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Demand response allows facility managers to reduce energy costs while supporting grid stability.

Demand Response: A Key Strategy for Facility Managers to Enhance Operational Efficiency and Sustainability

June 17, 2024
Demand response is a critical operational tool that can help avert a crisis and reduce facility energy costs. Learn more.

Electricity powers our modern world, making life more convenient, efficient and connected. Today’s interconnected electric grid plays a vital role in supplying reliable electricity, and with more demand than ever, Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) consistently call for more energy conservation. These conservation calls will only increase as the margin between supply and demand declines.

With this backdrop, now imagine a scenario where a sudden heatwave pushes your facility's energy demand through the roof, putting not just your operations but the entire region's power grid at risk. When energy demand peaks during the hours with the tightest supply margins, facilities can play an important role in preventing blackouts and supporting grid stability by temporarily reducing power consumption. With these considerations underscoring the need for proactive strategies, demand response arises as a critical operational tool for facility managers. This isn't just about averting a crisis; it's also an opportunity to reduce energy costs by receiving payments for temporarily reducing power consumption.

What is Demand Response?

In most organized wholesale electricity markets, ISOs, like ERCOT, PJM, CAISO, etc., play a dual role, operating a reliable grid and running an efficient wholesale market. Operating an electric grid reliably means ensuring supply and demand are always matched and any mismatches are quickly corrected with the help of reserves to avoid catastrophic grid failure. During the tightest hours when reserve margins are shrinking, demand response plays a pivotal role in ensuring supply and demand are balanced. Every megawatt of demand response means the ISOs and RTOs can continue to serve residential and critical customers, like hospitals, police and fire stations, schools, etc.

At its most basic, demand response is defined as “changes in electric usage by demand-side resources from their normal consumption patterns in response to changes in the price of electricity over time, or to incentive payments designed to induce lower electricity use at times of high wholesale market prices or when system reliability is jeopardized.” When this happens, facilities that participate in demand response can reduce their consumption and help the ISOs to rebalance supply from the grid with demand from users.

Large industrial businesses like steel mills, flexible data centers, midstream pipeline companies, manufacturing facilities or food production plants that consume huge loads of electricity are examples of businesses that may participate in demand response. This is because they have the flexibility to give electricity back to the grid at short notice (unlike hospitals or fire stations that need a steady, reliable supply), which is helpful in restoring balance and enhancing grid reliability. Beyond this simplistic approach, demand response comes in many shapes and sizes, and various regions and ISOs often have different approaches. For instance, some businesses can be paid to offer greater flexibility by shutting down high-consumption operations where necessary. Others involved in passive demand response may not receive payment for participation but may enjoy lower prices on the power they use. One example of passive demand response programs is price-sensitive load, any load that can curtail its usage depending on wholesale energy prices or Time-Of-Use (TOU) rates. This complexity is why it is important to have an energy partner working behind the scenes to help you walk through different programs and identify the best demand response strategy that suits your business needs.

How Does the System Work?

Going back to its definition, demand response essentially reduces electricity consumption in response to one of many triggers, which may include wholesale electricity price, wire charges or grid reliability. There are many different kinds of demand response programs, but demand response is commonly deployed at times of extreme energy scarcity. These periods of scarcity can be driven by factors like the weather, with winter storms and heat waves being major culprits of outages for large generating plant(s). Additionally, unexpected variability from renewable sources of energy like wind and solar can contribute to an increased demand. In any of these situations, if the energy demand and supply become unbalanced, demand response participants receive a signal from their grid operator instructing them to curtail their consumption.

How this is activated within each facility is different, and it largely depends on the demand response program they are enrolled in. It can be as basic as increasing the temperature on your thermostat during summer or a big red button pressed to set off an on-site alarm that begins a manual shutdown. In many cases, though, it can be a lot more sophisticated, and an automated signal goes out in the facility and triggers a shutdown or triggers a backup generator to start up and reduce the facility's electricity usage from the grid. No matter how the strategy is activated internally at a facility, demand response can be a powerful tool to help balance the grid. This is because a decrease in consumption at the right time is just as helpful as an increase in production at the right time. It’s why demand response is viewed as an “alternative power plant” due to its ability to give supply back to the grid. 

