Transcript Corporate Business Model

Demand Response:
New Offers and
Customer Acceptance
Prepared for the:
Peak Load Management Alliance (PLMA)
Annapolis, MD
By:
Daniel M. Violette, Ph.D.
Summit Blue Consulting
Boulder, Colorado
Phone: 720-564-1130
[email protected]
October 7, 2002
Background
•
Recent Experience draws from two white papers coauthored for the Peak Load Management Alliance
(www.peaklma.com).
– “Demand Response: Principles for Regulatory Guidance,”
February. 2002
– “Demand Response: Design Principles for Creating Customer and
Market Value,” October, 2002
•
Recent work for utilities on demand bidding, DR valuation
in wholesale markets, benefit-cost tests for DR, program
design for ISOs.
1
Demand Response Defined
Three Components:
1. Load response called for by others -- includes direct load
control, partial or curtailable load reductions, load
interruptions.
2. Price response -- includes real time pricing, dynamic
pricing, fixed time-differentiated rates (e.g., time-of-use
rates), and demand bidding at different prices.
3. Distributed generation -- includes backup generation and
“net” on-site generation.
All three represent some form of “price response”.
2
What’s Up in Retail Markets
•
Regulators who are working on existing market design and
planning post-transition market design are keenly aware of
demand response.
– Several states are initiating pilots to address time-differentiated
pricing (New York, Massachusetts, California, Pennsylvania)
– Others are following (e.g., New England Demand Response
Initiative).
– NARUC meeting agendas show high regulator interest.
– FERC designated ISO NE as a test bed for DR offers.
•
Customers are actively being brought into the discussions
– Increases awareness and helps put energy on customers’ agenda
– Develops better understanding of what they can bring to the table
with demand response and pricing options.
3
Key Trends
•
The value of demand response offers (pricing and load) is
becoming more widely recognized
– As a risk management tool (past planning tools understated value)
– As a supplier of reliability and operational services to grid operators.
•
Projections of modest wholesale electric prices for the next
few years has interesting effects:
– Creates more headroom for retailers in markets open to retail choice.
– Returns the willingness of regulators to experiment with pricing and
demand response offers.
– Still, risk remains from unexpected events such as forced outages,
and transmission bottlenecks.
4
Benefits of Demand Response
•
Creates opportunities for risk management
•
Enhances Market Efficiency
•
Price reduction at the margin
•
Enhances system reliability
•
Potential environmental improvements
•
Customer service and choice
•
Market power mitigation
5
Key Factors
•
Demand response is important to the continued
development of wholesale and retail markets.
– Competitive markets are based on the interaction of supply and
demand in response to price signals.
– However, the history is one of cost-based administered pricing in
retail markets with average rates that ignore the fact that costs vary
across hours, months and seasons.
•
So, what are markets about?
1. Markets should be designed to to allocate resources efficiently.
2. This is done through price signals.
3. A promise of innovation and improved productivity -- this was a
promise made by regulators as part of restructuring activities.
6
Bottom Line for Markets
•
If we don’t “price what’s scarce” (e.g., peak-period
commodity), how do we incent innovation and enhance
productivity.
•
If we don’t price what’s scarce, how do we improve load
factors in one of the country’s most capital-intensive
industries.
•
Issues:
– Uncertainties from restructuring and bifurcation of incentives have
discouraged investment in infrastructure to support demand response.
– While wholesale competition has been encouraged, it can be argued
that price elasticity and demand response capabilities have actually
decreased in recent years.
– This creates a disconnect between wholesale and retail markets.
7
Key Factors
•
Opportunities for generators have increased with open access and
market based rates -- this needs to be balanced with market
incentives and access for demand response resources.
•
Market designs need to provide support for this balance between
supply-side and demand-response resources.
•
This is a long term proposition -- markets that incorporate economic
demand response capability will promote efficient resource
investments over time.
•
The appropriate transition path to markets with economic demand
response may be uncertain and open to debate; but markets are
going to change.
•
Where are the points of leverage and how will the retail business be
affected?
8
RTO and ISO Issues
•
A liquidity point is needed for DR, i.e., customers able to
respond to price need to benefit from taking these actions.
