Context
Change is the name of the game. Customers – industrial, commercial, and institutional energy users, whether regulated or deregulated – face a list of changes. kW registered demand (it is usually the maximum integrated in 15-minute intervals in each month) changes and potentially a lot. Watch this 5-min-video to learn more about DFE.
What happens with their electricity bills?
There are two kW demand billing formats – in both, the utility chooses the bigger one monthly. Usually applied to peak and off-peak. This is called by the market as “wire fees” and is the same for regulated and deregulated energy users.
- The fixed contracted demand that is compared to the registered (physical) demand, and
- The ratchet contract by which the registered demand is compared to a percentage of the maximum recorded demand of a number of previous months.
Both formats of demand contracting are very stiff from the client’s perspective, but It makes sense for the utilities because they need to amortize the investment made to connect the client to the grid.
Then…where is the challenge?
Given the change scenario and the kW billing format above described, in most cases energy users are registering a demand that is not the contracted demand … to the dot. In most cases, the differences are relevant.
If it is lower, then it is as if an “idle demand” is being paid for. If it is higher, there is a penalty whether on that specific month (fixed contract arrangement) or for many months to come - potentially – if it is the ratchet system.
Demand Flexibility Exchange - the Concept
The Demand Flexibility Exchange – is a service to be sponsored by the local electric utility company to its customers.
Customers in the opposite situation (those willing to increase their contracted demands and those willing to reduce them) trade their contracted demand differences in a “zero sum game” from the utility’s viewpoint. They can adjust their contracted demands and accordingly avoid “idle” demand or “penalties.”
For the utility, the total contracted demand remains the same, so there are no kW-related revenue losses. But there is an important extra advantage at stake. The utility company’s load factor increases because an “idle” demand when “exchanged” to become an “active” demand generates additional kWh delivery without increasing the total contracted demand.
Synergetic with Demand Response (DR) programs
DR was conceived to avoid critical situations (peak demands) especially during hot days (summertime). It is “called” a few times a year.
The Demand Flexibility Exchange is another DR initiative. It uses the same concept (avoiding the need of additional infrastructure just for a limited number of hours per year) but applied to contractual demands. Customers must contract demand – the Demand Flexibility Exchange is a “tool” to enable them adjusting their contracted demand according to their needs but without changing the overall contracted demand (utility’s prospective).
Is a Load Factor increase valuable?
Sure it is. Existing demand response programs, for example, were conceived to help utility companies to meet their market’s demand during extreme situations. DR programs allow utilities to avoid additional investments that would only be needed during a few hours per year – which is a very expensive solution.
The Demand Flexibility Exchange is a synergetic solution with respect to demand response (DR) programs, BYOD (bring your own device), NWA (non-wire alternatives), EE (energy efficiency), DG (distributed generation), VPP (virtual power plants) among others. The difference being that it deals with contracts between the customer and the utility company.
What Value does Demand Flexibility Exchange bring to Utility companies?
Here is an example to demonstrate this:
- The utility’s infrastructure marginal cost of expansion requires a capital expenditure of US$ 500/kW in ballpark numbers
- The Demand Flexibility Exchange improves the utility’s contracted load factor by 7%
- Each GW of contacted capacity is associated with USD 0.5 Billion CAPEX
- It is then about postponing capital expenditure of 0.5 Billion/GW x 7% = $350 million/GW
Traditionally, for decades, utilities did not have to be concerned about developing value-added services because they were basically the only available power supplier. However, these days there are many alternatives that customers may consider including other energy sources such as: gas, onsite solar, biomass, onsite generation/cogeneration, outsourcing selected energy intensive items, among others. So, the Demand Flexibility Exchange may be a tool to retain customers by offering added value.
A simple example of what happens in a Demand Flexibility Exchange
- A shopping mall is willing to increase its contracted demand by 500 kW
- An automotive parts plant is willing to reduce its contracted demand by 500 kW
- Both are customers of the same utility company
- The shopping mall and plant “post” their desired changes at the utility’s Demand Flexibility Exchange
- The utility checks if the 500-kW shopping requirement is consistent with the grid’s capacity
- Assuming it is, the utility approves and validates the kW exchange by both parties
- The utility will be able to promptly deliver energy associated with this 500-kW transaction
- Assuming the shopping mall’s load factor of 60% it is then 500 kW x 60% x 720h = 210 MWh/month
- If the shopping mall is a regulated energy user, then the utility will bill it 210 MWh/month
- If the rate is $50/MWh (to illustrate) then it is about $126 k/year
- The plant and the shopping mall can quickly change their contracted demands
- Without the Demand Flexibility Exchange, the utility would have to add grid capacity
- This was a real situation that I faced years ago when consulting for these two companies
- Since there was no Demand Flexibility Exchange available, the shopping had to wait one year for its utility to increase the capacity of the grid
- Meanwhile the plant was told to wait the required 6 months before the contracted demand was reduced
- The plant and the shopping malls were next door to each other
- If the Demand Flexibility Exchange were there both would have their needs attended right away, and the utility would not have to increase the capacity of the local grid.
What are the Demand Flexibility Exchange’s limitations?
Since it is a non-wire alternative, it deals with available overall capacity. My suggestion, when developing the Demand Flexibility Exchange is including a “flag” associated with the grid load x capacity at each customer location so as to enable transactions only when the party interested in increasing its demand is connected to a local grid that allows it in a safe manner.
How to make the Demand Flexibility Exchange happen?
As an energy consultant who came up with this concept, I am open to helping companies that work with utilities to transform this into business development. A structured process might be a way to go:
Create “the business case” considering local rates, client’s profile, etc.
- Approach the local utility company and show the concept
- Understand the utility’s business preferences for such a development
- Identify the best formats considering the utility’s needs and wants
- Create a timeline with activities, persons in charge and deadlines involving all parties
- Implement experimentally (pilot) and then with the acquired experience replicate the model