Why analogue utility rates in a digital world?

Doug Staker of Demand Energy.

Doug Staker of Demand Energy.

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, Consolidated Edison (Con Ed), the utility serving New York City, has massive energy needs, peaking at around 13GW. That’s nearly a third of typical peak demand in the entire state of California.

At the same time, base-load 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 USD$1bn into installing 3GW of solar power across New York State by 2022.

A great source of energy

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 4am to a peak typically in the late afternoon or early evening.

But in some parts of New York City, the peak may occur between 7pm and 11pm. 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 kilowatt hours), with a kind of ‘speeding ticket’ added based on the fastest rate that they use energy (in kilowatts).

Needing to address local conditions

These speeding tickets don’t really address local conditions, though. Con Ed has a system-wide peak that occurs between 2pm and 6pm.

But if you look across the utility’s more than 50 networks, different areas peak at different times. Downtown peaks between 11am and 3pm, midtown peaks from 2pm to 6pm and many residential areas from 7pm to 11pm.

These differences are not factored into demand charges or even New York City’s Demand Management Program (DMP), which gives customers an incentive to provide bulk load reductions during the system peak of 2pm to 6pm.

Participating in the DMP may benefit the Con Ed 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 neighbourhoods.

An analogue, one-size fits all approach

Hence, while the DMP is effective in some regards, it remains an analogue, 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 10am and 2pm. Very few grids have peaks that occur midday; most peak in the afternoon and evening.

The cost of supplying power during peak hours

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 power’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.

Much greater grid benefits and customer value

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 forecast to become overloaded, they have to develop programs like DMP to reduce loads at peak.

Or they have to build new infrastructure, even though in New York City the uppermost 2GW of peaking demand occurs for a mere 156 hours (or about 0.018% of) a year. It’s clearly not a very efficient model.

A managed storage inventory

By adding storage, New York can have a managed inventory capable of moving energy around and helping to build a more efficient delivery system.

Developing innovative rates that will align price with variable costs means 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 8am and 11pm, and commercial users received savings beyond the current demand charge methodology, then it could be a big incentive 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 New York saying goes: “If you can make it here, you can make it anywhere.”

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