Cleantech Market Intelligence
Is Demand Response The Wrong Strategy?
Warren Causey, who has earned his right to provocative punditry, postulated recently on Smart Grid News that perhaps demand response and dynamic pricing are wrongheaded ideas. He’s not the first to make this argument; this question is at the heart of the industry’s hand-wringing over “consumer engagement” for the last several years. In fact, you could say that the wisdom of driving consumer behavior change is perhaps the only rational consumer argument worth having.
A while back, I argued that opponents on both end of the political spectrum should have reasons to embrace dynamic pricing: Tea-Partiers should support free market-based energy pricing, and Occupy-movement types would surely embrace forcing wasteful power users to “pay their fair share.” So I believe linking consumers with the real cost of electricity is good idea that, if done well, will benefit many across the value chain.
However, what if the fundamental premise is wrong? The concept of demand response is based on the assumption that electricity, which inconveniently requires generation and consumption to be time-synchronized, is a scarce and expensive resource. Hence it needs careful optimization. Will this always be true?
Earlier in my career, my job was defining product requirements for networking equipment and associated silicon. I argued the finer points of media access protocols, quality-of-service mechanisms, and advanced queuing algorithms, all in the name of “bandwidth optimization,” because, as everyone knew, bandwidth was a scarce and highly valued resource. That was less than 15 years ago. Then came cheap, plentiful, high-capacity fiber, dense wave division multiplexing, and advanced digital signal processing for twisted-pair copper wires, and suddenly bandwidth wasn’t so scarce anymore. And simple (and wasteful) Ethernet, alongside simple (and wasteful) IP, trounced the ATM, FDDI, Token-Ring, and myriad other “bandwidth efficient” protocols of the age. Eventually this simple but wasteful technology became responsible for dismantling and rearranging the entire telephone industry. Fortunately, I had the opportunity to ride the fun side of that wave, but many experienced the more destructive side.
One of the commenters on Causey’s SGN article mentions the “Enernet” pitch developed by Bob Metcalfe (Ethernet inventor, venture capitalist, and industry pundit), who claims that the same market dynamics behind the telecom revolution can apply to energy, if we get the incentives right. Having witnessed Bob’s talk evolve during a stint at one of his companies, I agree with his major points, though the parallels he draws can be overdone.
So what technologies could end the scarcity of electric power? Today’s fracking-enabled, cheap, and seemingly abundant natural gas is already upsetting the energy management apple cart, at least in North America. Advances in energy storage and net-zero energy buildings and homes (whether via green construction, local renewable generation, small fuel cells, or a combination) are other potentially disruptive examples. Even straightforward energy efficiency initiatives may have the side effect of reducing the percentage of load available for demand response.
Does this mean that we should ignore the near-term benefits of dynamic pricing, demand response, and other supplier-grid-consumer connections? I think not. But Causey is right that our industry must be open to challenging fundamental assumptions, and be on the watch for inevitable waves of creative destruction.