Mass Market Demand Response and Variable Generation Integration Issues: A Scoping Study

The penetration of renewable generation technology (e.g., wind, solar) is expected to dramatically increase in the United States during the coming years as many states are implementing policies to expand this sector through regulation and/or legislation. It is widely understood, though, that large scale deployment of certain renewable energy sources, namely wind and solar, poses system integration challenges because of its variable and often times unpredictable production characteristics (NERC, 2009). Strategies that rely on existing thermal generation resources and improved wind and solar energy production forecasts to manage this variability are currently employed by bulk power system operators, although a host of additional options are envisioned for the near future. Demand response (DR), when properly designed, could be a viable resource for managing many of the system balancing issues associated with integrating large-scale variable generation (VG) resources (NERC, 2009). However, demand-side options would need to compete against strategies already in use or contemplated for the future to integrate larger volumes of wind and solar generation resources. Proponents of smart grid (of which Advanced Metering Infrastructure or AMI is an integral component) assert that the technologies associated with this new investment can facilitate synergies and linkages between demand-side management and bulk power system needs. For example, smart grid proponents assert that system-wide implementation of advanced metering to mass market customers (i.e., residential and small commercial customers) as part of a smart grid deployment enables a significant increase in demand response capability.1 Specifically, the implementation of AMI allows electricity consumption information to be captured, stored and utilized at a highly granular level (e.g., 15-60 minute intervals in most cases) and provides an opportunity for utilities and public policymakers to more fully engage electricity customers in better managing their own usage through time-based rates and near-real time feedback to customers on their usage patterns while also potentially improving the management of the bulk power system. At present, development of time-based rates and demand response programs and the installation of variable generation resources are moving forward largely independent of each other in state and regional regulatory and policy forums and without much regard to the complementary nature of their operational characteristics.2 By 2020, the electric power sector is expected to add ~65 million advanced meters3 (which would reach ~47% of U.S. households) as part of smart grid and AMI4 deployments (IEE, 2010) and add ~40-80 GW of wind and solar capacity (EIA, 2010). Thus, in this scoping study, we focus on a key question posed by policymakers: what role can the smart grid (and its associated enabling technology) play over the next 5-10 years in helping to integrate greater penetration of variable generation resources by providing mass market customers with greater access to demand response opportunities? There is a well-established body of research that examines variable generation integration issues as well as demand response potential, but the nexus between the two has been somewhat neglected by the industry. The studies that have been conducted are informative concerning what could be accomplished with strong broad-based support for the expansion of demand response opportunities, but typically do not discuss the many barriers that stand in the way of reaching this potential. This study examines how demand side resources could be used to integrate wind and solar resources in the bulk power system, identifies barriers that currently limit the use of demand side strategies, and suggests several factors that should be considered in assessing alternative strategies that can be employed to integrate wind and solar resources in the bulk power system. It is difficult to properly gauge the role that DR could play in managing VG integration issues in the near future without acknowledging and understanding the entities and institutions that govern the interactions between variable generation and mass market customers (see Figure ES-1). Retail entities, like load-serving entities (LSE) and aggregators of retail customers (ARC), harness the demand response opportunities of mass market customers through tariffs (and DR programs) that are approved by state regulatory agencies or local governing entities (in the case of public power). The changes in electricity consumption induced by DR as well as the changes in electricity production due to the variable nature of wind and solar generation technologies is jointly managed by bulk power system operators. Bulk power system operators function under tariffs approved by the Federal Energy Regulatory Commission (FERC) and must operate their systems in accordance with rules set by regional reliability councils. These reliability rules are derived from enforceable standards that are set by the North American Electric Reliability Corporation (NERC) and approved by federal regulators. Thus, the role that DR can play in managing VG integration issues is contingent on what opportunities state and local regulators are willing to approve and how customers' response to the DR opportunities can be integrated into the bulk power system both electrically (due to reliability rules) and financially (due to market rules).