IEA Task XIII: Demand Response Resources

1

• IEA Task XIII Demand Response Resources
• DR Market Potential and Valuation Task
  Discussions
• 1st Experts Meeting
• Valencia, Spain
• May 10-11, 2004
• Presented By
• Daniel M. Violette, Ph.D. Summit Blue
  Consulting
• Boulder, Colorado
• Phone [phone]
• E-mail dviolette_at_summitblue.com

2
Proposed Activities / Tasks

• Eight proposed activities and project tasks
• Task 1 -- Finalize Principles and County-Specific
  Objectives
• Task 2 -- Define the DR Resource Base and Market
  Characterization
• Focus on Task 3 Market Potential of DRR
• Focus on - Task 4 Demand Response Valuation or
  building the "economic case" for DR
• Task 5 Role and Value of Enabling Technologies
• Task 6 Priorities and Barriers Solutions and
  Recommendations
• Task 7 Develop DRR Network of Methods, Tools
  and Applications
• Task 8 Deliver Products and Intellectual
  Property (IP)

3
Task 3 Market Potential of DRR

• Build on Best Practices to determine economic DR
  within different markets and under different
  market conditions.
• Steps
• Define markets based on DR product and delivery
  pathways.
• Consider market structures, product and delivery
  needs, and objectives to be met by DR.
• Develop method(s) for estimating economic DR
  potential.
• On a regional level and on a country level.
• Develop DR potential relationships, i.e., how
  economic DR will vary given changes in key
  variables (e.g., operating reserves, peak and
  off-peak prices, customer characteristics, and
  technology costs).
• Apply methods (by request) on a regional and
  country-specific basis.
• Product -- Define attainable magnitudes of DR (or
  estimation methods) for region and
  country-specific markets (based on the market
  attributes).

4
Task 4 Demand Response Valuation

• Develop the methods and procedures to establish
  the value proposition to guide DR initiatives.
• Steps
• Methods to assess the "public value" of DR --
  contributions to reliability and price
  stabilization objectives of liberalized markets.
• Methods to assess the "private value" of DR to
  market actors.
• Create an integrated value model/approach that
  characterizes the level and distribution of
  benefits associated with DR (recognize different
  market structures, product designs, and customer
  response).
• Conduct workshops to train country experts on the
  use and interpretation of the integrated value
  model -- the business case from public and
  private perspectives.
• One Concept -- Use the "value framework" combined
  with "economic market potential" to establish DR
  goals (by country and/or market).

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Sub-Task 3 DR Technical, Economic, and Market
Potential
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Task 3 Agenda

• Define market structures.
• Defining DR technical, economic, and market
  potentials.
• Comparing DR potential to energy efficiency
  potential.
• DR Potential estimation tools to be developed
  through this project.
• Options for estimating different types of
  potentials. DLC potential example.
• Next steps.

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Define Market Structures

• Based on Template information, variations in
  market structure that might influence viable DR
  potential.
• For example, length of peak period
• Might be 12 hours in for markets where hydro
  dominants but,
• In other markets, the relevant peak period for DR
  might be just late afternoon and early evening in
  the summers -- 2 P.M. to 8 P.M.
• Basic point -- to assess DR, a definition of DR
  as a resource is needed. This might vary across
  countries and markets.
• Standby Capacity Reserves (2 hour or even
  day-ahead)
• Operating Reserves (30 Minute)
• Spinning Reserves (5 minute which may include
  directly dispatchable resources such as AC units,
  water heaters, or any other resources that can be
  dispatched in near real-time)

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Definitions of "Types" Potential

• DR Technical Potential the maximum amount of DR
  resources that could be achieved with currently
  available technologies.
• DR Economic Potential the maximum amount of DR
  resources that would be cost effective for a
  utility or power pool.
• DR Market or Achievable Potential the amount of
  DR resources that could actually be realized
  through feasible DR programs and prices.

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Technical Potential

• Technical potential is an upper bound of what is
  technically feasible, not a realistic estimate of
  potential that can achieved through market
  mechanisms. Its a thought experiment.
• It tends to be technology dependent, i.e., If all
  technology of a type could respond, what would be
  the magnitude of the response?
• For a direct load control program example, all of
  the central air conditioners in a utilitys
  service area could technically be supplied with
  cycling devices, and could be very aggressively
  cycled.
• However, not all utility customers will allow
  their AC units to be cycled at all, and most will
  not allow them to be cycled more than 50.
• Unreasonable alternatives are not considered,
  e.g., such as all industry shutting down and
  moving to another region.

