Cut electricity costs through demand response

by Brian Owenson, SPL WorldGroup

There’s a new tool on the horizon that can help North American manufacturers in the constant battle against high electricity costs.

It’s called “demand response.” And, it’s intended as a market-based alternative to the two traditional ways to handle grid constraints: interruptible rates and blackouts.

Why a new program?
Interruptible rates are a long-standing backbone of electricity reliability. They offer lower year-long or seasonal electricity prices to facilities that agree to reduce electricity use in emergencies.

Unfortunately, utilities control the cut-offs for interruptible customers. That limits the number of participants. In today’s high-tech manufacturing world, loss of electricity during certain processes can ruin materials. And, just-in-time establishments serving just-in-time customers can encounter significant financial penalties for failure to deliver. Putting your financial results in the hands of your utility, with little or no control, is far too high a risk for many manufacturers to accept.

Enter demand response
Fortunately, policymakers and a few utilities have developed viable alternatives. Demand response programs make specific requests to reduce load during a specific period. They reward participants with financial incentives geared to the length and size of the reduction.

While not widespread, these programs have already proven valuable in solving grid constraints in New York and elsewhere. The Federal Energy Regulatory Commission (FERC) has become a strong advocate.

Demand response comes in two varieties.

Reliability-based programs ask facilities to sign up as potential participants. When a problem arises, utilities contact participants and request a demand reduction. Those who volunteer get a financial reward geared to the size and duration of the reduction.

Market-based programs have a different trigger: the wholesale price of electricity. Facilities can determine in advance a set price at which they will reduce demand. Alternatively, they may elect merely the option to cut back.

Within these basic program types are dozens of variations: guarantees on length of cutback, variations in time to respond and in response method. Some programs even have penalties.

Fundamental to demand-response programs are interval meters that measure consumption during a prescribed time interval. The interval can theoretically be of any length; for electricity it is generally 10 and 60 minutes. Prices for each interval can vary, for example, in response to spot-market prices. But facilities do not have to undertake such complex pricing on a regular basis to participate in demand-response programs. Everyday intervals can be grouped into categories that resemble common peak or shoulder designations. During emergencies or high-price periods, they can be pulled out and priced differently.

Should you participate?
A demand response program could be of value if you meet two or more of the following tests.

Participation is part of a package of cost-saving uses for interval billing data. Analyzing interval data can help you identify billing errors (for instance, another facility is cross-wired with yours), operational issues (turning on all the equipment at one time is creating an expensive peak), and equipment problems (thus letting your order maintenance and parts that prevent down-time).

Software is readily available to guide your analysis; even viewing the data via Microsoft Excel graphics is a big step toward electricity cost-cutting. Interval metering may also make your facility eligible for supply contracts (from a retailer or your utility) tailored to your special needs.

Your electricity costs are higher than those of your competitors. Metal fabrication uses on average more than 5 million kilowatt hours annually per establishment. That means at average U.S. prices (4.7 cents per kilowatt hour), the average establishment pays about $235,000 per year in electricity bills, or slightly more than 1 percent of average output. Your costs may be higher if you’re in a high-price region or if you run only when electricity prices are on peak.

You have alternative sources of energy. On-site generation and (for larger sites) air permits to cover anticipated emissions mean that demand-response participation does not threaten to interrupt normal operations.

You can reduce energy use for several hours or shift use to other times. North American electricity overloads tend to occur during the air-conditioning season. If your electricity use includes substantial space cooling that is not process-related, you may be able to cover demand-response requirements by permitting temperatures to rise or reducing air intake. If program incentives are high enough, it may be cost-effective to delay production to a later shift.

Costs don’t outstrip benefits. Interval meters frequently cost more than $1,500 to install and $300 annually to operate. But they may not cost you that much. Some utilities provide meters for free. Elsewhere (including New York and California), state subsidies may be available to underwrite at least some of these costs.

You’re willing to invest some time. If you’re new to interval metering, it will take some study to maximize the use of the information. Sorting out a utility’s specific demand-response programs can also require a time investment. One study found that for the convenience of the utility, or because software was not up-to-date, many direct-response programs were confusing, designed with tight restrictions, or limited to only the largest facilities. You may need to activate your trade association to persuade your utility to design programs that elicit participation from a broader group.

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