National Demand Response Action Plan Message to Customers: You Win!

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The Energy Independence and Security Act of 2007 (EISA) required US DOE and FERC to prepare a National Action Plan on Demand Response and tell Congress what it would take and by whom to achieve the potential of demand response.  On July 11, 2011 the agencies delivered their report.  The report was more a retrospective rather than a prescription.  It recited all the work done by Federal agencies and laboratories in research on the potential for energy efficiency and demand response.

The Process of Achieving Demand Response is Agonizing

The US DOE report to Congress was an admission that the government has run out of money to spend on new stimulus programs including smart grid and demand response.  It is telling the industry: You are on your own, folks!  Equally important is the de facto admission that the utility failure to get active customer engagement as evidenced by low rates of participation in energy efficiency and demand response programs as well as customer push-back on smart meter deployment especially here in California is frustrating government efforts to advanced its policies more quickly.

The National Action Plan recites the benefits and potential of demand response and energy potential.  it it also recites the agonizing detail of communication, collaboration, cooperation and confusion among the Federal agencies, state regulators, utilities, stakeholders and the smart grid-related technology vendors trying to sort out the new order of things emerging in our smart-grid enabled future.

But Demand Response Potential is Great

The list of studies of the potential for using energy efficiency and demand response to optimize our energy performance is growing and shows consistent opportunity for business and customer savings:

  • 2006. Carnegie Mellon did two studies looking at demand response and dynamic pricing in PJM finding that a 1% shift in peak demand producing 3.9% savings.  A 10% reduction in peak demand could produce $8-28 billion in overall energy cost savings.
  • 2007. The Brattle Group study suggested that a 5% decrease in Us peak demand would produce annual energy operating cost savings of $3 billion and avoided cost savings of $35 billion over twenty years by displacing the need for 625 peaking plants.
  • 2010.  Pike Research reports that DR revenues are expected to grow at a 17% compound annual growth rate (CAGR) from 2010 to 2020, resulting in an annual market of more than $8 billion by 2020.

The US government has spent more than $ 4 billion on smart grid related investments from stimulus money to quicken the pace of smart meter deployment and thus create a stronger market for demand response and energy efficiency.  As the National Action Plan recites the substantial work being done and that needs still to be done to coordinate the policies, regulations, ratemaking decisions and actions by states, and regional transmission organizations the good news turns sobering for the industry.

There is no more money to subsidize demand response or smart grid—good luck, but you are on your own.

This isn’t a surprise to anyone who reads the press reports about slow economic growth, deficits and the bickering between Congress and the President over what to do next.  Now the energy industry and its technology partners must figure out how to make things work.

What’s Next?

Rationalizing Products into Solutions.  Every start-up friendly market niche sees new entrants arrive with great ideas producing new products and services, demand response and its smart grid cousin is no exception.  But good products by themselves are rarely sufficient to make complete solutions, so the process of rationalizing and putting them together is underway as bigger players buy up smaller ones. Smart meter deployment enables demand response programs but it will take dynamic pricing, better customer engagement and better marketing of programs to turn this national action plan into action.

Trial and Error of Assessing What Customers Want. The decision by Google to scrap PowerMeter and Microsoft to shelve HOLM are examples of the trial and error process underway to get customers to engage.  So far the response from customers has been ‘show me the money’ as the hassles of gadgets, dashboards and solutions are not worth the savings they produce especially in an average rate regulatory environment. Utilities still control the gateway to customers but utilities have proven poor performers in educating customers or creating solutions that have lasting impact.  We’re still waiting for fresh ideas to make demand response and energy efficiency worth the hassle.

Customer Resistance and Resentment will lead to Customer Aggregation.  The “light bulb war” when Congress mandates the end of the incandescent light bulb as wasteful even though it is cheap only to discover the unintended consequence that the CFL bulb that is the transitional replacement contains mercury that is ending up in landfills and the LED bulb they want us to buy costs 15X the cost of the incandescent bulb.  For customers this smacks of political correctness and the growing intrusion of politicians into our lives and lifestyles. We need time for the market not politicians to drive the transition and bring us products and services we want and will use.  The good news is new entrants will seek to aggregate disaffected customers offering better solutions and services as customer aggregation business models are used to produce scalable growth across regional grids.

Consolidation of Players for Smart Grid, Act II  We’re near a tipping point in smart meter deployment where there are enough smart meters installed to reach critical mass, but the incremental growth in smart meter deployment is slowing forcing companies to turn to other products and services for growth.  These smart meter companies are trying to figure out what Act II will be.  Some argue they should focus on distribution system automation, or energy storage or high voltaic power line construction and improvement in performance to reduce line losses.  Demand response and energy efficiency must compete with these other growth opportunities and they may not be the highest and best use of capital or resources at this next stage of the energy value chain transformation. Big fish will eat smaller fish in this Darwinian process of consolidation.  Products will get combined into more complete solutions and there will be a fierce competition for market share for growth among the giants left standing.

So what does this have to do with Demand Response and the US DOE National Action Plan?

Demand response and energy efficiency will likely play a prominent role in the transforming energy value chain but they are tools of customer aggregators (the new entrants seeking to displace utility control over the gateway to customers) that will use them to scale their market share, reduce the influence of utilities, and consolidate their gains with more complete solutions offering security, entertainment, convenience services in home are networks, home energy management, broadband and information services, entertainment and more as bundled solutions designed to fit our lives and lifestyles.  These will be the antithesis to the heavy handed, politically correct, regulation-driven approaches often favored today for energy efficiency, demand response and emissions reduction on the energy side.  The revenge of customers is likely to be better results across the board through market approaches than these command and control approaches.

The US DOE National Action Plan is an admission that it is losing the battle for control over the gateway to customers because disruptive technology and a lack of customer engagement and enthusiasm for its top down approach is giving the market forces time to consolidate, scale and offer customers a better deal.