10
Economic Potential

• Economic Potential is similar to technical
  potential
• adds an economic screen to identify the maximum
  amount of DR resources that are cost effective to
  the utility or power pool.
• In the U.S., the economic screen is often the
  total resource cost test. This test compares
  the lifetime PV of avoided supply costs from DR
  to the PV of total costs of obtaining the DR
  resources.
• Economic potential is an upper bound for
  cost-effective potential, but is not this still
  may not be generally realizable through customers
  who volunteer to participate in DR programs.
• May reflect information costs or simply
  information congestion costs -- how does a
  decision get on a customer's agenda?
• Changes in code can achieve this potential as it
  affects all cost-effective technology.

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Market or Achievable Potential

• Market/Achievable Potential represents a
  realistic estimate of the DR resources that could
  be obtained through specific DR programs or
  prices.
• Utilities often use market potential forecasts in
  the demand-side part of their integrated resource
  plans.
• Market potential estimates are often based or
  actual program or pilot program experience.
• Product development research that includes
  customer surveys are also used frequently to
  estimate market potential.

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Comparison of Different Types of DSM Potential
Energy savings
Energy
Consumption
Year 10
Year 7
Year 5
Year 3
Year 1
Turnover
Add-
Ons
Base Case
Instantaneous
Phase-in
Economic
Achievable
Forecast
Technical
Technical
Potential
Potential
Potential
Potential
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DR Potential Compared to Energy Efficiency (EE)
Potential

• Similar approaches
• Technical, Economic, Market Potential
• Similar segmentation
• Residential, Commercial and Industrial
• Energy-Efficiency (EE) technology focused
• Demand-Response (DR) procedure focused

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DR Potential Compared to Energy Efficiency (EE)
Potential

• Economic potential for DR programs can be more
  difficult to estimate than for EE programs.
• WHY -- Customer participation costs beyond DR
  technology costs can be a larger percentage of
  the total cost of DR programs than for EE
  programs.
• Day-ahead bidding requires every day actions to
  examine the price curve.
• Each DR event may require on-site action.
• EE can be installed and forgotten in many cases.
• Customer costs can be an important impediment.
• Customer participation costs can be difficult to
  estimate accurately.

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What is needed to estimate Technical and Economic
potential?

• Approaches range from
• 1a. Very quantitative/model-Intensive
• -- versus --
• 1b. Simplified spreadsheet approaches.
• AND
• 2a. Data-intensive approaches with a lot of
  on-site data
• -- versus --
• 2b. Secondary-data approaches using customer
  class data and data from other locations.

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DR Potential Estimation Tools

• Tools that could be developed through this
  effort
• Case studies of best-in-class programs/companies
  for different types of DR programs in different
  climate zones/continents.
• Survey templates to assist utilities in
  developing DR potential estimates. Mail,
  telephone, and on-site survey instruments will be
  developed.
• Pilot program results as examples for various
  types of DR.
• Spreadsheet format models for that are easy to
  use in developing long-term DR forecasts.
• Model-based approaches for estimating potential
  that embody the complexity of the decision
  process.

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General DR Potential Estimation Process

• Decide on key project parameters
• goals/purpose, budget, schedule, internal staff,
  and any consultants.
• Specify the analysis framework
• DR approaches consider, customer types, market
  potential of interest, snapshot potential (single
  point in time) or a forecast required (over
  time).
• Collect and analyze data.
• Develop initial potential estimates.
• Refine and finalize potential estimates.

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DR Potential Estimation Methodology Options

• Three general methodological options for
  estimating DR potential are available, depending
  on project budgets and schedules
• Benchmarking approaches
• Customer survey approaches
• Pilot program approaches

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Benchmarking Methods

• These methods can provide quick and inexpensive
  estimates of DR potential.
• Difficult to account for nuances of a specific
  customer base.
• These methods use available best-in-class DR
  program results from a similar region.
• Adjust results from other areas to your region as
  much as possible.
• Adjust for customer attitudes, electric prices,
  equipment saturations, building sizes, and
  climates if possible.
• POSSIBLE PRODUCT -- Benchmarks from best-in-class
  programs.

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Data Collection -- Mail/Telephone Survey
Approaches

• These approaches work best for simple programs
  such as direct load control, or for programs that
  customers are already somewhat familiar with.
• Key advantages of these methods are that theyre
  relatively inexpensive and quick.
• They can provide good estimates of customer
  interest and likely participation in DR programs.
• They do not generally yield good estimates of the
  potential load reductions per customer. Other
  sources should be used for those estimates.

