Demand response -- the business of turning down electricity use at homes, offices, factories, and other such sources of demand, to help manage grid needs -- has changed a lot over the past few years. What grew up as a specialized, utility-focused enterprise has, with the growth of the smart grid, expanded to include all kinds of new technologies and business models.
That means smart-meter-connected homes, as well as smart building technologies that shave and shift energy consumption for commercial and industrial clients. The purpose of demand management has also expanded, from the hour- or day-ahead power-down calls of the past to fast-reacting, automated systems to help balance grid frequency, ease congestion on specific power lines, or even mitigate the ups and downs of wind and solar power.
So what are the top developments in this strangely named, sprawling line of business? Here are a few takeaways from 2012:
1) It’s been a tumultuous year for the U.S. demand response industry, but it looks like the tumult has ended up in the industry’s favor. The United States is the core market for demand response, with some 40 gigawatts of capacity -- much of it conducted via markets set up by Mid-Atlantic grid operator PJM and similar grid entities in California, New England, Texas and the Midwest.
The Federal Energy Regulatory Commission (FERC) regulates these ISOs and RTOs, and back in March 2011, it issued FERC Order 745, which essentially requires demand response assets to be paid on par with the generators that supply grid power. This year, however, a dispute between PJM and big U.S. demand response provider EnerNOC threw into question the implementation of that order in the country’s biggest DR market -- with a commensurate effect on EnerNOC’s stock price.
That dispute was settled this summer with FERC ruling largely in demand response’s favor -- and that’s helped ease the uncertainty that has dogged the industry. At the same time, we’ve seen certain markets like Texas turn to demand response to mitigate a lack of new generation capacity that’s putting pressure on power reserves -- one way that demand response can help reduce the need for peak power plants.
Not all companies managed to navigate the challenging climate over the past year unscathed. Comverge, which had been the other publicly traded demand response provider in competition with EnerNOC in the U.S. market, was bought by private equity firm H.I.G. Capital for $49 million, a fraction of the value it had once commanded on the public markets.
2) Demand response markets are opening up in other parts of the globe as well -- but each market has its own priorities and special characteristics that need tending to. Europe doesn’t have big afternoon peak loads driven by air conditioning to contend with -- instead, it’s mainly trying to shape big industrial loads to manage its peak problems. And abundant pumped hydroelectric energy storage capacity in Scandinavia does provide much of the continent’s peaking needs.
But individual countries in Europe are still facing some significant challenges. Not only are countries like the U.K., Germany and the Netherlands struggling to keep up with their needs for peak generation capacity, they’ve also got a large and growing shares of intermittent wind and solar power making up that mix. Some of Europe’s biggest countries, including Germany, have also pledged to phase out nuclear power over the course of the decade, which will only increase the need for demand response.
In Japan, of course, the nuclear plants have been shut down ever since the Fukushima disaster, which has left the country in a major power crisis. To meet it, Japan is both importing lots of natural gas to generate power, and engaging in a major push for new wind and solar power, along with energy storage, building load controls, and campus-wide microgrid and “smart city” technologies to help out.
Other demand response markets are also emerging in Australia and New Zealand, in South Africa and in the Middle East -- each with its own challenges.
3) Automated demand response is real -- in fact, it’s going to be the new normal. Traditional demand response relies on a whole range of old-fashioned methods, from phone calls to plant managers who crank up generators and turn down factory lines to mitigate peaks, to emails or web portals that inform customers that a peak day is coming and they’d better turn down power. But two-way digital communications and control technologies are at the heart of the new breed of demand response, which can act faster and more reliably – and also open up participation to a whole new range of end users.
The main challenge for fast and automated demand response is integrating all those building-side power controls with the network that currently manages the grid. In the United States, one important standard for doing this, called OpenADR (for automated demand response), has really taken off in the past year. New entrants, including giants such as Schneider Electric and Lockheed Martin, as well as smaller contenders like Stonewater Control Systems, Powerit Solutions and IPKeys, are starting to pose a challenge to incumbent Honeywell, which bought OpenADR server maker Akuacom in 2010 and has since rolled out projects in the U.S., Europe and China. California, as the single biggest market for OpenADR-enabled demand response, will be a critical market to watch on this front.
4) New technologies have opened up new markets for the “negawatts” that demand response can provide. Another critical driver for fast and automated demand response comes from FERC’s Order 755, which should increase the value of fast-reacting energy storage and demand response assets used for frequency regulation, or the critical yet relatively little-known market for power that keeps the grid’s frequency from getting out of whack.
That requires a lot of preparation on the part of both end users and grid operators. For example, we’ve seen companies like Enbala and Viridity Energy launch demand response projects with customers in Pennsylvania that are delivering negawatts of load reduction to frequency regulation markets. PJM, for its part, just announced that it has launched an Order 755-capable upgrade to its demand response management system, in partnership with French power grid giant Alstom, via its acquisition of OpenADR software developer UISOL in 2010.
Another application for demand response that flips the concept on its head is using building resources to absorb extra power. Wind farms are usually oversized to make sure that they can deliver a certain minimum amount of power during calmer days -- but that means that during windy days, they may be producing a lot more energy than the grid needs. We’ve got undertakings ranging from U.S. projects in the Pacific Northwest with EnerNOC and in Hawaii with Honeywell, to projects in Europe using cold storage, plug-in vehicles and other “power sinks” to help manage extra wind power.
5) Smart building technologies and demand response are becoming increasingly intermingled. One challenge for demand response is that relatively few building owners (or occupants) are willing to risk messing with their building’s core functions, like keeping the lights on and offices comfortable, or running factories at top efficiency, just to make some money on a sideline. But as buildings themselves get more energy-efficient, and start installing technology to track and manage that energy use, new vistas for demand response can open up as well.
We’ve seen a host of companies bringing these kinds of building-smart technologies to market, and 2012 saw some significant steps forward for a number of noteworthy competitors on this front. Air conditioning optimization startup BuildingIQ landed a partnership with Schneider Electric and a big project with Las Vegas’ NV Energy, for example. “Virtual power plant” technology startup Viridity Energy raised $15 million from Japan’s Mitsui and expanded its work in the U.S. and abroad. Blue Pillar, a specialist in power management for hospitals and other backup-generator-equipped clients, and Powerit Solutions, which specializes in power sensor and control networks for industrial settings, both raised money as well.
At the same time, we’ve got established energy services giants like Honeywell, Johnson Controls, Schneider, Siemens, Eaton, Emerson, ABB and General Electric all integrating smart building technologies and services in ways that could serve demand response’s needs. Possibilities range from simplifying the process of signing up for and executing demand response via building services platforms like Johnson Controls’ Panoptix or Constellation New Energy’s VirtuWatt platform, to harnessing the capabilities of microgrids, or remotely powered buildings or campuses, which proved their ability during Hurricane Sandy this fall.
We’re seeing the demand response industry recognize that broader energy efficiency is going to be a bigger market in the long run. EnerNOC has built up its building efficiency software and service business to manage more than 200 million square feet of customer real estate, for example.