The respected Gratton Institute in Australia hosted a discussion of energy insiders – grid operators, distributors, the regulator. It’s well worth reading for many reasons. When I was thinking about this article I remembered the discussion. Here are a few extracts:
MIKE: Andrew, one of the elements in the room here is the growth in peak demand. I can put however many air conditioners I want in my house and as long as I can pay for the electricity, I can turn them on and I don’t have to worry about that. You certainly can’t regulate for it. When are we going to allow you to regulate for peak demand? Obviously it’s not in the interests of the network operators who get a guaranteed rate of return on investment in growing the grid, as I understand it. It’s not there in the business model anyway. Do you see that coming?
MIKE: Well, controlling this thing which is really driving a lot of the issues that we have which is peak demand growth. The issue at the moment is that we haven’t had peak demand growth in the last few years because we haven’t had hot weather. We just don’t know how many air conditioners are out there that have never been turned on – three or four per household? People have made those investments, and when the next hot weather comes they’re going to recoup their investments by running them full bore. We don’t know what the load be like when that happens.
ANDREW: Mike’s quite right. Unless there is a change in usage, there’s the risk of this ongoing growth in demand and the ongoing necessity for investment in the network, and a continued increase in prices. That is the key to it. Then the question becomes who’s responsible for managing the demand? Ought it to be the businesses themselves, and providing the businesses with the incentives to go for the lowest cost solution, whether that is network augmentation or demand management. That’s a very good way of approaching it. The other is to look at the pricing structures such that those consumers who are putting the extra load on the network, with the four air conditioners, are paying for their load on the network. At the moment everybody pays on the basis of average use rather than paying for how much demand they put on the network. Now that’s a pretty radical change in the way electricity is charged. That would lead to arguably a much better outcome in terms of the economics, it would then give people the right signals to manage their demand…
MATT: I think customers face network charges and at the moment they don’t have any way to manage their network bill because it’s just based on average usage rather than peak demand and they don’t get a signal that tells them use less peak power.
GREG: How far are we away from consumers being able to control that?
TRISTAN: In other parts of the world it’s already working. For large customers at the moment they can already do that. We have a number of customers within Victoria and Australia who when the wholesale price of power goes high they curtail their usage. Smelters who just stop hotlines for a couple of hours to reduce their usage at that point in time. The reason they can do that is they can see the price signal. They have a contract which tells them in times of high prices if you turn off you get a financial reward for doing it. And they say, it’s worth doing it, I’ll turn off. Retail customers don’t get any of those price signals at the moment.
GREG: Should they?
TRISTAN: We think they should. We think there’s about $11b of installed electricity infrastructure that’s used for about eight days a year, but no-one sees that price signal. If you’ve got something that’s not used very often, it’s very expensive. The reality is if you want people to use less of something, charge them what it costs. If they’re willing to pay it, they can use it. If they’re not willing to pay it, then they’ll do something about it. In terms of enablers, though, then you do have to have things like smart meters which allow people to actually see what’s happening in their household, and you have to have products from retailers and other participants that can allow them to do something about it. Some of the things that we’re exploring in that field are the pricing mechanisms off-time use pricing, linkages to smart appliances, so your fridge, your air conditioner, your washing machine, your dishwasher, can all be interrupted based on a price signal received by the smart meter that turns the appliance on and off. We’re getting to the point where we can do that, but we need to have the regulatory infrastructure that just enables that sort of competition and pricing to occur.
Demand management is an important topic for the electricity industry regardless of any questions about renewable energy.
The highlighted portion in the last statement is the key – to cope with peak demand, lots of investment has to be added that will only ever be rarely used. Earlier in the discussion (not shown in the extract) there was talk about discussing with the community the tradeoff between prices and grid reliability. Basically, making the grid 99.99% reliable imposes a lot of costs.
Maybe consumers would rather have had the option to pay 2/3 of their current bill and go without electricity for half a day every 5 years.
Imagine for example, that you live in a place with hot summers and this is scenario A:
- you pay 20c per kWh
- across a year you pay $2,000 for electricity
Now the next year the rules are changed and you have scenario B
- you pay 12c per kWh
- a saving of $800 per year on your bill
- on 20 or so hot days you would pay $1 per kWh from 11am to 3pm
- on one day of the year between midday and 3pm you would pay $20 per kWh.