How is Demand Response Beneficial to Facility Managers?

You may be wondering, why would any large-scale facilities voluntarily shut down operations, even for half an hour? For most, it’s because they can get paid for that flexibility, as it rarely gets deployed—and, in some cases, facilities build that arrangement into their business plans as cost-benefit value proposition. Beyond that payment, however, demand response provides facility managers with the opportunity to be smarter in how they use electricity. As mentioned above, when demand rises, the price of energy increases. Many facilities establish demand response protocols which automatically kick in as soon as wholesale electricity hits a certain price. To meet energy needs for operations, these facilities often turn to alternative sources of power instead, such as on-site generation or storage facilities.

Depending on the facility’s needs, demand response can also help facilities focus their grid consumption at times when electricity generation from renewable sources is high (i.e., when the sun is shining, or the wind is blowing). This can be more sustainable while helping them to use power when cost is at its lowest. So, not only do they get paid to consume electricity when this happens, but they get paid again to provide a reserve. The generation mix of the grid is publicly available information on ERCOT’s Real Time Fuel Mix chart.

How Can an Energy Partner Support You?

Demand response is an attractive value proposition for many businesses and can be an important tool to reduce electricity costs. Collaborating with an energy partner can help you participate in the most suitable demand response programs. By acting as an agent between the business and the grid, an energy partner can help by monitoring consumption, managing response to signals from the local grid operator, and ultimately competitively supply energy to meet a facility’s needs. An energy partner’s goal is to make this process as seamless as possible for facility managers and guide the best possible use of their business’ electricity demand.

About the Author

Sandip Sharma

Sandip Sharma is Senior Vice President, Demand Response and Markets, for Shell Energy Solutions (SES). Sandip joined Shell Energy Solution in July of 2022. In his current role, he is responsible for managing SES’s Demand Response portfolio, QSE (Qualified Scheduling Entity) Services, Day-Ahead Market (DAM), Real-Time Market (RTM) Operations and Business Development. Prior to joining SES, Sandip worked at ERCOT (Electric Reliability Council of Texas) and in his last role in ERCOT he was a Director of Market Operations overseeing Day-Ahead Market, Congestion Revenue Right (CRR) auctions, and Demand Response programs. During his more than 16 years at ERCOT, he led ERCOT’s energy storage initiative to write market participation rules to integrate battery energy storage systems into ERCOT grid, redesigned the ERCOT’s existing Ancillary Service products, and was instrumental in setting up rules and requirement for integrating wind and solar resources in ERCOT. Sandip Sharma holds a Master of Business Administration (MBA) from Rice University and Master of Science in Electrical Engineering (MSEE) specializing in Power Systems from University of Texas at Arlington. He has also written several publications relevant to the electric utility industry which have been published in many journals.

About the Author

Heddie Lookadoo

Heddie Lookadoo joined Shell Energy Solutions as Director, Demand Response Settlements in June of 2021 and is responsible for managing all settlement activity for the Demand Response and asset management team as well as Business Development across all markets. Heddie’s expertise includes over 20 years in ERCOT settlement. Prior to SES Heddie spent 15 years at NRG where she was serving as the ERCOT Settlements Accounting Manager for NRG prior to joining SES.  During her time at NRG, she had responsibility for gross margin supply for NRG’s retail brands while acting as the SME for commercial operations, risk, billing, FP&A, and origination.  Additionally, she chaired various ERCOT committees and was the project lead for various system enhancements around Settlements and Complex billing initiatives. Prior to NRG, Heddie worked for Bryan Texas Utilities as the ERCOT Settlement Operations Analyst where her duties included settlement, fuel budgets, and various other financial reports.  Heddie holds an MBA from Texas A&M University Corpus Christi and a BBA from Kaplan University, graduating Magna Cum Laude.

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