Report Release: The Economics of Demand Flexibility
Electric utilities typically focus on supply-side solutions to meet peak demand, balance electric loads, and meet customer needs. Demand profiles are assumed to be static, and the grid must be built to meet that load profile. This approach to building a grid is expensive. The grid will need an estimated $1.5 trillion in investment between now and 2030, largely to meet forecasts for ongoing generation, transmission, and distribution needs. That translates to $50–80 billion dollars every year.
But a much cheaper approach is to make not just supply but also demand highly flexible and responsive to price signals. In a new report released today, The Economics of Demand Flexibility, we show how simple, Internet-connected technologies like smart thermostats to control AC, dryer timers, grid-interactive water heaters, and smart EV charging can drive out 10–20% of those anticipated grid investments, while simultaneously saving customers 10–40% on their electricity bills.
This approach, termed demand flexibility (DF), relies on more-granular electricity rates such as time-varying pricing and residential demand charges that exist today as opt-in choices for 65 million customers, and simple technologies—costing only a few hundred dollars—that can help customers automatically respond to these price signals.
The enormous potential of “flexiwatts”
Just as a “negawatt” refers to power not used, “flexiwatts” can be thought of as power demand that is shifted in time across the hours of a day and night to reduce costs. And just as demand-side negawatts are much cheaper than supply-side watts of generation to meet electricity, we show that flexiwatts are a much cheaper way to meet capacity needs than supply-side solutions.
In our recently released report, we quantify the value of flexiwatts for both the grid and for individual customers, by examining its potential to 1) reduce peak demand, 2) shift load to lower-price times, and 3) help integrate renewable energy (e.g., customer-sited solar PV) onto the grid.
Deployed at scale, DF in the residential sector alone can reduce grid costs by $13 billion per year.
By controlling the timing of just two common residential appliances (air conditioners and electric water heaters), U.S. peak demand can be reduced by 8 percent, reducing required infrastructure investment costs by 10–15 percent through 2030.
Demand flexibility offers customers net bill savings of 10–40 percent under rate structures available today.
We examined one proposed and three actual residential rates offered by four utilities across the United States, and analyzed the potential of DF to reduce customer bills in each scenario. Across the four utility markets we analyze, this represents over $800 million in potential customer bill savings each year.
- Real-time pricing:
In ComEd service territory in Illinois, under the opt-in real-time pricing tariff, DF can shift 20 percent of residential customer load to lower-cost hours. This reduces customer bills, net of the cost of investing in DF technology, by 12 percent, or $250 each year per customer. These savings can support a $900 million investment opportunity for DER developers to provide customers with DF technology bundles, and reduce the utility’s peak demand by over 900 MW.
- Residential demand charges:
In Salt River Project service territory in Arizona, under the demand charge tariff required for new PV customers, DF can reduce customer peak demand by nearly 50 percent each month. This reduces net customer bills by 41 percent, or $1,100 each year per customer. These savings can support a $100 million investment opportunity for DF, as well as unlocking a $6 billion PV market in SRP territory.
- Rooftop solar with no export compensation:
The Hawaiian Electric Company has proposed a “self supply” tariff for homes with PV systems that would prohibit export, or not compensate the customer for any exported PV. DF can shift load to occur during times of PV production, increasing the amount of PV energy that is consumed on-site from 53 percent without DF to 89 percent with DF. Depending on the final rate design, customers could save up to $1,600 per year, or 33 percent of total bills.
- Avoided cost compensation for exported PV:
Alabama Power Company offers PV customers reduced export compensation at avoided cost, which is far less than under a net metering scenario. For a small solar PV system, DF can increase on-site consumption of PV energy from 64 percent to 93 percent, essentially turning PV into a behind-the-meter resource and reducing customer net bills by $210 per year, or 11 percent. Over the next 5–10 years, this can unlock a $10 billion residential PV market in Alabama.
Under unfavorable rate structures, DF may accelerate “load defection” and reduce utility revenue.
Utilities should see DF as a golden opportunity to engage customers and reduce system costs. However, if rate structures evolve unfavorably (higher fixed charges, technology-specific “penalties,” reduces compensation for services provided), DF may instead allow customers to meet an increasing portion of their load through rooftop PV; in the Northeast region alone, DF could expand the PV market by 60 percent through 2030 and enable load defection equivalent to nearly 40 percent of residential sales if net metering is reduced or eliminated.
Implications and opportunities
Demand flexibility presents a huge opportunity for system cost reductions and customer engagement. The market is large: there are roughly 65 million residential customers in the U.S. with access to opt-in rates from their local utility that support the value of DF. All stakeholders face both opportunities and challenges in unlocking this market:
- DER developers and third-party innovators: The DF capabilities we analyze in our report can unlock a range of business models that empower customers to reduce their utility bills. In pursuing these opportunities, innovators should take advantage of opportunities that exist today (like the scenarios outlined in our analysis), while keeping in mind that scaling DF business models will likely require 1) offering customers more than just bill savings, 2) ensuring standardization and security in DF-enabled loads and communication platforms, and 3) utility partnerships to monetize DF benefits in front of the meter.
- Utilities: Utilities are in a unique position to capture the benefits of DF by offering and promoting granular rates that allow customer bill savings while encouraging system cost reductions. Utilities should view DF as a golden opportunity for cost reduction, and design rates and programs to capture it, while avoiding rate components (like fixed charges, PV-specific fees, or limited export compensation) that skew incentives for cost reduction.
- Regulators: State regulators can take an active role in promoting DF as a least-cost alternative to many grid investment needs. Regulators can require utilities to promote customer choice by offering a variety of rates suited to customers’ preferences and capabilities, and spur innovation by encouraging partnerships and pilot programs that highlight DF value.
Customers are realizing vastly increasing choices in how and when they purchase and consume electricity. Customers can buy electricity from the grid, generate it themselves with distributed generation, avoid it with efficiency, or now shift it with demand flexibility. These new choices give customers more power (pun intended), giving them the opportunity to manage costs more effectively, contribute to a lower-cost and more-resilient grid, or defect from the grid entirely if they choose.
In the context of the U.S. electricity system’s evolution, DF represents a huge, cost-effective resource option for customers, utilities, and third-party innovators alike to reduce costs and create value. Harnessing DF at scale can accelerate the electricity system along the path towards an “integrated grid,” in which customers are engaged and incentivized to reduce both their own bills as well as system costs, and utilities effectively use all available resources to provide clean, reliable, and low-cost electricity.
Download The Economics of Demand Flexibility
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