Assuming you have read part I and part II of this series you understand what demand response is and why you may want to have such a capability. You should also have an idea of what capacity you need under management to make your investment worthwhile.
Remember; there are four main reasons why you may want to develop a demand response capability:
- Avoid or defer generation investments
- Avoid or defer network investments
- Bid demand response capacity into the wholesale energy market
- Capture, maintain, and cross-sell to high-value customers
None of these reasons deliver any direct benefit to the consumer. So you must design a service that provides the right value proposition to potential customers while ensuring the output meets your requirements at a cost to your business that is acceptable.
When designing these services, or you may call them products, I tend to think about the level of inconvenience to the customer. You need to consider the following.
What is the maximum notice you can give a customer before the event starts? If you are asking the customer to reduce energy consumption in the next few minutes, it will create a lot more inconvenience to them, then if you gave them 12 or 24 hours notice.
Duration of Event
How long do you need the event to run for it to achieve your objective? If you are asking someone to reduce energy consumption for 30 minutes, that’s far easier than asking them to reduce consumption for 4 hours.
Level of Discomfort
Are you calling the event because it’s a hot or freezing day and the use of cooling or heating is what’s placing pressure on the system? If a customer cannot leave the property and go somewhere else, you are asking them to endure a certain degree of discomfort
Number of Events
How many events are you likely to ask the customer to participate in and over what period? If you expect someone to take part in ten events during a three-month summer period, that’s a much greater burden than if there is just one event every twelve months
What customer segments are you targeting? Small to Medium Businesses may look like they have great potential but there is a range of reasons they are unlikely to participate in an event. Commercial & Industrial customers may take part if the event occurs on certain days or at certain times. Residential customers have busy lives; it is hard to get their attention and spark their interest. Knowing who you will target and how is crucial.
Manual or Automated
I cover this off a bit more in the next post, but this is also a big factor to consider. If you have an agreement with the customer to automatically and remotely change their appliance settings, or the building management system, then there is not much inconvenience, so this can significantly change how you may compensate them.
Once you can answer the above, you then need to think about the incentives you are planning to give customers. They fall into four categories. If you are not familiar with the various types of ‘dynamic pricing’ models then I would recommend reading Ahmad Faruqui’s presentation: ‘Dynamic Pricing for Residential and Small C&I Customer‘. Published back in March 2012 it provides a great introduction to the subject. If you just want to understand my references below to PTR and CPP, then you can just look at slides 10 – 13.
The most common approach is Peak Time Rebates or PTR. The customer gets a financial incentive to make the change. Knowing what this dollar amount per kW should be is a mix of art and science.
The principle here is to penalise the customer for using energy during critical peak times. You may ask, why would a customer want to be involved in such a plan. Typically you would reduce their basic tariff for the rest of the year, so in a way, if they take part in the event, there is still a financial incentive. Critical Peak Pricing (CPP) is a common approach in this category.
Not as common at the moment. I believe the adoption of automated demand response programs will drive up the subscription model. You pay a fixed rate to the customer each month whether you call an event or not. In return, customers must take part in a pre-agreed number of events each year, or reduce a certain amount of demand.
Less common still. Through education, people want to take part as they understand the overall value to the community.
Bringing it all together
The skill in designing these services is to hit the right balance that delivers the greatest demand cut with the minimal investment. Different customers will respond to different services. As I will talk about in part V, focus on data analytics to get insights. Understand what works, what does not then refine it, try something new and test again. Demand Response works, it’s about delivering the right value proposition to the right customer.
I have previously talked about ‘set and forget’. Utilities will achieve this through automated demand response. In the residential and SME sectors ‘set and forget’ will take quite a few years to be adopted at scale due to the cost. In the meantime, I expect behavioural demand response to deliver the majority of demand response capacity in these sectors.
Those that believe there is value to their organisation to have a demand response capability should start now. Every utility is unique, there is much to learn and it takes time to develop the internal capability and to educate your customers.
About our Guest Author
|Wayne Pales is the co-founder of The Chapel Group.
Wayne has over 20 years’ experience in the UK, Australia and more recently, Hong Kong, with exposure to business operations in China and India. Previously focused on helping companies get the most from their information technology investments.
Further background to Wayne can be found on Wayne’s LinkedIn profile.