Price-responsive demand can accelerate renewable generation


At times of “surplus” renewable generation, customers with flexible demand for electricity can use more electricity that would otherwise be curtailed, says a paper from the Energy Systems Integration Group, a nonprofit group.

In a grid the size of Texas, at 15% renewable generation flexible demand could yield $3.3 billion in annual net savings for all consumers, including those with non-flexible demand, says the ESIG report by Michael Hogan, citing a Pacific Northwest National Laboratory study.

About 80% of cost reductions yielding those annual savings would result from avoided costs of investing in infrastructure—generation capacity, transmission and distribution hardware.

With increasing adoption of “inherently flexible loads” such as EVs and heat pumps, there is a growing potential for price-responsive demand, according to the report. To avoid unnecessary infrastructure investments and capture the cost savings, the ESIG calls for progressively assessing and incorporating expected demand elasticity into long-term capacity planning and procurement, at both the bulk system and distribution levels, among other measures.

The savings from flexible demand are “anything but inevitable,” because incumbent market actors including system operators tasked with balancing supply and demand, are “strongly biased” in favor of supply-side investments—principally fossil fueled generation but also grid-connected batteries—“even when empowering” demand-side flexibility would be less expensive.

Price-responsive demand faces discrimination and market pre-emption, as “embedding outdated assumptions about the inelasticity of demand overstimulates supply-side investment, which in turn undermines the value of empowering demand flexibility.

Providing two examples to make his point, Hogan said that market actors suppress market price signals to flexible consumers “by shifting compensation” to out-of-market capacity procurement, and also pre-empt the market by “centralizing commitments to pay for uneconomic capacity years in advance.”

As a result, “customers lose” because the transition to a decarbonized grid “becomes far more expensive than it needs to be,” Hogan said.

Price-responsive demand requires retail electricity prices that go up and down with the wholesale price of electricity, a concept known as Real-Time or Dynamic Pricing.

Hogan called for creating “safe” options for customers to select real-time retail electric pricing because “direct exposure to real-time pricing is unlikely to gain traction with most small consumers.” He added that regulators should allow third-party load management services at the distribution level, among other measures.

At the wholesale level, Hogan proposed measures to reduce or eliminate the discrimination and market pre-emption of price-responsive demand.

California has approved or is considering eight real-time pricing pilot programs, and the state’s public utilities commission is evaluating whether to expand those programs, as part of a proceeding aimed at achieving flexible demand through dynamic pricing.

Hogan’s paper is titled “Tapping the mother lode: Employing price-responsive demand to reduce the investment challenge.”

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