– RTOs and ISOs can provide price signals and settlements
•
ONE VIEW: Any market in which generation competes
should be open to DR resources including:
– Energy resource markets (day-ahead, hour-ahead, and real time)
– Ancillary services markets (as appropriate)
– Replacement reserves
– Emergency demand response
– Capacity markets
•
In these markets, demand response resources should be
treated on an equal footing with generation.
9
What is the Impact on Your
Business?
•
Do you believe that the retail industry is facing change?
– Think about the regulatory initiatives going on across the country.
– Think about the FERC SMD NOPR and White Paper:
“Demand response is essential in competitive markets to assure
the efficient interaction of supply and demand.”
“Demand response options should be available so that end users
can respond to price signals.”
•
What are the implications of this attention to demand
response?
•
Are customers willing to discuss innovative pricing for
electricity?
10
Distribution Company
•
Distribution companies are likely to continue to have a major
supply responsibility.
– Regulatory rules on rates (pricing) and cost recovery will be
critical.
– Factors that impact the financials of LSEs may also impact the
distribution company, specifically the role of risk management.
– In states with retail choice, what happens after the transition
period?
•
Up till now, demand response has not been on the regulator’s
agenda -- Does that matter for the future?
11
Key Regulatory Issues
•
Who benefits from and pays for demand response:
– If a customer is served by an unregulated energy services
provider?
– If a distribution company acts as a standard offer provider or
provider of last resort?
– If DR is provided by a specialist curtailment services
provider (CSP)?
•
Regulators need to develop rules that keep distribution
companies from taking on additional risks without equal
opportunity for reward.
12
Market Challenges
•
How should DISCOs be expected to manage the
large fixed-price MWh obligations as markets
continue to transition?
•
How to align retail offerings with products from
wholesale markets?
•
What types of regulatory and market rules will allow
for, and even encourage, the development of tools to
address these issues?
13
Key Trends
•
Three trends can be expected as retail markets
expand:
1. Increased recognition of the value of flexibility across both price
and quantity dimensions (regulators and retailers).
2. A drive to develop innovative price and related demand
response offerings that meet strategic and financial objectives.
3. There will be a re-integration of retail and wholesale activities.
• Physical hedges will complement financial hedges
• A portfolio play that manages risk will be needed to maintain
margins
14
Pricing Options
•
Innovation in pricing is already occurring:
– quantity limits
– two-tiered fixed/spot contracts
– variable TOU rates where the peak and off-peak periods are
tailored to or defined by the customer
– hour-ahead and day-ahead quantity adjustments in
contracts and demands
– bidding contracted quantities back into supply by customers
– standby and buy-through contracts
– retailer serving as a broker for portions of customer load on
peak days
– Customer load control through on-site or proximate
generation options
15
Success Factors
•
Don’t follow. Instead, seek to create new markets
with appropriately priced product offerings:
– Develop sales tools and techniques that engage customers
in the process of procuring energy.
– Sales discipline -- negotiating specific pricing schemes
requires setting limits and creating enabling sales tools.
– Analytics are developed to value the negotiated offer:
• A contract confers future rights to buyers which can be
represented by a strip of options.
• Setting prices that appropriately reflect the value of
these options to the seller and buyer is a challenge.
– Can this be done by DISCOs in a tariff environment?
16
Appropriate Regulatory and
Market Rules
•
Many distribution companies will continue to be in the supply business.
– Regulators need to set incentives that encourage economic demand
response.
– DISCOs may already have sizeable incentives to seek out demand
response that are not fully recognized.
– DISCO benefits depend on nature of the contracts for default, standardoffer or basic service obligations.
• Is there a regulatory hedge against price volatility, i.e., fuel-clause
pass through?
• Are there inadvertent penalties for load reductions?
• What happens after the transition period?
– Outsourcing standard-offer/default service may alleviate some concerns.
17
Conclusion
•
Customer differentiation matters.
– Different product and pricing options can be marketed.
– Attain what ever flexibility is available.
– Identify opportunities by engaging customers in the sales process.
•
Risk management is a necessary and a critical success factor.
•
Demand response can be one of the most cost-effective methods of
managing risk, and providing operational reserves.
•
Customers will become increasingly sophisticated.
•
Time-differentiated pricing will increase the market for energy services
by rewarding technology that manages energy use.
•
A period of modest wholesale electric prices may promote
experimentation by regulators.
18