The Fundamentals of Energy Efficiency and Demand Response

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What are Energy Efficiency & Demand Response Programs?

Though the Energy Information Administration states, “there does not seem to be a single commonly-accepted definition of energy efficiency,” efficient energy use, sometimes simply called energy efficiency, refers to the reduction in the amount of energy required to provide the equivalent quality of products and services. Examples include improvements to home insulation, installation of fluorescent lighting & efficient appliances, or improving building design to minimize energy waste.

Demand response, according to the Department of Energy, is defined as, “a tariff or program established to motivate changes in electric use by end-use customers in response to changes in the price of electricity over time, or to give incentive payments designed to induce lower electricity use at times of high market prices or when grid reliability is jeopardized.” Utilities can signal demand reduction to consumers, either through price-based incentives or through explicit requests. Unlike energy efficiency, which reduces energy consumption at all times, demand response programs aim to shift load away from peak hours towards hours where demand is lower.

What are the Benefits of Energy Efficiency & Demand Response Programs?

The decreasing and ‘flattening’ of the demand curve can directly contribute to improved system and grid reliability. This ultimately translates to lower energy costs, resulting in a financial cost saving to consumers, assuming the energy savings are greater than the cost of implementing these programs and policies. In 2010, Dan Delurey, then president of the Demand Response and Smart Grid Coalition, pointed out that the top 100 hours (or just over 1% of the hours in a year) account for 10-20% of total electricity costs in the United States. Slashing energy consumption during these high peak hours, or at least shifting demand to off-peak hours, relieves stress on the grid and should make electricity cheaper.

Additionally, decreasing energy consumption directly contributes to the reduction of greenhouse gas emissions. According to the International Energy Agency, improved energy efficiency in buildings, industrial processes and transportation prevented the emission of 10.2 gigatonnes of CO2, helping to minimize global emissions of greenhouse gases.

Lastly, reductions in energy consumption can provide domestic benefits in the forms of avoided energy capital expenditure and increased energy security. The chart below displays the value of avoided imports by country in 2014 due to the investments in energy efficiency since 1990:

Added Volume and Value of Imports Figure 1: Avoided volume and value of imports in 2014 from efficiency investments in IEA countries since 1990. Source

Based on these estimated savings, energy efficiency not only benefits a country’s trade balance, but also reduces their reliance on foreign countries to meet energy needs.

Modeling the Impacts of Energy Efficiency and Demand Response

Using AURORAxmp, we are able to quantify the impact of energy efficiency and demand response programs. In this simple exercise, we compare the difference between California with 2 GW of energy efficiency and 2 GW of demand response versus a case without energy efficiency or demand response from 2016 to 2030. The charts below show the average wholesale electricity prices & system production costs:

average electricity price $-MWhAverage System Cost (000's)

 Figure 2: Note these are 2014 real dollars.

Holding all else equal, adding demand response and energy efficiency programs into the system decreased average wholesale electricity prices by about $2.88 (5.4%) and the average system production cost fell by $496,000,000 (5.1%). This is a simple example in one part of the country, but one can easily include additional assumptions about the grid, resources characteristics, and load shape as they desire.

Both demand response and energy efficiency programs are intended to be more cost effective and efficient mechanisms of meeting power needs than adding generation. Emphasis on the demand side can lead to lower system production costs, increased grid reliability, and cheaper electric bills; all of which lie in the best interest of governments, utilities, and consumers.

Filed under: Energy Efficency, Power Market InsightsTagged with: , , , , ,

1 Comment

  1. Thanks for explaining a little bit about energy efficiency and demand response. I didn’t realize that there are programs designed to shift energy consumption away from peak hours towards hours when demand is lower. It seems like this is a great way to reduce energy consumption as well as lower the cost. Hopefully, more communities can implement things like demand response to help reduce energy consumption and help everyone save money.


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