The Death of Load Response – By Solar, On The Roof, With The Battery

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What is load response and why is solar (with the battery) going to kill it?

Load response (LR, often also called demand response (DR) means that customers use less electricity at specified times and get paid for the electricity they did not consume. Originally, this meant classic DR, the reduction in usage by customers when there is a likelihood of insufficient supply to meet demand, typically during the peak hours of the year. Most wholesale markets pay DR program participants based on market capacity rates and the amount of capacity the participants supply during peak hours. Classic DR primarily targets capacity.

Relatively recently, people in the electric industry increasingly define LR to include both classic DR, and, more broadly, reductions in usage that address energy and ancillaries (see Constellation Load Response). PJM states:

PJM’s Economic Load Response program enables demand resources to voluntarily respond to PJM locational marginal prices (LMP) by reducing consumption and receiving a payment for the reduction. Using the day-ahead alternative, qualified market participants may offer to reduce the load they draw from the PJM system in advance of real-time operations and receive payments based on day-ahead LMP for the reductions. PJM Economic Load Response Description

LR has become big business. Many companies work with customers to enable them to participate in LR,either as their primary business (EnerNOC) or as a significant portion of business (Constellation, Direct Energy, Hess Energy). In turn, many customers can make a significant amount of money from participating in LR. So, both companies and customers have a vested interest in LR.

But,without high capacity market prices and a relatively small number of hours of supply demand imbalance, classic DR will become economically unattractive to customers. And  without spikes in spot prices, economic load response in  reaction to market prices will also become economically unattractive. So how will solar, on the roof, with the battery do this?

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A recent study by UBS indicates:

  1. In many parts of Europe, solar is already competitive with grid power and wildly competitive with at-meter power prices (“socket parity”).
  2. By 2014, modest battery installations along with a modest solar installation will be cost-effective in some places, and become much more so in subsequent years. (Note that the price axis in the graph below appears to be mislabeled as €/MWh instead of Euro cents/kWh. Also note that solar-only prices rise through the years because only a 4 kWp system is used in the analysis, requiring purchases from the grid at ever higher prices; it may be cheaper to install more solar.)
  3. UBS expects that solar with a modest amount of batteries (3 kWh) will significantly flatten the wholesale market price curve, reducing the value of capacity and increasing the number of possible hours that could be the system peak. Both of these items are a death knell for demand response.

The UBS report leaves us with several other important nuggets, unrelated to demand response, but critical to our current electric industry paradigm:

“We are at the beginning of a new era in power markets. Purely based on economics, we believe almost every family home and every commercial rooftop in Germany, Italy and Spain should be equipped with a solar system by the end of this decade.” Without any peaks, the profit margin of generators is removed. UBS calculates the EBITDA profit pool of the conventional generators will shrink by around 50 per cent. “Households will be able to use the electricity stored in batteries during the evening, which means pressure on spot prices during the evening hours. So far, solar has only been shaving the midday peak. Even worse, batteries installed in family homes or commercial buildings could also reduce the morning peak as they could be charged with low-cost electricity from the grid during night hours.”

Many have likened the coming change in the electric industry to what happened in the telecommunications industry with regard to cell phones. (See, for example, Solar PV will do to grids what mobiles did to telephony.) This is only a partially correct analogy.

The real problem was that landline telephony companies were charging for their service based on distance and duration, yet computerized switching and fiber optics meant that their variable costs (not incremental costs) were essentially zero. Their competitors, who had the same cost structure, were able to continually under price the incumbents until they all got to the same price structure based on their costs, i.e., a fixed price for all you can eat (or call).

Subsequently, cell phones made it cheaper to connect to the switches than the cost of running copper from the switch to the geographical location. Landlines lost because they were priced incorrectly, were upstaged by a cheaper cost model (cellular), and were upstaged by a better value model (call from any location instead of a fixed location).

The electric industry faces a similar, though not exactly the same, problem. First, its price structure does not reflect its current cost structure. It charges for fixed costs with volume-based charges, especially for distribution costs. Second, its production costs do have a large variable component (fuel costs), but its new technological competition (solar and wind) do not. Ultimately, the charge structure will be driven by the paradigm that has the lowest total costs, and as that moves to solar, especially on-site solar, it must drive utility charges to be based on costs or the existing utilities go out of business and their assets reconstituted as new companies who  will price competitively.

Third, if on-site solar with batteries can offer higher reliability (e.g., outage protection) than the grid, it will have a better value model for which people will pay a premium in direct proportion to the amount of protection. (Think after Hurricane Sandy where you needed back up power for at least a couple weeks.)

The UBS study only looked at Europe. UBS thinks that countries with inadequate sunshine (northern Europe) or relatively low electricity rates (France) are, for now, protected from the solar + battery disruption. However, if it becomes prevalent (UBS: ”Purely based on economics, we believe almost every family home and every commercial rooftop in Germany, Italy and Spain should be equipped with a solar system by the end of this decade.”), costs will decrease dramatically and threaten LR, and utilities, throughout Europe, the Americas, and Australia.

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