Oct 15, 2018

Could Demand Response Be a Better Deal than Solar for Iowa Customers?

See how DR stacks up against solar in the Hawkeye state.

Could Demand Response Be a Better Deal than Solar for Iowa Customers?
Gregg Dixon
Chief Executive Officer & Co-founder

The Energy News article, “Could solar be a better deal than demand response for Iowa customers?” is an unfortunate hit piece that one might consider “friendly fire.” Kerri Johannsen, an environmentalist with the Iowa Environmental Council, questions the value of demand response in Iowa, relative to solar as an option to address peak demand. Unfortunately, she doesn’t attempt to quantify the economic benefits of solar to Iowans but she’s more than eager to cut down demand response.

She got it half right. We agree wholeheartedly that Iowans are paying too much for demand response, especially in light of the fact that demand response has been dispatched so rarely in Iowa over the years. Where she got it wrong for those of us serving up clean energy is that she didn’t put forth a clear economic argument for solar. She could have said, “Could cold fusion be a better deal than solar for Iowa customers?” and leave Iowans scratching their heads just the same, left hanging on whether there are numbers behind her argument. Iowans deserve better.

We’re not solar experts so we won’t attempt to knock the benefits of solar. What we can say is that demand response has proven to be the least cost, most reliable, and cleanest source of energy to meet the top 10 percent of peak demand. And we’re willing to do the math and compare it to any alternative resource:

  • 10% of peak demand lasts less than 1% of the hours of the year (or about 80 hours a year). This is a well known fact for most electricity grids for which everyone in the power industry can agree, well supported by DOE Energy Information Administration Data. This simple fact is why the demand response industry exists. Power generation is the only industry where we have traditionally used only supply-side resources to address demand. Many peaking power plants in the US run for less than 1% of the hours of the year. Yet, we don’t build 20 lane highways for rush hour, we don’t build churches for Christmas and Easter, we don’t roll out another plane to carry the five overbooked passengers on a flight.
  • However, because states have largely incentivized utilities to build assets that capture a guaranteed rate of return on the rate base, a perverse incentive exists that prevents the benefits from demand response to be realized by rate payers. Every state, including Iowa, has the opportunity to use the price elasticity of supply and demand to arrive at a market-driven, economically efficient answer, while preserving traditional rate base models that carry important benefits.
  • The “price to beat,” so to speak, in solving the peak demand challenge is the cost of new entry, the standard for which in the US is a simple cycle combustion turbine. On average in the US, the cost of new entry ranges from $87,300 to $121,300 per MW-year.
  • Additionally, demand response carries tremendous reliability advantages due to its dispatchability. Power resources that are dispatchable can help avoid blackouts, or lost load. The value of lost load (VOLL) ranges in MISO from $29,299 per MWh for small C&I customers to $42,256 per MWh for industrial loads. DR provides grid operators, utilities, and states with a vital resource that is proven to increase grid reliability while putting dollars back in the pockets of rate payers. Over the past twenty years, as DR has gained prevalence, it has prevented dozens of blackouts throughout the country (from Texas to PJM) and often when traditional generation was expected to be available.
  • Finally, the cleanest MWh is the one never used. No doubt solar is clean. Just not as clean as an avoided MWh or MW. Kerri’s position leaves us scratching our heads about why an environmental organization, undoubtedly knowing the environmental benefits of DR, wouldn’t advocate with specificity the changes that need to be made to MidAmerican’s approach to DR to not only make it more economical but to expand DR’s market penetration and use during the hours she says solar would make sense. DR can be dispatched 24/7/365 with the right market price signals. Kerri must know that PJM, for instance, has implemented this very approach.

This brings us to the economics of DR in Iowa. We agree with Kerri that Iowa is paying too much for DR. We encourage Iowa to make use of the MISO LMR auction price to determine the value of the DR resource and to determine whether DR is even necessary. Iowa is, in effect, subsidizing an out-of-market resource with MidAmerican’s DR tariff. It may seem self-defeating for a DR company to say that the DR resource in Iowa may not be necessary at all. But we believe in the power of markets and a market’s ability to determine the most efficient balance of supply and demand. In the case of DR in Iowa (and many other MISO states), if there is too much supply then the price should fall accordingly. If there’s not enough supply then the price should rise. Currently, the price for DR in the MISO market is $3,650 per MW-year and $3,500 per MWh only when dispatched. Taking a market-based approach would save Iowans approximately $16.6 million per year. Can solar beat those figures? Can coal? Can natural gas? Can nukes? We’re willing to bet a prime rib dinner from the Pink Poodle with anyone who can beat it.

The real beauty of demand response is the simple fact that it meets everyone’s needs, albeit for a small portion of power delivery (that 10% of peak demand). It is attractive to those of us who love the power of markets. It is attractive to those of us who love the best price. It is attractive to those of us who value resilience. It is attractive to those of us who value a world of sustainable energy.

But if DR isn’t the best deal in town, you better bring your calculator and make your case.