The History of Demand-Response
For many years, utilities called upon large industrial and commercial customers to cut load in an ad hoc fashion, working their phones to find good corporate citizens willing to turn off non-essential lighting, motors or other equipment. To formalize this relationship, some utilities offered “interruptible” electric rates that exchanged routinely cheaper power for the right to demand occasional usage reductions. Except in very extreme cases, power flow was never cut off; instead, customers might be penalized if they did not reduce usage to the level pledged to receive the lower rate. Because utilities rarely made such calls, interruptible rates gradually became the “normal” price for industrial power. To minimize their electric bills, many large institutions also signed such agreements, even when they lacked an easy way to cut their load.
In the 1990s, however, several factors soured this relationship. For a variety of reasons, the addition of new power plants failed to keep pace with load growth. As regional grids originally created for reliability morphed into interstate wholesale power markets, power sales between utilities and private generators were no longer regulated at the state level. A door was thus opened to commodity speculators that thrive on price volatility.
Sudden price spikes appeared in 1998 during a very hot Midwest summer, but it was the 2000-01 California power debacle that focused national attention on the problem. When called upon to reduce load, many “interruptible” customers failed to do so just when power prices were going through the roof. To recoup their losses, utilities tried to penalize those customers. Many refused to pay, saying they had been assured that such calls would never come. They tried to escape their pricing agreements, but utilities and regulators would not give them an escape hatch, setting the stage for a political firestorm. A better way was needed to secure load reductions on very short notice.
Lindsay Audin is president of EnergyWiz, an energy consulting firm based in Croton, N.Y. He is a contributing editor for Building Operating Management.