To explain what Demand Response means to energy market participants, we’ll use an example of a commercial office building. This building, in a typical peak period, uses 500 kilowatt-hours (kWh) of electricity. This same building can reduce or shift its usage by 50 kWh during those peak periods (curtailment). Therefore, the net energy usage is reduced in that period to 450 kWh.
Simple, right? The building doesn’t pay for 50 kWh of energy and electricity generators don’t have to provide it. Spot wholesale electricity prices (the default wholesale price that the utilities pay for energy) are reduced during the period as a result.
The energy markets recognized that a kWh of energy saved is equivalent to a kWh of energy generated. Through the various Demand Response programs administered by regional Independent System Operators, energy market participants are paid for their participation in the demand response programs. Many Demand Response programs offer an incentive to large users by paying them the spot wholesale electricity price for demand reductions.
How does it work?
Let’s assume the building pays a retail price of $0.10/kWh and during this particular peak period, the spot wholesale price is $0.15/kWh:
| Baseline energy usage | 500 kWh | * | $0.10/kWh | = | $50 | |
| Energy that can be curtailed during peak periods | - | 50 kWh | * | $0.10/kWh | = | $5 |
| Net energy usage by building | 450 kWh | * | $0.10/kWh | = | $45 | |
| Energy available for use by other energy market participants | 50 kWh | * | $0.15/kWh | = | $7.50 |
As a result, during this period of curtailment, the building reduces its energy costs by $5 (10%) through the shifting of energy usage. In addition the building receives a portion of the $7.50 from the Demand Response program. This amount is paid separately through EnergyConnect rather than as a bill credit.
In some cases you will receive $2.50 from the Demand Response program (the incremental wholesale cost savings is passed directly to you). In other cases, you will receive an incentive which captures the full $7.50. The incentive is justified by the fact that participants working together reduce the wholesale costs for everyone in the market. Consequently, the broad market benefits are much larger than the individual payment before the incentive.
In short, Demand Response programs provide energy market participants with the ability to actively manage their energy operations in response to dynamic wholesale energy market prices.