Are You Ready to Compete with Your Customers?

New technologies and consumer demand for cleaner energy are rapidly transforming the power sector. This transformation is most evident in the advent of distributed energy resources (DER)—a marriage of information technologies with the power grid. Some call it the internet of electricity.

DER is a package of customer-side technologies including energy efficiency, demand response (DR), distributed generation, storage (both thermal and electric), and smart electric vehicle charging. Thanks to digital controls and wireless communications, these demand-side resources are becoming controllable enough to look to the grid just like a power plant. Supply and demand are becoming interchangeable to grid operators.

As part of America’s Power Plan (, Rocky Mountain Institute looked at the potential for DER and the barriers standing in their way.

Losing Control

The growth of DER is a wildcard in the power sector. With central-station power plants and transmission lines, regulators have a high degree of control over how much gets developed and where. Even in competitive markets, independent power plant developers are keenly aware of market trends and do not risk billion dollar investments lightly.

But demand-side technologies are driven by consumers, who make decisions to meet their own needs, not those of the whole system. As long as efficiency, distributed generation, and smarter controls deliver value to consumers, their use will continue to grow.

How big a contribution can they make? Some examples suggest we are in the early stages of a revolution.

A New Type of Capacity

The PJM Interconnection, serving 60 million customers from the Mid-Atlantic to Chicago, has enthusiastically embraced demand response. With DR, customers respond to calls for conservation and the market price of electricity in real time. Automated controls change the temperature of thermostats, dim lights, briefly turn off water heaters and refrigerators, and otherwise give the grid a break.

DR is an evolution of what utilities have for years called direct load control. But information technology has refined it to be faster, more reliable and transparent, and more attractive to consumers.

Now that DR has become reliable enough to count as a utility system asset, its value has been quantified and an industry of DR aggregators has grown up, led by companies like Enernoc and Comverge. These companies recruit customers, bundle the DR to make it look to the utility system like a power plant, and then sell “negawatts” to the market.

Each year PJM holds auctions to buy capacity three years ahead of time. Starting in 2009, PJM allowed efficiency and DR to compete in the auctions with new power plants. Last May, PJM signed up 169,000 MW of capacity for 2016. Most of this was existing power plants, but for new resources DR was the biggest winner, with 12,400 MW accepted. This was over two times as much as new power plants.

“We can reduce our peak loads in this country by 20 percent using demand response,” according to Jon Wellinghoff, recently retired chair of the Federal Energy Regulatory Commission. “It’s happening and it’s coming very quickly.”

Big customers, like factories and campuses, have been the first to adopt DER technologies. Companies like Amazon, AT&T, and Home Depot are beginning to test products for residential customers. Meanwhile, Ford has launched MyEnergi Lifestyle with Whirlpool, SunPower, and others to integrate its Cmax Energi electric car with smart appliances and solar, delivering a 60% reduction in energy costs for a typical home.

Paving the Way for Innovation

These innovations no doubt are just the beginning. But they are confronting regulations that are not equipped to incorporate them gracefully.

A paper for the Edison Electric Institute, “Disruptive Challenges,” drew on parallels with the telecom industry to evoke a “vicious cycle” triggered by DER that would undermine utility profits. “The threat to the centralized utility service model is likely to come from new technologies or customer behavioral changes that reduce load,” it argued.

In many places the rules penalize utilities with lost profits for every kilowatt-hour not used and for every generator put on the customer side of the meter. Our century-old legal, economic, and regulatory structures are thwarting innovation.

To address the mismatch between evolving electricity system needs and the rules and regulations constraining that system, we recommend the following set of policy changes:

  • Better analysis. Policymakers need to better measure DER costs and benefits to provide a foundation for designing effective incentives, pricing structures, and markets, as well as to compare centralized and distributed options in resource planning processes.
  • Create a level playing field. As long as DER play a different game than centralized options, there will be unintended results that could undermine the quality of service, financial viability, and innovation. We need to put them on the same field, competing fully and fairly, to provide energy and ancillary services.
  • New technologies and service models. Distributed technologies are like square pegs in the round holes of current regulations. Regulators must remove this barrier to innovation by setting up appropriate metering and cost accounting, and allowing innovative ownership and billing structures. Permitting, financing, and interconnection procedures can all be streamlined to avoid wasted money and effort.

These changes will allow for a graceful transition to the cleaner, more efficient, more resilient, and more affordable future customers are seeking with distributed energy resources. ■

James Newcomb is a program director for Rocky Mountain Institute and lead author of “Policy Implications of Decentralization.” Ben Paulos is the director of America’s Power Plan.