One of the important motivating factors for building the Smart Grid is improving Demand Response. This is also related to the goal of reducing peak demand. But why is it important to reduce peak demand? And what does it mean to have ‘Demand Response’?
The fundamental problem with electricity is that we do not have the technology to economically store it. The generating capacity must always match the consumed load. Every time a consumer turns on an additional appliance, he is increasing his demand. To meet that additional demand, the generator must produce more electricity. The electric grid ensures that every time demand fluctuates, the generation capacity is tweaked to match the load and everything runs smoothly. But if everything runs smoothly, then what is the problem? The problem is economics or more simply put: cost.
The economic cost problem is a direct consequence of the technological inability to store electricity. The problem can be summarized as: The marginal cost of electricity production is not constant. What does this mean? Let’s say that you have a plant that is currently generating 100 KW of electricity at a cost of $100.00. If the demand increases to 101 KW, then you need to generate an additional 1 KW of electricity. But generating this 1 KW would cost you significantly more than $1.00. For illustration, let’s assume it costs you $5.00 to meet the demand of 101 KW. Now if the demand increases to 102 KW, the cost of generating one more unit will increase further. It might cost you $10 to meet the additional one unit. The cost of production increases with increasing demand. (Note: These numbers are only for illustrating the problem of rising marginal cost of electricity production. They are nowhere close to being correct. And the real economic models are also more complex than those depicted here.)
Let’s take a deeper look at why the marginal cost of electricity keeps increasing. In order to deal with fluctuations in demand, the electricity infrastructure supports two kinds of power plants: Baseload plants and Peaker plants. Baseload plants are the general work-horses of electricity generation. They are typically either coal-based, hydro-electric or nuclear energy plants. These plants are designed and built to generate enough energy to meet a pre-defined maximum demand. For examples, a nuclear plant might have a peak capacity of 100 MW. As long as the demand is under the plants peak capacity, the base load plant has the ability to meet the demand. But what happens when demand exceeds the plant’s capacity? If the demand goes beyond the Baseload plant’s capacity, the Peaker plants go into operation and supply the additional energy.
As their name implies, Peaker plants are built to handle peak demand. Since these plants are put in to action at short notices and need to generate power quickly to meet peak demands, they typically use oil and natural gas as their fuel supply. The economics of operating Baseload plants and Peaker plants are vastly different. According to reports, some of these Peaker plants are used for less than hundred hours a year. Imagine building a power plant, maintaining it to run safely and efficiently but running it for only 4 days a year! How expensive is the energy produced from this plant? This is the main reason that the cost per unit of electricity generated from a Peaker plant is substantially higher than those produced at a base load plant.
Now that we have an idea of the increasing marginal cost at the supply side, let’s look at the demand side. The consumer, who is at the demand end, typically pays a fixed rate for his consumption. The consumer is probably not even aware that the additional consumption is costing extra. This creates a situation where the demand is unresponsive to cost. Currently we neither have the ability to communicate this cost increase to the customer nor charge them extra. In short, we have market place that ignores the fundamental demand-supply law of economics. This situation is purely a result of the limitations of our current technology. If the consumer were informed of the additional cost every time he turns up the air conditioning, then the consumer might change his consumption habits.
Let’s take a look at an example of how reducing peak demand can help. Here’s a graph from Dominion Power (my earlier post about it):
Let’s say we managed to spread the demand evenly across time. Then there would be no need to bring the Peaker plants in to operation. Our problem of energy supply should not be dealt with only at the supply side. It is simply too expensive and inefficient to build additional capacity to meet peak demand. Intelligent demand management should be part of any energy solution.
Additional References:
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Severin Borenstein, “The Theory of Demand-Side Price Incentives“.
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Ahmad Faruqui, Ryan Hledik, Samuel A. Newell, and Johannes P. Pfeifenberger, The Brattle Group, Inc. “The Power of Five Percent: How Dynamic Pricing Can Save $35 Billion in Electricity Costs“
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Kathleen Spees, Lester B. Lave, “Demand Response and Electricty Market Efficiency“.
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