What's a Negawatt Worth?
The latest demand response regulatory question is a biggie. The question is, in its simplest form: how much is a negawatt worth?
Back in mid-March, the Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rulemaking (NOPR) proposing "an approach for compensating demand response resources in order to improve the competitiveness of organized wholesale energy markets and thus ensure just and reasonable wholesale rates."
"We propose that Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) with tariff provisions permitting demand response providers to participate as resources in energy markets by reducing compensation of electricity from their expected levels in response to price signals be required to pay to demand response providers, in all hours, the market price for energy for all such reductions," the FERC NOPR noted.
By way of background, the FERC proposal is designed to ensure that demand response compensation structures are set up in such a way to encourage, rather than discourage, wholesale market participation. The NOPR went on to explain: "Despite the benefits of demand response and various efforts by the Commission, ISOs and RTOs to address barriers to and compensation for demand response participation, demand response providers collectively play a small role in wholesale markets. After several years of observing demand response participation in ISO and RTO markets with different, and often evolving, demand response compensation structures, the Commission is concerned that some existing, inadequate compensation structures may have hindered the development and use of demand response."
The bigger picture, of course, is the development and deployment of consumer demand response resources across the country, not in a hit-and-miss kind of way, but across the board, in keeping with the path FERC set out in June with its National Action Plan on Demand Response, which will be coalition-driven.
But the question of an across-the-board compensation structure for delivering negawatts, well, that may be a more tangled problem than first imagined by FERC. It's a critical issue, and there are numerous opinions about the right way in which to handle it.
Some feel full Locational Marginal Price payment is the way to go, while others feel it's inappropriate. And that's just the tip of the iceberg. On August 6, FERC issued a Supplemental NOPR, looking for specific comment on two issues addressed by those who responded to the first NOPR, back in March.
"If the Commission were to adopt a net benefits test for determining when to compensate demand response providers, what, if any, requirements should apply to the methods for determining net benefits; and what, if any, requirements should apply to how the costs of demand response are allocated?" it asked.
Both questions are on the agenda for the FERC Technical Conference on the issue set for Sept. 13. With 11 panelists on the agenda to discuss the net benefits test, and another 10 to discuss cost allocation, it's going to be a particularly full day.
Because this issue is so central, and so critical, to shaping load and encouraging demand response across the country, we'd like to discuss it here, as well, in advance of the Sept. 13 conference.
What do you feel is the best and fairest way for FERC to address the demand response compensation issue, and why?
Kate Rowland
Editor-in-chief
Intelligent Utility magazine
krowland@energycentral.com
720.331.3555
Twitter: @katerowland2
Comments
Re: What a Negawatt is Worth
Thanks for sharing the analytics, Tom. That's a pretty straightforward analysis, and I appreciate the way in which you spelled it out for us.
I've received some e-mails this morning, as well. One interesting thought proposed: if price were tied to demand (i.e., if demand goes up, then price goes up), the equation would be quite simple. It is (and please pardon my simplification here, as the e-mail I received went into a much more lucid detail) a matter of needing to change our culture, just as we did with recycling.
Kate
What's a Negawatt Worth
A negawatt's value to the grid is calculable. To keep numbers meaningful, look at avoiding one megawatt of consumption, or conversely, adding one megawatt of local generation capacity. This reduction of one megawatt of demand to be met by central generation is, on average, worth about $331,000 per year to the grid, based on DOE reported costs and line losses. Here is the arithmetic:
Adding the three grid savings categories, we find that a megawatt reduction of local load will save the grid $331,000 per year.
Assuming an 85% load factor on the reduced MW of local load, it will account for 7446 MWh of power per year. Dividing the annual grid saving by the power yields the following grid savings per MWh
What is left is the cost of producing the power centrally. Although the instantaneous impact of reducing load, or generating load locally, is to reduce generation from the marginal central generation unit, with an average cost of $45 to $65/MWh, the longer term impact is to avoid building new central generation, which will have a cost at the generator, prior to grid costs, of $80 to $130 for conventional gas, nuclear or coal, and as much as $170 to $260 for off shore wind.
At the lowest cost of new generation of $80/MWh, plus $44/MWh of grid savings, an avoided MWh, either from demand reduction or from local generation, appears to be worth $124 or 12.4 cents per KWh
The FERC language does not spell out how a regulatory agency should calculate the above items, and most calculations ignore some of the savings. This depresses the price offered for load reduction and/or local generation and thus fails to optimize system costs.
Anyone wanting more detail can send a request to khampton@recycled-energy.com and we will forward the analytical program.
Tom Casten
Chair, Recycled Energy Development