Navigant Research Blog

Emissions Plan Powers Energy Efficiency

— June 2, 2014

President Obama has finally unveiled the long-awaited draft carbon emissions regulations on existing power plants.  The goal of the Clean Power Plan Proposed Rule is to reduce carbon emissions from the power sector by 30% by 2030.  While most of the focus is on how this rule will affect coal power plants, it has huge ramifications for the demand-side management and renewable energy sides of the equation, as well.

This is the first time that the U.S. Environmental Protection Agency (EPA) will allow “outside the fence” solutions for such a major regulation.  Instead of requiring unit-specific actions to reduce emissions, regulators will allow each state the ability to submit its own compliance plan by June 2016.  States can choose from a menu of four sets of measures, or building blocks, that the EPA has identified as being eligible for Best System of Emission Reduction (BSER) status:

  • Make fossil fuel power plants more efficient
  • Use more low-emitting power sources (such as natural gas)
  • Use more zero- and low-emitting power sources (renewables and nuclear)
  • Use electricity more efficiently, with a goal of an annual increase of 1.5% in demand-side energy efficiency

Have It Your Way

In addition, states have the option to convert their emissions rate-based goals to emissions mass-based goals in order to set up cap and trade-based systems.  The agency also made it clear that states can develop their own individual plans or collaborate to develop multistate plans, including existing programs, such as the Regional Greenhouse Gas Initiative (RGGI), or new ones.  Finally, the EPA stated that states that have already invested in energy efficiency programs will be able to build on these programs during the compliance period to help make progress toward meeting their goals.

The draft rule is extremely accommodating to energy efficiency.  For states that have existing energy efficiency programs, this presents a new avenue to provide value and expand their reach.  For states that have yet to develop energy efficiency programs, or for those states (mostly out west) that have the highest emissions reductions goals, this rule can act as a jump-start for energy efficiency.  It also provides a roadmap to attain emissions cuts in ways that are more cost-effective than strictly targeting power plants and that have the smallest economic impacts – possibly even economic benefits.

There is still some ambiguity about how solutions like demand response and smart grids will be applied under the plan, but that can be hammered out through comments and negotiations prior to the final rule in 2015.  This is just the beginning of what will be a long, arduous, and likely litigious process – but the opening salvo certainly bodes well for clean demand-side resources.


A Dark Day for Demand Response

— May 27, 2014

Two announcements came out late on Friday, May 23 that will have a big impact on the future of demand response (DR).  First, the U.S. Court of Appeals published its decision to overturn the controversial Federal Energy Regulatory Commission (FERC) Order 745 on Demand Response Compensation.  Second, PJM Interconnection, which operates the largest DR market in the world, released results for its 2017-2018 capacity auction.  It reported a drop of more than 10% from last year’s auction and 25% from its peak in the auction 2 years ago.  Depending on your interpretation, these two events could be seen as mild setbacks for DR or major impediments to future growth.

FERC Order 745, which came out 3 years ago, said that DR payments should be the same as those to generators in the wholesale energy markets.  A number of generator and utility groups appealed the ruling and have been waiting for a year to hear from the court.  In a 2-1 decision, the court didn’t necessarily disagree with the order, but determined that DR in the energy markets is a retail product rather than a wholesale one.  This means that the FERC had overstepped its jurisdiction.  On the simplest level, the decision could also mean that independent system operators (ISOs) and regional transmission operators (RTOs) will have to revisit the way they pay DR aggregators for the energy conserved by DR customers.

Death Blow

The bigger question is whether the court’s ruling will be interpreted to mean that all wholesale DR market participation is outlawed, including capacity and ancillary markets.  If so, that would be the death blow to DR in ISO/RTO markets.  It would also destroy the main business model of DR aggregators like EnerNOC and Constellation Energy, the largest wholesale DR players.  Individual states and utilities would have to step in to fill the void to create programs and payment mechanisms for DR to continue at a reasonable level, which would be tenuous and time-consuming.  Other regions of the world that are looking to emulate or learn from the U.S. DR model will take note and may reevaluate their plans.

The recent PJM auction results add to a continuing decline in DR capacity in the northeastern ISO/RTO capacity markets.  Despite the fact that capacity prices in the eastern PJM territory stayed relatively flat from the prior year and the price in the western PJM area doubled, DR declined in both zones.  The bulk of the reduction, however, came from the East.  Some specific utility territories in the West did see increases, like Commonwealth Edison in Chicago and Allegheny Power Systems in Pennsylvania and West Virginia, but the American Transmission Systems, Inc. territory in Ohio was nearly cut in half, outweighing those gains.

Headed Down

EnerNOC publicly released its auction results, stating that received capacity payments for 2017-2018 total $185 million for approximately 4,000 MW, compared to $140 million and 4,400 MW in the prior auction.  So while capacity dropped, value increased due to the higher prices in the West.  The overall 2,000 MW reduction in DR in the last auction was written off by some in the DR community as an anomaly due to depressed prices from a glut of imports from Midcontinent Independent System Operator (MISO).  Now that these results are in, it is clear that DR is in a structural decline.  With further rule changes in the works making DR participation more restrictive, there are headwinds to turning that pattern around.

