As the saying goes, “Everything is bigger in Texas.” While it may be clichéd, I think the expression is right on the money when it comes to describing the Lone Star State’s current, rather large, energy challenges. But it also characterizes something else: the substantial role demand response can play in solving these issues.
Texas has a power problem.
Market dynamics have resulted in dangerously low reserve margins in the Electric Reliability Council of Texas (ERCOT) region, to the point that the North American Electric Reliability Corporation (NERC) has demanded a plan of action by April 30 to ensure adequate energy capacity for the coming summer. How did this happen? For starters, while retail choice has delivered tremendous benefits to consumers since it was introduced in 2002, it has created competitive pressures that have kept electricity prices for consumers low. Low natural gas prices have only increased the downward pressure on electricity prices, and as a result, it is very difficult for generators to realize appropriate returns on investment in power plants -- a point demonstrated by the fact that there has not been enough investment in generation to keep pace with load growth.
Simultaneously, strong population and economic growth in Texas continue to increase electricity demand. So while Texans have had access to cheap and competitively served electricity for almost a dozen years, the current market construct is no longer sustainable. Reliable demand response must be incorporated into the market design, even though the ERCOT market design didn’t envision the need or incorporate comprehensive demand response protocols.
The Public Utility Commission of Texas (PUCT) has decided that part of the answer is to raise the cap on wholesale electricity prices in spot markets. The hope is that this price signal will increase investment in new generation and demand response resources’ participation in its energy-only market. The problem with this approach is that only large industrial customers are typically exposed to spot market pricing and they already curtail load when economics dictate that it is prudent to do so. Additionally, the price signal alone does not provide ERCOT with a reliable source of load reduction.
Looking at the bigger picture, residential and small commercial customers make up 75 percent of summer peak demand in ERCOT, primarily due to air conditioner load. The PUCT needs to focus newly developed solutions on these customers, who generally enjoy fixed-price retail contracts, to achieve a reliable market solution.
So what should Texas do? Demand response should be a first line of defense for ERCOT, as it’s immediately available and helps secure a more stable energy future for the state. Specifically, the PUCT should empower ERCOT to manage residential and small commercial demand through a direct load control demand response program focused on the air conditioning load from residential and small commercial customers. Direct load control programs have proven track records of predictably delivering significantly more load drop -- more than 1 kilowatt per home in Texas -- than systems that rely on approaches such as energy-efficiency reports, games and pricing incentives like peak time rebates. Those tools may provide great actionable data, but they don’t deliver the reliability ERCOT needs, as it depends on a direct consumer action to reduce load.
With a direct load control demand response program, demand from high-energy-use consumer appliances -- air conditioners, pool pumps, hot water heaters and more -- would be automatically cycled down. Not only does this approach deliver more predictable load shed, but by cycling demand, rather than switching off the appliances, it provides consistent load drop over a curtailment period and simultaneously minimizes the impact on the customer. Additionally, a direct load control program can be deployed and provide curtailment capabilities in only a few months, whereas building a new generator takes time. This combination of speed and predictability would provide ERCOT with a reliability asset to help achieve the reserve margins that NERC recommends. And with the hot summer months rapidly approaching, it is clear that ERCOT needs a more immediately available solution.
In the absence of a direct load control initiative, Texas will be faced with the possibility of costly rolling blackouts and brownouts in the hot months ahead. If Texas heats up like it did in 2011, ERCOT will need to be able to shed load in minutes to keep the lights and cool air on. Blackouts bring life to a standstill, stalling traffic, stranding people in elevators, endangering hospital patients, closing schools and leaving people exposed to the heat as happened for the 7 million people in Southern California and Arizona affected by the September 2011 power failures. Texans should not have to bear the risk of these social and economic impacts, especially when that risk is manageable in the near term with a well-structured direct load control program.
With reserve margins threateningly low, and predicted to go even lower, Texas cannot simply hope for mild summer months every year. Instead, in true Texas fashion, it needs to think bigger and select a tried-and-true method of demand management that produces immediate, predictable and reliable results. The state needs to empower ERCOT to implement a direct load control demand response program now, before the weather turns and it’s too late to keep the power on through the summer peak.
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Frank Lacey is Vice President of Regulatory and Market Strategy at Comverge.