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When Economic Curtailment … Isn’t

Posted on November 5, 2020 by Kelly Yazdani

Flexible load, responding to real-time price signals: an energy economist’s dream come true. Customers avoid paying electricity prices that drive the costs of production higher than the value of the widgets being made, simultaneously reducing demand on the system and associated costs.

In practice, however, economic curtailment can be 

  • Tricky to get right &
  • Operationally challenging. 

For certain businesses that can provide fast-response load curtailment, Operating Reserves (OR) is a better alternative, resulting in lower net electricity costs without the frequent hassles of economic curtailment.   

Tricky to get right

Accurately predicting price spikes, especially with enough notice to drive curtailment decisions, is not straightforward. System operators tend to either under- or over-forecast electricity prices the majority of the time. Forecasts are often biased high, and often by a significant margin when actual prices turn out to be low.1, 2 

In addition, earlier price forecasts leading up to a given hour can vary wildly based on shifting expectations of system conditions (imports/exports, renewable generation output, etc.). From one hour to the next, a price spike that very afternoon could go from looking implausible to imminent. Sophisticated modeling services can help improve accuracy, but the reality remains that predicting price spikes is just tricky to get right.    

Operationally challenging

Curtailing load to avoid high prices can impose operational challenges. Periods of sustained high prices may merit prolonged shutdowns. Very brief load reductions would be required to avoid isolated price spikes, and are likely not worth the shutdown/startup costs and operational hassle.   

A better alternative

In fast-response OR programs, loads help balance real-time supply and demand on the grid by curtailing when called upon by the system operator. Businesses get paid to be available to reduce their load, and they are called upon at most a few times per month. Operating Reserves participation is open to customers regardless of retail rate structure, not just to those who are exposed to real-time rates. 

While a business on real-time rates does end up using “expensive electricity” to produce its widgets, payments for being available for OR are linked to the real-time price (i.e. you get paid more to be available when prices are high). On net, electricity costs minus OR revenues generally turn out to be less for a customer participating in OR than for the same customer tracking prices and curtailing economically (even assuming they do hit the majority of high-priced hours accurately). To achieve the same net electricity costs through economic curtailment, a customer would need to curtail for hundreds of hours per year!3

Take home

If you want to minimize electricity costs and your business can provide fast-response load curtailment, Operating Reserves is in short a better alternative. The end result? Lower overall costs for much less curtailment. 

Notes

1All figures are illustrative, based on a case study for Alberta, Canada.

2Peak shaving to avoid system capacity charges is a separate electricity cost management strategy. This article focuses purely on energy ($/MWh) related charges.

3Assumes 60% customer accuracy for avoiding price spikes.

Nicole Irwin-Viet

Energy Markets Manager

nirwin@voltus.co

Interested in learning more about how your business can earn cash in Operating Reserves programs? Chat with our team below or email info@voltus.co to get started.

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Week #5 – Uncovering the Gross Up

Posted on March 25, 2020 by Kelly Yazdani

At Voltus, we talk to hundreds of energy decision makers every day from dozens of industries in every major energy market. Sometimes these organizations are learning about the benefits of demand response for the first time. At other times, we’re connecting with businesses long-steeped in demand response program participation. Our message, regardless of experience, is that it is possible for customers to double their demand response dollars, and one of the easiest ways to contribute to this goal is giving demand response customers their fair share of the “gross-up.”

What the heck is the gross-up!?! 

So glad you asked.

The gross-up is industry-speak for the transmission loss factor and operating reserve margin that is applied to electricity demand in wholesale power markets. These concepts impact the value of demand response resources in these same markets.

The bottom line: if you’re not being paid your portion of the gross-up you could be losing 5% to 40% of your demand response dollars depending on year and market.

Let’s look at an example to understand the concept clearly.

You have 1,000 kW of demand response capability at your facility. You contract with a demand response provider to get 65% of the revenue earned from enrolling your load curtailment in the ISO-NE market. At $7.03/kW-month you would expect the gross revenue from the 1,000 kW to be worth $84,360 for power year 2019, which at 65% nets your business $54,834. Pretty good, huh? Yet, your demand response capability is actually more valuable than 1,000 kWs and here’s why.

When power is generated by a natural gas power plant, 7% of that power is lost on average over transmission lines (a 100 MW generator only delivers about 93 MWs of usable electricity to the point of consumption). Additionally, that natural gas power plant isn’t 100% reliable throughout the year, which requires the grid operator to buy, on behalf of the market, what’s called “operating reserve.” Operating reserve averages about 15% of generation capacity (that 100 MW generator requires the grid operator to purchase 115 total MWs of generation). These transmission line losses and operating reserves add up, amounting to an additional 22% in this example. 

Demand response capacity behaves differently though since it’s created at the point of consumption. This capacity doesn’t experience transmission line losses and doesn’t require operating reserves. As a result, the grid operator in our example would “gross up” the value of your 1,000 kW demand response capacity by that same 22%. The demand response provider is actually credited with 1,220 kW (1,000 kW plus the 220 kW gross up). In many cases, demand response providers only pay the customer 65% of the “nameplate capacity” (the original 1,000 kW). The additional $18,559 of value that comes from the 220 kW gross-up goes entirely to the demand response provider. 

You can do the math to determine the true revenue share, but in this example it amounts to 53% to the customer, not the expected 65%.

Gross-up values can vary significantly by wholesale market, the particular power year, and the customer’s transmission level service. Regardless of the exact value, the gross up is money that shouldn’t be left on the table. If you’ve been doing demand response for a long time and you’re looking to maximize cash from your operational flexibility, ask your demand response provider for your share of the gross up.

At Voltus, we value transparency above all else. Interested in working with us or learning more about the many ways you can double your demand response dollars? Email us at info@voltus.co or chat with us below.

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