Demand Response and Demand Side Management What’s the Difference?

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Demand Response and Demand Side Management are terms used by electric utilities to describe programs developed to influence the electricity usage patterns of customers. Many people get confused by these two terms. However, don’t be concerned. Tom Peters, co-author of the best-selling business book “In Search of Excellence” says “If you’re not confused, you’re not paying attention.”

What is Demand Response?

Demand Response (DR) is a term used for programs designed to encourage end-users to make short-term reductions in energy demand in response to a price signal from the electricity hourly market, or a trigger initiated by the electricity grid operator. Typically, DR actions would be in the range of 1 to 4 hours and include turning off or dimming banks of lighting, adjusting HVAC levels, or shutting down a portion of a manufacturing process. Alternatively, onsite generation can be used to displace load drawn from the electricity power grid.

What is Demand Side Management?

Demand Side Management (DSM) programs encourage the end user to be more energy efficient. DSM measures can include lighting retrofits, building automation upgrades, re-commissioning, HVAC improvements, variable frequency drives, etc. DSM programs help focus attention to reduce the cost of the demand charge on electricity bills which can range from $10 – 25 per kW.

In order to provide an incentive for end-users to develop DR capability, many utilities and power regulators across North America have developed suites of DR programs. These same entities also provide incentives for DSM.

Benefits to Electric System

The ability of customers to shed loads during periods of peak demand through demand response activities is beneficial to the electric system as a whole for two main reasons. First, under tight electricity supply and demand conditions demand response can significantly reduce peak prices and overall price volatility for all users. Second, by reducing system peaks, demand response may reduce the need for very expensive new generation, transmission, and distribution facilities to meet these peaks in demand.

Historically, DR and DSM programs have caused some confusion for electricity users. Broadly speaking, both programs are similar in that they offer benefits to the electricity user and can be part of an effective energy management program. They are designed to operate under different circumstances with different electricity reduction goals. DR and DSM programs are not interchangeable but, if their respective advantages and limitations are properly understood, they can compliment one another, which will allow a more successful overall energy management program.

Advantages & Limitations

Capital Expenditure and Payback Cycle

DR programs are attractive since they require relatively little capital expenditure and they have a short payback cycle, if automated control systems are already in place. In contrast, energy efficiency measures can be capital intensive and the payback cycle is usually longer, even where generous incentives are offered to organizations that implement energy efficiency programs.

Price Risks
DR programs also offer a minimal price risk: when prices are low, there are no DR opportunities but customers still benefit from a low electricity bill. DSM programs are riskier in this sense because if energy price expectations do not materialize, financial saving will be reduced and the payback cycle is lengthened.

DSM programs are advantageous in that they have a long-term effect on the sustainability of the facility and will reduce total energy use. In addition to long-term financial savings, using less energy will mean reduced greenhouse gas emissions and environmental sustainability. The short-term nature of DR programs, by comparison, means that they have little effect on the total amount of energy used in the building over a longer period of time.

Electricity versus Other Energy Sources
While DR programs are limited to electricity users, DSM programs can be extended to any application in the facility that uses energy, regardless of whether it uses Natural Gas, Propane, Water or another energy source.

Visual Comparison

Figure 1 shows the effect of energy efficiency on a typical facility’s electricity load. The effect is a load reduction for all hours of the day. Although the reduction does not always have the effect described, the philosophy is to establish a net reduction across all hours.

Figure 1 – Effects of Energy Efficiency

Effects of Energy Efficiency

Demand Response, as shown in figure 2, is reducing electricity usage when prices are high. In hours 11, 14 and 17 the electricity prices spiked and the facility reacted by reducing its demand in those hours.

Figure 2 – Effects of Demand Response

Effects of Demand Response

Building an Energy Management Program with DR and DSM

As mentioned at the beginning of the article, while DR and DSM programs are not the same, the electricity user is not confined to choosing either one program or the other. For example, the quick payback benefits of DR programs can be used to fund longer-term DSM programs while DSM projects such as automation upgrades can become an enabler for DR. Used under the correct circumstances; DR and DSM actions are very effective at achieving energy management goals.

Instrumental to a successful DR or DSM program is real-time monitoring and tracking.

Last updated on October 25,2017 from original blog by Peter Rowles posted on February 10,2010. Peter is an entrepreneurial energy engineer with over 20 years of experience in the energy industry.

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