| 07/06/2007 - Demand Response – Background |
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By Don McLean The demand for electricity in the Province of Ontario is growing. Peak demand has increased significantly between 2003 and 2006 by 2,252 mega-watts (MW), or 9%. In 2006, a peak demand record was set at 27,005 MW. However, while demand continues to grow, generating capacity is aging; 80% of our current capacity will be out of service by 2025. Consequently, huge investment will be required in order to meet Ontario’s future electricity needs. Demand Response (“DR”) programs are one way of immediately tackling this problem. DR is defined as "actions that result in short-term reductions in electricity demand in response to real-time price signals." This is different from energy efficiency, which is performing the same services but using less power. Typical demand response actions would include switching off lights and/or shutting down HVAC or industrial process equipment. Running a natural gas fired back-up generator can also be a demand response action. Typically demand response would be for a minimum of one hour. The Ontario Power Authority (“OPA”) has a mandate to include Demand Response as a component of the future power supply of Ontario. There are certain benefits for electricity users who implement programs to monitor hourly electricity prices and then respond to these by reducing electricity use when prices reach certain trigger levels. Firstly, there is the benefit of the lower energy cost associated with the energy not used. Secondly, in Ontario, there are incentive programs offered by the OPA. In effect, the OPA will purchase the electricity capacity made available by the electricity user. With an effective DR program in place, a company now has the capability to shed electricity load. Since this capability to shed load is based upon a price signal, this ability represents a financial asset. In order to realize the value of this asset, it must be developed and properly managed. For any given company, the following factors drive the basic economics of developing a demand response:
OPA Programs The OPA introduced its initial program last May. The program is commonly referred to as the DRP. The DRP is a voluntary program whereby a participant has the option to participate when the 3-hour ahead price surpasses the participant’s strike price. The participant has the option but not the obligation to participate. The OPA is in the process of introducing three new programs to replace the current DRP. They are currently being referred to as DR1, DR2, and DR3. The DR3 Program Rules have been issued for public comment. The DR3 differs from the original DRP in that the proposed DR3 is a “contractual” load reduction program. In general the DR3 targets loads larger than 5 MWs. Participants in the new DR3 will be paid a stand-by payment for being available, and a utilization payment for actually shedding load. The program requires a 95% reliability. For participants that fail to shed when called upon, there will be penalties. The program targets the 250 highest demand hours of the year. The new DR2 program, followed by DR1, is scheduled for release for public comment by the end of June. Ontario Pricing The level of Ontario spot prices drives Demand Response activity. The table below provides a summary of the number of hours that the spot price has reached various strike price levels from January through mid-June. For example, prices have been above $100 per MW, 228 times this year. From the table it appears prices, and hence Demand Response opportunities in 2007, are running higher than 2006 but not as high as 2005.
With this in mind, companies who choose to participate in DR programs this summer seem likely to experience significant benefits. - 30 - Editorial Contacts:
Dan Morel |
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