Virtual Power – Market Rewards for Smart Energy Practices

The entire electricity grid is undergoing innovations, and one interesting change is occurring in electricity markets and the way we value electricity consumption.  The California Independent System Operator (CAISO) is the not-for-profit corporation charged with operating the majority of California’s high-voltage wholesale power grid.  It serves as the link between power plants and utilities, and ensures equal access to the grid for all qualified users, among other important functions.  Their latest strategic plan identifies integration of renewable energy sources and Smart Grid technologies into the grid to improve reliability and conform to California energy directives and air and water quality mandates.  (This definition is taken from the Smart Grid Dictionary).  

CAISO, following the lead of other ISOs based in the Northeast and Mid-Atlantic states is introducing a new program called Proxy Demand Response or Proxy DR into the wholesale California power market around August of this year.  Demand Response (DR), which is saddled with a terrible name, is a smart energy practice to reduce electricity use at times when demand is greatest.  California has always had DR programs at the retail level (such as residential opt-in programs to change air conditioning temperatures), but the introduction of Proxy DR into the wholesale market has broader implications for California commercial and industrial (C&I) and residential consumers. 

Proxy DR lets companies – not just utilities – be generators of virtual power by reducing energy consumption at times of peak electricity demand.  In other words, you reward the behavior.  In practice, a chain of grocery stores could commit to dimming lights in California stores at high use times to reduce their electricity needs, and receive compensation for their reductions.   Those payments help them keep their operating costs down, which in turn benefit consumers through lower prices for products and services.  Since Proxy DR participation is based on a competitive bidding system, CAISO can award business to the lowest bidders, helping ensure the lowest costs for electricity in its region. 

There are regional and national environmental benefits as well.  Jon Wellinghoff,  Chairman of the Federal Energy Regulatory Commission (FERC) stated that an estimated nationwide 20% reduction in peak electricity demand “if realized, can reduce…the number of power plants needed to meet peak demand and thereby reduce carbon emissions by as much as 1.2 billion tons of carbon annually.”  That’s huge.

In addition to saving money and the environment, Proxy DR is also an important tool to integrate variable renewable energy sources such as solar and wind into the grid.   If you’ve ever been sailing, you understand how fickle the wind can be. The ability to quickly reduce system-wide electricity use through a Proxy DR market program helps ISOs manage variations in electricity production caused by solar or wind through deployment of these virtual generation resources. 

Proxy DR is a creative program that can be used at wholesale and retail power markets, and the retail aspect will be addressed in next week’s blog.  The retail market presents different challenges, and that’s where Smart Grid technologies such as Home Energy Management Systems (HEMS) come into play.  However, as many of my blogs point out, there’s a need for consumer education about this market innovation.  Consumer education and enlightenment models will be discussed at the upcoming Peak Load Management Alliance (PLMA) Spring Conference, where I’ll be one of the panelists delivering perspectives on how to rollout innovative technologies and services.  

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