Transcript Besser Roundtable Presentation (3/23/01)

Electricity Industry
Building a Sustainable Demand
Response in New England: The
Theory and Policy Framework
for the Massachusetts Electric Restructuring
Roundtable
Janet Gail Besser, Vice President, Lexecon
Boston, MA
March 24, 2001
TODAY’S “HOT” ISSUES
• Reliability
• Electricity Prices
• Competition
2
SEARCHING FOR SOLUTIONS
• Additional Capacity
• Price Regulation
• Monitoring and Mitigating Market Power
• Load Response
3
THE VALUE OF LOAD RESPONSE
• Enhances reliability by providing equivalent of
additional megawatts
– at peak times
– all the time
•
Moderates electricity prices
– Reduces costs for responding load
– “System benefits”
• Provides the demand response needed to
equilibrate the supply/demand balance
4
LOAD RESPONSE AND PRICE
• The need for efficient price signals
• The value of price-responsive load
• Connecting wholesale and retail markets
5
WHY EFFICIENT PRICE SIGNALS?
• To protect system reliability, by properly reflecting
its value
• To induce efficient levels of investment in new
capacity
• To equip customers with accurate information so
they can choose whether to consume or to limit
demand
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IMPORTANCE OF PRICE SIGNALS
•
Customers who see only average or capped prices have no
incentive to reduce demand when electricity prices are high.
•
Customers who can see spot prices have an incentive to
provide demand side response (i.e., bids that give the amount of
electricity to be purchased as a function of the price of
electricity).
•
With demand side bidding, demand function for electricity
becomes downward sloping (elasticity increases). As price
increases, the quantity demanded declines.
•
The more elastic the demand curve, the less volatile electricity
prices will be.
7
WHO NEEDS TO SEE SPOT PRICES?
• Some customers are very inflexible
–
–
–
–
less capability to reduce load
transaction costs (metering, real time communications)
time constrained usage
budget effects (cash flow and total budget level)
• Others have more flexibility
– productions processes that can be cancelled or
rescheduled on short notice
– back-up generation
• Most efficient alternative: give customers choice
whether to see spot prices
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LOAD RESPONSE CAN LIMIT PRICES
• Load response limits prices by
– creating demand-side sources of capacity
– reducing scarcity
• Voluntary load reduction will
– be compensated (I.e., receive payment or pay lower rate)
– free up capacity at price level less than “value of lost load”
• Efficient price signals in spot markets are needed
– to stimulate investment in demand-side capabilities
– to signal customers who may choose not to consume
9
PRICE EFFECT OF LOAD RESPONSE
Simulated Price Spike Scenarios: An Example
Real Time
Price Market
Share
0%
5%
10%
15%
20%
Price Elasticity of Demand
0
0.1
0.2
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$6,189
$4,141
$2,945
$2,199
$10,000
$4,765
$2,656
$1,667
$1,146
0.3
0.7
$10,000 $10,000
$4,063 $3,182
$2,021 $1,253
$1,180
$620
$776
$373
Source: Caves et al. Mitigating Price Spikes in Wholesale Markets. The Electricity Journal, April 2000.
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PRICE EFFECT OF LOAD RESPONSE
What Does This Market Simulation Tell Us?
•
A mere 5% market share with a 0.1 elasticity of demand
facing spot prices would have reduced $10,000 prices
spike by almost 40%.
•
It is not even necessary that 5% of industry load be
purchased at spot prices
•
Only need customers representing 5% of load to perceive
marginal prices that are close to the wholesale spot price
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TOOLS TO ENHANCE LOAD RESPONSE
•
•
•
•
Advanced metering
Load management technologies
Flexible end-use technologies
Energy efficiency measures and technologies
Technologies will become more widespread as
opportunities for customer to see spot prices
increase
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CONCLUSION
Load response is needed
• To enhance reliability
• To moderate prices
• To fill in the missing piece of the supply/demand
equation
BUT…
• Load response is inhibited by reluctance to let
customers see spot prices
13