Why you should love negawatts
If you’re not a total energy nerd like me, you may have missed the announcement of one of the biggest rulings in the energy space in a long time. The Supreme Court ruled 6–2 in favor of a rule known as FERC (Federal Energy Regulatory Commission) Rule 745, named Demand Response in Organized Wholesale Energy Markets.
If you managed not to fall asleep through that intro, you’re probably wondering what that mouthful actually means. Basically, the rule requires that energy market regulators treat the ability to decrease demand (demand response) the same as the ability to generate additional power. This is sometimes referred to as “negawatts,” or negative watts.
Why should you care about demand response? It provides a number of benefits. First, it brings stability to the grid. Demand response is able to act on the order of seconds or minutes, making sure energy production and consumption are always in sync. Second, demand response is almost always the least-expensive option of balancing the load on the grid, meaning immediate costs are lower. It’s much easier for someone to dial back usage than it is for a power plant to start up, purchase fuel, and start sending electricity to the grid. Third, it reduces long-term costs by reducing the amount of new generation capacity which needs to be built. Finally, demand response is the best way to reduce the environmental impact of the energy space. Increasing generation in response to increased demand always comes from fossil sources, as renewable resources (with the exception of hydro) are not dispatchable, meaning they can’t respond to changes in demand.
So why was the Supreme Court required to act? As you can imagine, power producers were not exactly thrilled that FERC was creating a new source of competition for them. Especially integrated utilities, like those in the Southeast, who are guaranteed a rate of return based on their investments. Demand response reduces the need for additional investment, reducing the amount of money these utilities can earn. A group of utilities sued FERC, trying to get the rule overturned. Their argument was that the FERC rule regulated retail sales, which by law is under state control, not federal. A lower court agreed, so FERC appealed. The Supreme Court’s decision argued that while FERC only has jurisdiction over wholesale sales, its rules will, by definition, impact retail sales as well.
The utilities were right to be freaked out. Navigant Consulting recently released a report predicting the demand response market will be worth $1.3 billion per year by 2024, up from $183.8 million in 2015. That’s a lot of money for the utilities to miss out on.
There are a number of ways demand response can be implemented. Several home appliances draw a significant amount of energy. The first method of demand response is to alter how these appliances operate, for example by increasing thermostat set points in the summer to decrease air conditioner loads. While this sounds like it would create discomfort, remember that the spikes where demand response is called on typically last for minutes, meaning the air conditioner can be cranked back up a few minutes after they’re turned down. Second, a growing area of demand response is electric vehicle charging. These vehicles draw a significant amount of power while charging, but in general, people don’t need to charge their cars immediately when they get home. That load can then be shifted to night time, when demand tends to be lower. Finally, a somewhat unconventional source of demand response is water heaters. Again, people typically don’t need to heat up their water in the middle of the day, so electric water heaters can shift their load to a time when demand is low. This may not sound like much, but the average electric water heater uses about 10 kWh of energy per day, and with 53 million electric water heaters, that’s 530 million kWh of consumption each day, for a total of 193 billion kWh per year, or roughly 5% of total US electrical demand. Shifting just a portion of that would have a big impact on the daily energy balance.
There are several companies trying to cash in on demand response. EnerNOC out of Boston and Opower in California are two of the biggest, but certainly not the only, players. They obviously got a huge boost out of today’s ruling, with EnerNOC’s stock price rising 70% in the aftermath of the Supreme Court’s decision.
Demand response has an important, but thus far limited, role to play in electric markets. With this ruling firmly cementing the legal basis for demand response, it will be exciting to see how this market unfolds.
