Are Commercial Demand Response Programs Good for Business?

With capacity costs ever-changing, it’s a good idea for large energy users to consider demand response strategies. Commercial demand response programs give companies the opportunity to reduce energy costs through incentive programs, and in some cases, through rate design and smart metering.

In order to avoid brownouts and blackouts (loss of electricity), electricity production and delivery systems must be designed to meet daily peak demand. Because electricity cannot be easily stored, the costs to meet this daily peak demand can be extremely high; either a generator would need to come online just to fill that demand, or the Independent System Operator (ISO) would need to import power.

More often than not it is more economic to match electric supply and demand when many consumers choose to marginally reduce electric use during times of peak demand. In order to incentivize consumers to reduce demand at critical peak times, ISO’s and electric utilities have demand response programs that will pay the consumer for reducing energy consumption when called upon. There are providers in the demand response markets that will aggregate organizations that are willing to participate and pledge a certain kilowatt reduction to meet capacity supply requirements. Most organizations will participate in demand response through one of these service providers.

Generally, large energy users that participate in a demand response program will be able to reduce electricity consumption by at least 100 kilowatts during peak times. The benefit they receive for this flexibility is a capacity payment on a regular basis – often monthly. This reduction in energy use has the same effect as turning on a peaking generator, typically at a lower cost than dispatching the generation.

There are three types of demand response programs a consumer can participate in:

  1. Capacity Markets: These programs are in place to help system operators meet demand when supply sources may not be sufficient. The value of the ability to reduce electric load is based on auctions and forward capacity markets. If a consumer is called on to reduce energy, it is obligated to and will get payment accordingly. If a consumer is called and cannot reduce energy, it won’t be paid and, in some cases, may incur a penalty.
  2. Price Response: These programs help the system operator manage spikes in peak demand. When the price for electricity goes to a certain level the service provider may ask for a reduction in electric use from consumers to add supply to the market and will have a revenue sharing mechanism for the sold electricity. Unlike the Capacity Markets program, consumers are not obligated to reduce energy consumption.
  3. Ancillary Services: These programs are in place to help system operators maintain system reliability and quality when there is an immediate need for power to address an unexpected and sudden issue with the transmission grid or a generator. This dispatch of demand response needs to happen quickly and requires consumers to respond immediately to reduce demand on the grid.

When called upon, consumers can reduce electricity consumption by doing things like:

  • Reducing lighting in certain areas
  • Turning down air conditioning
  • Ramping down machine-based processes

Demand response programs can be part of a comprehensive energy management strategy that helps your company or organization manage energy costs and contribute towards sustainability goals. Your Usource energy advisor can help you evaluate whether a demand response program is a good option for reducing your electric costs.

commercial energydemand responseenergy procurement

About the author

Scott MacDonald

As Usource's Managing Director, Scott brings 25+ years of experience in the energy industry to the Usource Team. He is a recognized expert in energy economics and consulting. He holds an MS from MIT and a BA in economics from the University of New Hampshire.

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