Demand Response Management Updated 04052020

1.
Overview of Demand Response
Since electricity cannot be stored, supply and demand must be maintained in balance in real time. The
presence of high PV’s penetration on the grid may cause fluctuation in power generation which
simultaneously result in supply demand imbalance. On the other side, demand levels also can change
quite rapidly and unexpectedly. Both conditions may simultaneously cause mismatches in supply and
demand which threaten the stability of the grid. To ensure the stability and reliability of the grid despite
supply demand uncertainties, power system need to be planned and managed for years in advanced and
it is high capital intensive. While planning and managing grid in advanced incur relatively expensive cost,
demand respond programs can be a cheaper solution available for operating the grid with high PV
penetration. With demand response program, system can curtail or shift demand, instead of generating
more electricity.
Demand response programs (DRP) can be defined as the implementation of technical and economic
measures which serve to motivate changes in electricity consumption by end-user in response to
changes in power generation over time. It is designed to reduce peak demand or avoid system
emergencies. DRP allows for a dynamic control of the load especially during peak period, to match the
power generation in real time, thus help ensure the stability of the grid with high penetration of PV.
Generally, it includes all modification in electricity consumption pattern that are intended to alter the
level of instantaneous demand, timing, or total electricity consumption. Those modifications can be a
demand reduction or demand shift to non-peak period.
2. Classification of Demand Respond Program
Demand Response can be classified into price-based demand response and incentive-based demand
response.
a) Price-based Demand Response

Price-based demand response programs use dynamic pricing rates that reflects the real time cost of
generating electricity. This type of demand response aims to flatten the demand curve by offering a
high price during peak demand and lower prices during off-peak demand. Price-based demand
response can be further classified into:
- Time of Use (ToU)
This type of demand response program differs electricity price per blocks of time, usually peak
time and off-peak time. The design rate reflects the average cost of electricity during different
periods.
- Critical Peak Pricing (CPP)
In Critical Peak Pricing, a pre-specified higher electricity price is superimposed on normal flat
rates or ToU rates. This type of pricing is used for contingencies period or during high wholesale
electricity prices for a limited number of days or hours per year.
- Extreme Day Pricing
similar to Critical Peak Pricing, Extreme Day Pricing program also has higher price for electricity,
but the price is in effect for the whole day (24 hours) of the extreme day.
- Real Time Pricing
In Real Time Pricing, the customers are charged hourly fluctuating prices reflecting the real cost
of electricity generation in the wholesale market. RTP customers are informed about the prices
on a day-ahead or hour-ahead basis. This type of pricing is considered as the most efficient and
direct demand response program.
b) Incentive-Based Demand Response

Incentive-based demand response programs give incentives payment to participating customers to
reduce their loads at specific period. This type of demand response aims avoids outages due to a
projected grid reliability problem. Incentives-based demand response can be further classified into:
- Classical Demand Response
Classical demand response includes direct load control and curtailable program. In direct load
control program, the utilities have the ability to remotely shut down participant equipment (e.g,
air conditioner or water heater) on a short notice. This kind of programs is of interest mainly to
residential customers and small commercial customers. In curtailable program the utility asks
the customers to reduce their load to predefined value and in exchange the utility pay upfront
incentive payments or rate discounts. Penalties may apply for customers who do not respond,
but it depends on the term and condition of the programs.
- Market Based Demand Response

Market-based demand response includes demand bidding, emergency demand response,
capacity market and ancillary services. In demand bidding programs consumers bid on specific
amount of load reduction. When a bid is accepted, the customer must curtail the load by the
amount specified in the bid or face penalties. On the other hand, in emergency demand
response programs pays to participating customers an incentives payment for measured load
reductions during emergency conditions. In capacity market programs, customers who can
commit to provide pre-specified load reductions during contingency will be notified, usually one
day earlier, to reduce their load, and failure to respond will result in penalty. Lastly, in ancillary
services customers bid on load curtailment in the spot market as operating reserve. When bids
are accepted, participants are paid the spot market price for committing to be on standby and
are paid spot market energy price if load curtailment is required.
3. Benefits of Demand Response

