There’s been a lot of talk lately about utilities activating demand-side management to address capacity needs and the intermittency of renewable power supplies.
I’m a believer in that approach: the beauty of the smart grid is that it enables a dynamic market where energy suppliers and users have real-time access to price and availability information and can make decisions accordingly, ultimately resulting in a balance of supply and demand on the grid. This is how well-functioning markets work. But utilities are unlikely to achieve their demand-side goals if they don’t deal with a glaring failure in the current market: lack of pricing transparency.
The issue crystallized for me during a recent visit with one of our best customers, one with deep insight into energy, energy efficiency and managing loads to minimize costs and maximize throughput. The plant managers are aggressively using technology to take advantage of multiple strategies and incentives available to them -- demand control, traditional demand response and synchronous reserves -- and we are working with them to enable their future participation in frequency regulation. In sum, this is a much more sophisticated organization than the average industrial or commercial customer, and it seemed the least likely to suffer an expensive energy-cost blind side.
Yet that’s what happened. This business saw a 300 percent spike in its energy bill for January 2014, during the polar vortex. It’s not alone in this situation, of course, and the big-picture fallout and lessons from that event are just beginning to be assessed. But this is an energy user that was willing and able to curtail or shift its usage to avoid a spike like that -- if only it had received the necessary information.
What troubled our customer is that during the polar vortex, utilities reduced capacity on the grid to perform regular maintenance precisely as the cold reached its extreme. The utilities did not alter their maintenance plans to take into account the certain increase in demand from the cold snap. As a result, the day-ahead pricing feed didn’t match the much higher clearing price (what customers in this deregulated market actually end up paying). And there was no direct notification of this highly anomalous situation. Our customer was perplexed by how this could happen -- both the failure of common sense and the lack of notice to major energy users. How do you run a business when one of your largest costs is determined in an opaque manner after you’ve used the resource?
Frankly, we’re perplexed too. There’s no need for the ultimate (or potential) cost of energy to be a black box, and it’s not reasonable to expect businesses to constantly monitor a utility’s website for changes. Real-time pricing is the ultimate balancing mechanism, but utilities have had a hard time getting industrial customers to adopt it. Where the utility gives them no choice, many customers flee to fixed-rate contracts from energy retailers. That’s because the utilities are asking customers to bear all the risk without giving them all the information they need to make intelligent decisions. To get customers to play, utilities are going to need to make energy costs understandable and predictable -- at least at the reliability level of weather forecasts.
Yes, there are ways for customers to hedge the risk, but those methods end up imposing other potentially large costs and requiring companies to develop significant in-house energy expertise that has nothing to do with their core business. In the example above, our customer had just let go of an “insurance” block of fixed-rate energy because it had never proved to be worth the price (unfortunate timing, obviously) and hadn’t yet activated the automation system’s dynamic pricing management capability. Again, this is a sophisticated customer -- most aren’t willing (or able) to do nearly this much.
Why not just have transparency around costs instead? Providing information proactively allows customers to plan for and react to pricing changes that result from taking supply off the grid or from unusual events. And it’s essential for the smart grid in order to realize its market-regulating potential.
The grid will be much smarter if ISOs and utilities start to see themselves as part of the supply chain and make it easier for their customers to plan for fluctuations in their operating costs.
Kevin Klustner is CEO of Powerit, a maker of advanced demand management software for industrial facilities and other energy-intensive businesses.