Demand-side management (DSM) promises a reduced-emission, lower cost, efficient solution to the ever-increasing demand for reliable power, with added benefits to system operations and the integration of intermittent renewables, storage and distributed generation. However, as an alternative to additional investment in generation and grid infrastructure, DSM deployment has faltered. In the United States, for example, Demand Response (DR) programs are widespread, yet existing DR programs are employed nearly exclusively in “emergency” conditions as a last resort, and not as a structured grid resource.
One reason for this limited utilization is that vertically-integrated regulated utilities have hesitated to invest in DSM solutions that create expenses and erode revenue. While in a broader context the benefits of working on the demand-side are clear, conventional demand-side models do not contribute to the long-term support of a utility business. Regulated utilities recover their revenue requirement through their electricity rates, earning a return on the infrastructure that they own and operate. DSM poses unique ratemaking challenges because the “product” is reduced consumption of electricity (“negawatts”). 1
We believe that for DSM solutions to be successful over the long term, they must both serve the needs of the end-use customer and support the utility’s business model. To date, we have not seen a model for demand-side products or programs that adequately addresses the needs of both the utility and the consumer in a manner that is also attractive to state regulators. This paper proposes a regulatory framework for a new demand-side product that is coming of age: fully automated demand-side technology (Automated Demand Side Management or ADSM). ADSM delivers a physical asset to the utility that is operationally equivalent to a peaking power plant. As such, we believe it could, and it should, receive regulatory treatment equal to a generation unit. We have applied traditional ratemaking principles to existing regulatory structures to create a compensation mechanism for ADSM that is a “regulatory equivalent” to that for peaking generation. We hope this modified regulatory model will encourage utilities to see improving demand-side resources as an alternative equivalent to supply-side options.
Not all DSM is the same and not all DR is the same. Although demand-side efforts have a long and rich history throughout the world, the past twenty years have resulted in dramatic technological advances in demand-side solutions. Debate about DR products often groups all products that reduce demand together, from simple phone calls and radio ads asking consumers to conserve, to two-way automated, verifiable load management systems. But recognition of the distinct differences among these products would allow all of them to be used more effectively to maintain a reliable electric grid.
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1 See “Negawatt Hour,” Economist, Mar. 1, 2014, available at http://www.economist.com/news/business/21597922- energy-conservation-business-booming-negawatt-hour.