This is all, by the way, because we can’t store electricity (not with any reasonable cost). For the same reason, before intermittent renewable energy came on the scene, economical storage of electricity was also in high demand. But it wasn’t, and still isn’t, available.
If we picture the change from scenario A to B, a lot of people would be happy. Most people would take B if it was an option. Sure it’s hot but lots of people survived without air conditioners a decade before, definitely a generation before (lots still do). Fans, ice cubes, local swimming pools, beaches.. Saving $800 a year means a lot to some people. Of course, there would be winners and losers. The losers would be the air conditioning industry which would lose a large chunk of its business; suppliers of transmission and distribution equipment no longer needed to upgrade the networks; hospitals that had to pay the high costs to keep people alive..
Of course, what actually happens in this scenario, given the regulated nature of the industry that exists in most (all?) developed countries would be a little different. As peak demand falls off, the price falls off. So it isn’t a case of no one buying electricity at $1 per kWh. What happens is the demand drops off and so the price falls. Supply and demand – an equilibrium is reached where people are willing to pay the real cost. And based on the new peak demand patterns the industry tries to forecast what it needs to upgrade or expand the network over the next 5-10 years and negotiates with the regulator how this affects prices.
But the key is people paying for the very expensive peak demand they want to use at the real cost, rather than having their costs subsidized by everyone else.
It makes perfect sense once you understand a) how an electricity grid operates and b) electricity cannot be stored.
Let’s consider a different country. Although England has some hot summers the problem of peak demand in England is a different one – cold winter evenings. Now I haven’t checked any real references but my understanding is that lots of people die indoors due to the cold each year in cold countries and it’s more of a problem than people dying due to heat in the middle of the day in hot countries. (I might be wrong on this, but I’m thinking of the subset of countries where electricity is available and affordable by the general population).
If you add demand management in a cold country maybe the problem becomes a different one – poorer old people already struggling with their electricity bills now turn off the heating when they need it the most. The cost being pushed up by prosperous working people with their heating set on the maximum for comfort. The principle is the same, of course – demand management means higher prices for electricity and so on average people use less heating.
So in my hugely over-simplified world, demand management has different questions around it in different climates. Air conditioning in the middle of the summer day as a luxury vs heating in the winter evenings as a necessity.
The problem becomes more complicated when considering renewables. Now it is less about reducing peak demand, instead about trying to match demand with a variable supply.
There are a lot of studies in demand management, essentially pilot studies, where a number of consumers get charged different rates and the study looks at the resulting reduction in electricity use. Some of them suggest possible large demand reduction, especially with intelligent meters. Some of them suggest fairly pedestrian reductions. We’ll have a look at them in the next article.
Consumer demand management can come in a few different ways:
- Change in schedule – e.g., you run the dishwasher at a different time. There is no reduction in overall demand, but you’ve reduced peak demand. This is simply a choice about when to use a device, and it has little impact on you the consumer, other than minor planning, or a piece of technology that needs to be programmed
- Energy storage – e.g., during winter you heat up your house during the middle of the day when demand is low – and electricity rates are low – so it’s still warm in the evening. You’ve actually increased overall demand because energy will be lost (insulation is not perfect), but you have reduced peak demand
- Cutting back – e.g. you don’t turn on the airconditioning during the middle of the summer day because electricity is too expensive. In this example, you suffer some small character-building inconvenience. This is not energy use deferred or changed, it’s simply overall reduction in usage. In other examples the suffering might be substantial.
The demand management “tools” don’t create energy storage. Apart from the heat capacity of a house, reduced by less than perfect insulation, and the heat capacities of fridges and freezers, there is not much energy storage (and there’s effectively no electricity storage). So the choices come down to changing a schedule (washing machine, dishwasher) or to cutting back.
It’s easy to reduce total demand. Just increase the price.
The challenge of demand management to help with intermittent renewables also depends on whether solar or wind is the dominant energy source. We’ll look at this more in a subsequent article.
Articles in this Series
Renewable Energy I – Introduction
Renewables II – Solar and Free Lunches – Solar power
Renewables III – US Grid Operators’ Opinions – The grid operators’ concerns
Renewables IV – Wind, Forecast Horizon & Backups – Some more detail about wind power – what do we do when the wind goes on vacation