May 23, 2014 may be etched in the history books for DR depending on the ultimate outcomes.  In any case, it made for interesting fodder at Memorial Day barbecues for those in the industry.


For Utilities, New Value from DR

— May 8, 2014

After an active 2013-2014 season for demand response (DR), including a summer full of activations that spilled into September and the most winter dispatches ever, the industry has been wondering how DR customers will respond and how they can hedge against weather and price risk. At the Peak Load Management Alliance (PLMA) Spring Conference in Denver, multiple sessions addressed these concerns.

A panel of speakers from investor-owned utilities, including Duke Energy, Baltimore Gas and Electric (BGE), Pacific Gas and Electric (PG&E), Tucson Electric, and Xcel Energy, discussed DR program trends and customer experiences.  The most eye-opening comment came from Andrew Hoffman at PG&E, who noted that the company’s studies have shown that DR customers who participate in actual DR events exhibit higher customer satisfaction than customers who do not.  This somewhat surprising finding may be attributed to those customers feeling a sense of achievement in being part of the solution to an energy problem.  There is certainly a tipping point, beyond which customers may feel they are participating in too many events, but it is helpful to consider that DR is not an immediate turnoff.

The DR Effect

The most out-of-the-box session considered how DR could be used as a hedge against extreme weather impacts on electricity and natural gas markets.  The polar vortex this winter led to tremendous spikes in prices, which hit both energy suppliers and end users.  Utilities and suppliers typically purchase financial hedging instruments, like swaps and options, to cover themselves in unusual temperature circumstances.  Brian Beebe from Swiss RE posed the question of whether these entities could also employ DR as a physical hedge in those situations.  This theory holds new sources of potential value for DR in the financial and insurance industries.

Breaking away from the utility mindset, a panel of competitive energy suppliers explained their DR offerings and how they combine them with commodity products to increase customer loyalty and satisfaction.  Constellation has a suite of solutions for commercial and industrial customers to reduce supply bills through DR and energy efficiency.  Reliant offers Nest thermostats to residential customers and has plans that include free nights and weekends, akin to cell phone plans.  TriEagle Energy partners with ecobee and Weatherbug to provide energy management services.  Innovations in business models will flow more from these types of companies than from the utilities directly because they have the freedom to experiment and the profit motive to take the risk.

Spring is a good time to reflect on the winter’s activity and ponder the summer’s impending action.  Then, we can do it all over again in the fall and see how our predictions played out.


Utilities Face Impending Talent Drain

— May 5, 2014

I worked for an investor-owned utility for 3 years about 10 years ago.  After 2 months on the job, my boss pulled me aside and actually told me to slow down my work effort because other people felt I was making them look bad.  I realized that most people working there were lifers just waiting to reach retirement age.  There was no innovation and no motivation for change unless the regulators forced it.  It was very similar to working for the government.

Now, a confluence of events has transpired to change that mindset.  There is a lot of hype about the utility death spiral based on external market forces, but there is an internal issue to address, as well.  According to Deloitte, the average age of an employee in the power and utility sector is 50 and 48% of engineers in the industry are eligible to retire in 2014.  This situation is cause enough for concern just to replace the existing employees to maintain the status quo in utility operations.  There may not be enough young people going to school for the types of skills that these position require, particularly in areas like nuclear engineering (should the nuclear fleet continue to operate for the next 20 years or so).  However, at the same time, the business model for utilities is changing, which holds an opportunity to bring in new people with fresh perspectives who will start with blank, unbiased slates.

New Demands, New Skills

The utility’s role now is not simply to maintain the poles, wires, and central power plants – the hard physical assets of the grid.  Although those responsibilities will remain important jobs necessary for maintaining reliability, new skill sets are required to meet new focuses on IT, distributed resources, and customer interaction.

The IT world is combining with the operational technology (OT) side that utilities are experts in.  This flows from the transmission and distribution side in the form of sensors, to big data analytics, to smart meters, to social media, to end-user communication and control networks.  There are plenty of students looking to work in the IT field, and these challenges will be appealing to those who do not want to build gaming and photo apps for the Internet.

The days of needing hundreds of engineers to staff a huge power plant will slowly fade away as more roles become automated and development shifts to smaller, more flexible distributed energy sources like solar, combined heat and power, energy efficiency, demand response, electric vehicles, and microgrids.  There is a ton of entrepreneurial effort being put into these areas, as business schools place a bigger focus on sustainability and venture capital pours money into clean technology.  Utilities will need to have the brainpower to deal with these resources interconnecting with their systems or even manage them in-house where markets allow.

So Long, Who’s Next?

Utilities are starting to look at end users as customers rather than ratepayers.  This transition entails thinking about what kind of services customers want and delivering products and solutions to meet those desires.  These skills are far from the core competencies of the utility, so new blood that understands how to create customer-centric rate structures, energy management tools, and mobile communication and control applications will be essential.

The retirement wave may be approaching utilities, but it can be an opportunistic time to bring in fresh minds to lead down the new path of the strategic energy model.


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