Last year, we covered how California utility regulators and grid operators are rewriting the rules for demand response -- the practice of reducing energy use in homes and businesses to meet grid needs.
Now we’re seeing the first fruits of these efforts emerge, including two proposals that would radically change the way demand response works in the state.
The first proposal would create new opportunities for “direct participation” by third-party vendors that so far have been barred from these grid markets. While it’s only a first step, it’s part of a long-range plan that could open up much bigger markets for companies that can “bundle” lots of customers into blocks of grid-worthy demand response.
The second one would create a new Demand Response Auction Mechanism (DRAM) -- a program that would allow demand response providers to get paid today for energy reduction they promise to deliver in the coming year. That’s similar to, if not exactly like, the capacity auctions that have opened up demand response markets in other parts of the country.
Direct participation: Using smart meters and utility platforms to expand demand response
Let’s start with the first big change to California’s approach to demand response. Last month, the California Public Utilities Commission (CPUC) issued a proposed decision (PDF) that sets the first-ever budgets and targets for how the state’s big three investor-owned utilities will bring customers into these direct participation programs.
In simple terms, the proposal would allow Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric to recover costs for the technology platforms and business processes that could make direct participation in demand response possible. (Note: the CPUC clarified the “unknown IT costs” for SDG&E in the above chart by setting those costs at $1.5 million in its proposed decision.)
But the proposal also leaves it up to the would-be third-party players in these markets to bring customers on board. That’s according to Beth Reid, CEO of Olivine, the San Ramon, Calif.-based company that serves as the “scheduling coordinator” to manage the interaction of these third-party resources with the programs run by the state’s grid operator, California ISO.
“The wholesale markets for demand response technically have existed for awhile,” she said. But “bundled customers have not been able to be bid into the wholesale markets. That’s what Rule 24 and Rule 32 allows,” and what the CPUC’s proposed decisions would set up in its initial stage.
Olivine has played a role in previous pilot projects to test the ability for third parties to play in these programs, such as PG&E’s Intermittent Renewable Management Pilot Phase 2 (IRM2). That program has allowed aggregators of distributed energy assets, like Stem’s fleet of behind-the-meter batteries, to meet day-ahead demand response obligations and get paid as a result, as long as they can bring at least 100 kilowatts of bundled energy-reduction capacity to bear.
But the CPUC’s new proposal is asking utilities to also enable faster-acting demand response, which comes with more lucrative rewards for participants. Critically, it’s also asking utilities to provide the data to settle these transactions from the millions of smart meters they’ve installed at their customers' homes and businesses, rather than from specialized meters used for today’s demand response programs.
That should allow for a much broader group of participants, since it could take away the costs of installing specialized meters and handling the complex transaction management process with CAISO. The first test of this concept will come in August, with the launch of PG&E’s “Supply Side Pilot” or SSP, which will allow residential customers to join commercial and industrial customers in earning market rewards for timely demand reduction.
Leveling the playing field for aggregated, energy-enabled customers
Mission:data, an industry group that advocates for more open access to energy data, sees a lot of potential in this opening up of the market, according to Michael Murray, the group’s president and co-founder of Lucid.
“It’s huge, because Nest or anyone that has a cool thermostat, or some kind of curtailment mechanism, should be able to bid that directly into the market as a resource,” he said. “The utilities in California want all the demand response to go through them. So it’s kind of a multi-front battle, wresting some control out of their hands.” It's likely that Mission:data members, including energy management and distributed energy players like SolarCity, PlotWatt, Alarm.com, Bidgely, EcoFactor, Lucid and iControl, will see opportunities in that battle.
That’s also the opportunity being targeted by Ohmconnect, the San Francisco-based startup that’s aggregated several thousand households in PG&E territory into its energy efficiency and demand management platform. “There are relatively few parties that have the capabilities to provide residential demand response at the levels required by the Supply Side Pilot, and Ohmconnect will be one of them,” Matthew Duesterberg, CEO and co-founder, said.
Another PG&E program to launch this year, the Excess Supply Pilot (XSP), is aiming at a capability that doesn’t fall under the traditional definition of demand response at all, Olivine's Reid noted. “In that situation, demand response resources are also paid to consume, not just to curtail,” she said, to allow payment for end users who can absorb excess solar and wind energy, not just turn down energy to reduce peak loads.
As with so many parts of California’s push toward new demand response models, much remains to be settled, Reid said. For instance, CAISO has to create the application programming interfaces (APIs) to allow utilities to integrate their IT platforms into CAISO’s platforms.
Beyond these sorts of technical issues, there’s also the question of whether there will be enough third-party participants to make the market worth the costs of setting it up. Reid noted that Olivine now has more companies seeking to participate in the SSP and XSP programs that are allowed under the program caps, indicating that there are plenty of interested parties. But whether they can reliably and cost-effectively deliver the demand response they’re promising is another matter.
Even so, Duesterberg sees the CPUC’s push for an integrated, cost-effective way for new players to get involved in demand response as a big opportunity to test the proposition. In early 2016, when the CPUC’s proposal is asking all three utilities to have their direct participation capabilities up and running, “we are hoping to be part of that as well,” he said.
“All of the sudden, there are new products available that can be sold by third parties, and are no longer controlled by a single utility or a single entity. The CPUC is introducing competition in a way that’s never been done before.”
DRAM: Finding the clearing price for effective, mass-market demand response
The second major change on our list is the Demand Response Auction Mechanism, or DRAM. In a December 2014 decision (PDF), the CPUC recommended that the state’s big three utilities move forward with a pilot auction for doing something they’ve traditionally accomplished through bilateral contracts: securing the demand-side resources they need to meet their resource adequacy (RA) requirements for times of peak power demand.
The DRAM, by contrast, would set up an open bidding process, where the prices to deploy and deliver future demand response capability will be clear to all participants. That’s how large-scale capacity auctions run by mid-Atlantic grid operator PJM have supported the growth of what’s become the country’s biggest demand response market -- and California regulators have pointed to PJM as an example of how they’d like to see the state expand its still-small portfolio of demand-side resources.
Of course, there are important differences between PJM’s process and what the DRAM is proposing to do, Reid noted. The first DRAM auction, set for late 2015, will seek demand response to meet traditional, system-wide resource adequacy needs in 2016, but will see utilities make payments to winning companies, though CAISO will still hold those companies to account if they can’t perform what they promised.
The second auction in 2016, however, will likely ask participants to also provide “flexible capacity,” Reid said. That’s a term for demand response that can be used to handle the peaks and troughs in grid supply that will come with increasing amounts of solar energy on the state’s grid. CAISO is working on new ways to bring flexible capacity on-line to deal with the “duck curve” problem, when solar power feeds into the grid and reduces overall demand to lows at midday, then falls off in late afternoon and early evening, causing steep ramps in grid energy demand.
Despite these differences, the key benefit of an auction model should be to “create a viable demand response market in California that also supports ratepayers' objectives,” Reid noted. “You’re not overpaying, but you’re also paying enough so that there is a viable market so we can use these clean energy resources legitimately and on an everyday basis.”
That’s certainly a target market for EnerNOC, Comverge and Johnson Controls, the three demand response companies that have been pushing for opening the DRAM to broader participation in CPUC filings. Reid said that the DRAM is targeting 22 megawatts of participating resources, which is not a huge amount compared to the gigawatts' worth of demand response being procured in PJM.
But unlike the direct participation pilots, the DRAM doesn’t have a cap, she said -- and how much participants end up bringing to the table could have a big impact on whether or not the CPUC decides to move a majority of the state’s demand response programs to this new model in years to come.