In a dynamic market where electricity price changes over time, an active participation of demand side
through demand response program could bring significant benefits as follows:
a) Saving in electricity bills
Consumers could reduce their electricity cost by shifting their load from peak period to non-peak
period which has relatively lower electricity prices
b) Reduction in electricity price
The shifting of demand in peak period will flatten the load profile which result in the reduction of
electricity supply from expensive generating unit and need for distribution and transmission
infrastructure enforcements or upgrades. Eventually, these avoided costs will be reflected in the
price of electricity for all consumers, DRM participant and non-participant.
c) Improved electricity market performance
The implementation of DRM would lead to a more elastic demand hence reduce the ability of
generating company to exert market power
d) Improved reliability of the system
With the implementation of DRM, consumers will have the opportunities to reduce the risk of
outages.
4. Cost of Demand Response Program

The cost of demand response program varies depend on the chosen program but in general both
customer participants and program owner (could be utilities companies or market regulator) incur
initial and running cost. The customer participants might need to install some enabling technologies
to participate in a demand response program, such as peak load controls, smart thermostat, energy
management systems, and onsite generation units. This initial cost is paid by the participant. While
the initial cost for participant is one-time upfront cost, the running cost varies, depend on associated
events and response plan. For program owner, the initial costs usually involve metering and
communication costs. Utilities as program owner need to install advanced metering systems to
measure, store and, transmit required energy usage at specified intervals. Furthermore, the running
costs for utilities include cost incur in administration and management process as well as the cost
incur from making incentives payment.
5. Barriers to Demand Response Program

The main challenges faced by demand response program can be divided into consumer barriers,
producer barriers, and structural barriers.
a) Consumers Barriers
Limited consumers knowledge on electricity market is one of the main barriers in implementing
demand response program. It decelerates not only the development of demand response programs
but also the development of government policies to promote DR initiatives. Increasing educational
efforts and direct advertising can offset this problem but it will also raise the administration cost of
the program. On the other hand, imposing mandatory participation and increase educational effort
might be a more cost-effective solution. Next barrier could be the cost of technologies and financing.
Technologies and infrastructure costs were cited as the main reason for limited demand response
success. Since technological infrastructure is a necessity, it is important to ensure that policy maker
or utilities provide some financing options such as subsidies or cost sharing agreement to
consumers.
Another barrier could be response fatigue, which can be defined as condition where consumers are
tired of keeping track of electricity rates and usage. This condition mainly arises dynamic pricing
program. The most effective solution for this could be a gradual introduction to market signal. Lastly,
potential saving form demand response program may become another barrier for consumers.
Sometimes the incentives payment is not enough to motivate consumer to participate in demand
responds program. For consumer whose percentage of electricity cost to total expenditure is small,
it may not be worth to invest in demand response program. Significant savings then need to be on
offer to allow consumers take advantage of demand response programs. This may mean fixing a
larger gap between peak and off-peak rates to induce higher shifts to off-peak periods.
b) Utilities Barriers
The main barrier for utilities to initiates demand respond program is the investment recovery. If the
utility is not certain about the payback period of the investment, it will likely refrain from investing
in demand response program. Establishment of formal channels for investment recovery, such as
subsidies to the utilities, participation fees and mandatory customer participation. Mandatory
participation would allow utilities recovering its investment while keep the participation fee low.
Along with uncertainty of investment recovery, the confusion on who is responsible for promoting
demand response programs also play a role. However, as both utilities and consumers benefit from
this demand response program, cooperation along the supply chain is crucial for successful
implementation of demand response program.

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1.

Overview of Demand Response

2. Classification of Demand Respond Program

a) Price-based Demand Response

b) Incentive-Based Demand Response

- Market Based Demand Response

3. Benefits of Demand Response

4. Cost of Demand Response Program

5. Barriers to Demand Response Program

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