The Business Value of Demand Flexibility
In this digital age, electricity is the lifeblood of our society. After any major disruptive event, the top priority is to restore electric power service. Without power we lack heat, air conditioning, communications, financial services, and access to the Internet, pretty much sending us back to the Stone Age.
But who can afford building more electric power capacity? There are over one billion kilowatts of installed power capacity in the U.S. At such a large scale, increasing capacity even by a few percentage points is very expensive. Experts have forecast the need for $1.4 trillion of investment through 2030 to meet growing demand and replace aging infrastructure in the U.S. alone.
Fortunately, in today’s Internet-connected world, we can take a lower-cost approach, similar to the method that telecom, cable, and Internet companies have been using for decades to manage peak demand on their networks. Instead of building redundant capacity for each user, these networks intelligently manage both demand and supply.
Now, it’s possible to apply the same logic to energy demands: software can help lower coincidental demand peaks for a business using the same proven “queuing” approach as other networked industries. And at scale across thousands of buildings, this building-level demand flexibility can help lower peak demand for the grid, saving all customers the cost of building new power plants.
Peak demand drives high costs for the grid and businesses
Although the grid rarely uses 100 percent of electric power capacity, power plants to provide that capacity must be in place when needed. Currently, the average capacity utilization of the American electric grid is only about 55 percent, and it’s getting worse as peak demand rises while total sales fall. This means that about half the time, on average, power plants are sitting idle.
What causes this? Many homes and businesses don’t use much energy all the time, but when a thermostat’s mercury spikes, demand soars. Analysis of the electricity bill data of several major retailers and telecom companies reveals a pervasive trait: just four percent of their total energy use drives about 40 percent of their total peak demand. In other words, a tiny amount of energy use, occurring at the peak hours and largely driven by air conditioning, requires a lot of capacity that isn’t needed during the other hours of the year.
Why does this happen? Many common loads, including typical air conditioners, motors, pumps, charging stations, heaters, and others, often happen to turn on at the same time, creating coincidental energy peaks. This increases costs for the utility, which must have available capacity to meet these peaks.
In order to address this phenomenon, utilities typically impose “demand charges” on commercial and industrial customers, meaning that the customer pays each month for the maximum power demand at their meter during any given interval. These charges, combined with the “peakiness” of typical commercial loads, mean that only four percent of a business’s energy use drives 40 percent of the monthly demand charges a business must pay. With typical demand charges of $5–15 per peak kW per month, this peak energy can drive additional costs on the order of thousands of dollars per building per year.
For business customers, demand charges can comprise up to 40 percent of their utility bills, and these costs are on the rise. For example, there have been dramatic demand-rate increases of over 50 percent in the past five years in the PG&E service area in California. As utilities around the country grapple with new rate designs to better reflect system costs, it is likely that managing demand charges will become even more important.
New opportunities to manage demand charges
Traditionally, limiting demand charges has not been an easy problem to solve, and most executives have treated electricity costs as a “must-pay” expense.
Fortunately, in today’s IT-driven world, it is increasingly easy for businesses to effectively manage growing peak energy demand costs. By unlocking the potential of demand flexibility, businesses can use software services to manage peak demand and achieve significant savings on their monthly bills at scale.
One approach to unlocking the value of demand flexibility is by queuing connected loads using low-cost computer systems. In other words, it’s possible to keep these loads from all turning on at the same time and creating very expensive and unnecessary coincidental energy peaks by simply using a software upgrade.
Consider how network companies (phone, internet, and cable) manage peak demand on their networks. Whenever you place a call on your cell phone, click the button to watch a digital video, or push the send button of your email, you do not connect immediately; rather, your request is placed into a queue, and the system defines the optimum time for connection while still meeting your needs for timely service.
The same logic works for electricity loads: software can help manage demand variations with small adjustments that can add up to shrink the peak. With these methods, energy delivery is usually delayed for only a matter of seconds. For loads like air conditioners, this is practically imperceptible; temperatures don’t rise appreciably in the time it takes for energy to be queued, but peak demand can be lowered dramatically.
Benefits for businesses and the grid
With falling computer costs and rising demand charges, lowering peak demand can pay off very quickly for a business—sometimes in less than a year. Lowering peak demand also creates value for the grid; RMI’s recent analysis found a potential for $13 billion per year in savings for the grid, from just a few smart appliances in each household in the country. The savings potential for commercial and industrial buildings is likely just as large.
Today’s $300 billion per year electricity industry leaves about half of its available capacity idle, increasing costs for all customers. Business-led demand flexibility approaches can save companies money while dramatically improving the utilization of our trillion-dollar grid, leading to savings for all of us.