.

            You’ve made a lot of totally unreasonable claims, but that one might be the most ridiculous of all.

            Or not….

          • I don’t need patients.
            I will not see them in my area in my life.
            If we must get started today, then what are you doing for your cause other than preach about them.

          • Too

      • The hot water demand in Germany is about 25% of the entire electric energy demand. What is it in the US?

        • Much lower… because the heating demand is so much higher. Mostly because of poor insulation and houses that are on average twice the square footage of German houses. Average residential electrical use per house in Germany is 3500 kwh/year. American 10,000kwh/ year.
          An example of a new or retrofit properly built house in the U.S. is, the heat energy will be about the same or less than hot water on a yearly basis. A standard house will be 5 times the heat energy of hot water energy. That can also be altered through an air source heat pump which will reduce winter electric heat demand by 60%.

    • I am looking forward to getting some LiFePO4 batteries for storing my solar output and for knocking down my evening peak even farther. Vensonata is way ahead of us there, having already gone off-grid.

      Using batteries to attack the peaks will work, but only if my utility would pay me the spot price for my energy at that time.

    • Battery storage will need to be used for more than just a few hot days in August to make it a worthwhile investment. Demand and supply pricing could be used to create an artificial (non-market) price every day during peak hours. This should essentially put peak power generators out of business.

  • A really effective way to manage peaking is by storing ‘cold’ and then using it at peak. This is done by freezing water at off peak hours. This is already being done. And if we had a real market in electricity, would probably be done a lot more. These guys have an interesting product that does it –

    • Now if I could only get ice-energy to make a residential model, I would buy it.

      • Great link. Hope these devices come to Texas soon.

  • How much of this peak demand could be met on-site with a combination of rooftop PV and ground source heat pumps… on-site storage batteries optional? Insulation retrofits should come first, yes.
    Considering the confluence of sunny days with AC demand, rooftop PV isn’t “intermittent ” supply, it’s an on-site peaker plant. Ground- source heat pumps, especially, are heat storage systems — sun-heated air in your house has its heat stashed in your ground until you have a demand for it, whether in winter, cool nights after warm days, or for hot water if so equipped. If the electric to run the pumps can come from your own PV, so much the better.
    This might sell better as a policy since no one’s being told, or paid, to forego any production or activity.

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    • Fantastic points made. Good response IMO.

      My first thought was: sun=heat=energy

    • Ground source heat pumps do not pay back. There has been a revolution. Air source heat pumps work well in cold climates and are 25% of the price of ground source. This needs to be more widely known.
      Heat pumps, in general are a good idea in that they reduce the demand from fossil fuel power plants. Both for domestic hot water and space heating. And yes they are a beautiful complement to PV. And now we have the third leg of the tripod, battery storage.
      The low hanging fruit for battery storage, that is the best bang for the buck, is a residential battery sized only for the longest night of the year (about 7-10 kwh). If coupled with adequate rooftop PV one can achieve about 85% reduction in grid demand. The last 15% becomes progressively more expensive. However that last 15% can be dealt with much later, perhaps in a decade or so.

  • The utilities should be jumping at opportunities to load shed during peak hours. The technology is there, utilities and their customers just need the right incentives.

    • The hangup could be if the utilities own the gas peakers and are either making money off them or are at least still making payments.

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