Flexible demand through participation by large customers in wholesale markets

Large industrial users of electricity that could use less electricity at high prices, or more electricity at low prices, could bid prices for their demand in day-ahead wholesale markets to help set market prices, integrate renewables, and lower system costs, according to an ESIG report.

May 25, 2023 William Driscoll

Image: Pixabay

An Energy Systems Integration Group (ESIG) white paper proposes enabling large industrial customers with flexibility in their demand to bid in wholesale markets the day-ahead prices they are willing to pay for various quantities of electricity.

This “elegant approach,” says ESIG, would increase demand flexibility, which could “become more important with the increase in variable renewables, electrification, and new large loads.”

The California Public Utilities Commission agrees on the value of demand flexibility to achieve a high renewables grid, and is considering approaches that would enable demand flexibility by retail customers, community choice aggregators and direct access providers.

The approach proposed by ESIG would enable large customers that could increase consumption of electricity at low prices to bid for and buy more low-cost solar and wind power at times of day of high renewable generation, when wholesale prices can be low or even negative. Such large flexible loads, the paper says, might include overnight electric vehicle charging, and the data center loads of customers with multiple data centers and the ability to shift load among them.

Other large customers, such as cryptocurrency miners or future hydrogen producers, could set an upper bound on their electricity purchase price, says the paper, and thereby reduce load at times of grid stress and higher prices.

The maximum prices that participating large customers would be willing to pay and their associated quantities would form part of the wholesale demand curve that would be matched against the supply curve of generators’ prices by the independent system operator’s market software, to set wholesale market prices in the day-ahead market. The paper also discusses how large customers’ “bid-in demand” could work in the real-time market.

Currently, the wholesale market is based on an assumption that demand is “inelastic,” that is, that demand does not vary by price, ESIG says.

The proposed approach could lower system costs by reducing overbuilding, as it could reduce the system’s peak load and could result in lower resource adequacy requirements.

The opportunity for “bid-in demand” already exists, ESIG says, with most U.S. wholesale markets having options for wholesale demand to bid into the day-ahead market, “although it is not clear” to what extent that happens, and there is “a need to assess how this works” across different independent system operators, “to what extent this capability is used, and whether the participation leads to a physical response.”

Load-serving entities may also want to bid-in their demand, the paper says, if they already engage their customers through demand response programs, distributed energy resource programs, or “advanced pricing.”

Saying that “wider adoption among residential and commercial customers may be necessary to maximize the benefits of bid-in demand,” ESIG says that “if distribution-level locational marginal prices were available,” then distribution system operators might be able to use bid-in demand price curves to clear the market “just as the wholesale system operator can do today.”

But the white paper concludes that “more thought is needed around the way” residential and commercial customers “may consider bids and how that gets aggregated through a third-party aggregator or the load-serving entity.”

ESIG distinguishes its proposed approach from the “Griddy experience during the 2021 Texas winter storm,” in which customers were exposed to days of $9/kWh prices; from “conventional” demand response; from time-of-use pricing; and from real-time retail prices based on “sending prices to devices.”

The ESIG paper is titled “Treating demand equivalent to supply in wholesale markets: an opportunity for customer, market, and social benefits.” The paper is one in a series of ESIG papers on aligning retail pricing with grid needs, including a paper on price-responsive demand to accelerate renewable generation.

ESIG describes itself as “the leading source of global expertise for energy systems integration and operations.”

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