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Data Collection -- On-Site Survey Approaches

• On-site surveys provide the best potential
  estimates except for pilot programs. These
  approaches are intermediate in cost and time.
• A site visit gives the surveyor enough time to
  fully explain a new program to customers, and
  show them written program information.
• The surveyor can also conduct a DR audit
  similar to energy audits.
• "DR audits" can produce good estimates for the
  amount of customer load that can be reduced in
  response to a DR program.

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Survey Tools to Develop for this Project

• Initial survey instruments that utilities can
  start with in developing surveys to meet their
  specific needs.
• Mail, telephone, and on-site survey instruments
  will be developed for each of the program types
  specified previously.
• Databases to tabulate and analyze the survey
  responses will also be developed.
• DR audit protocols and procedures.

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Pilot Programs

• Pilot programs can be used to "test" DR programs
  and provide initial estimates of DR potential.
• Pick a representative area for the pilot, and to
  conduct the pilot using similar methods, but in
  an accelerated timeframe.
• Conduct a thorough evaluation of the pilot
  program results.

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Pilot Program Tools

• Pilot program guidelines
• Size,
• Customer population to be addressed,
• Selecting representative areas,
• Marketing procedures, and
• Incorporating evaluation planning into overall
  pilot program planning.

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DR Potential Models

• Several DSM forecasting models are commercially
  available in the US
• Itron/RERs ASSET model
• Kema/Xenergys DSM Assist model
• Quantecs Quant.sim model
• Vermont Efficiency Investment Corporation's
  (VEIC-model) model
• These models have primarily been used for energy
  efficiency program forecasting, but can be
  adapted for DR forecasting.

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ASSET Framework
Customer Data
Technology Data
SegmentData
Technology Definitions
Technology Adoption Data
UsageProfiles
Segment/ Technology Information
AdoptionModels
Adoption Results
Energy Impacts
Utility Impacts
B/C Results
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ASSET Model Adoption Framework

• Market Limits
• Applicability
• Feasibility
• Awareness
• Willingness

• Technology Data
• Equipment Costs
• Energy Use/Savings
• Availability

• Market Size
• New/Existing
• Event-Driven
• Discretionary

Adoption Model
UtilityPrograms
Model Parameters
Adoption with Programs (Run 1)
Adoption without Programs(Run 2)
Net Program Impacts
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ASSET Technology Adoption Modeling Concepts
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Using ASSET to Forecast DR Potential

• ASSET has been used to forecast DR potential for
  several US utilities and regions.
• Model uses customer payback estimates as a key
  input to forecast DSM potential.
• The model requires reasonable estimates of
  customer DR program participation costs.
• Customer DR technology program costs are readily
  available, but other customer costs, such as
  inconvenience costs, are hard to estimate.

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Quantec Quant.sim Model for EE
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Quant.sim Model Structure

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Quant.sim Forecasts

• Quant.sim starts with a base forecast and
  customer data.
• EE/DR potential forecasts are made in reference
  to a utilitys base forecast.
• Model requires program impacts per participant as
  input variables.
• Model calibrates program participation forecasts
  based on current year actual or expected program
  participation.

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VEIC-Model Screening Tool

• Determines cost effectiveness for DSM/DR programs
• Energy Efficiency and Demand Response
• Analyze up to 10,000 Measures
• 50 year analysis period
• Spreadsheet and Visual Basic Tool

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VEIC-Model Screening Tool (cont.)

• Technology Inputs
• Energy savings, capacity generation, installation
  costs, operating and maintenance costs, etc.
• Segmented by program type, sector, building type,
  vintage, end use, baseline,
• Economic Inputs
• Avoided costs, energy rates, and other economic
  inputs
• Calculates annual electricity and savings
• Calculates annual funding required

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IEA Project -- Next Steps on DR Market Potential

• Collect benchmarking information.
• Benchmarking case studies.
• Initial DR potential survey instruments.
• Pilot program case studies/guidelines.
• Develop DR forecasting spreadsheet approaches.
• Assess model-based approaches.
• Potentially assist interested project
  participants in starting DR potential assessment
  projects.

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-- Sub-Task 4 --Demand Response Valuation or
Building the "economic case" for DR
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DR Value Agenda

• 1. Information needs for incorporating DR into
  resource planning
• Resource characterization and value analyses.
• Need to dimension uncertainty around key factors.
• 2. What is needed from the planning tools
• Ability to work with distributions as inputs.
• Address the "value of information" as uncertainty
  is reduced over time.
• Time steps are required in the analyses to assess
  the value of flexibility.
• 3. A simplified example.
• 4. Conclusions.
• 5. Candidate project products.

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Information Needs for DR Value Analyses

• 1. Appropriately capturing all the value
  associated with a DR resource option.
• Many values associated with demand-side options
  are difficult to quantify, but are growing in
  importance as supply-side resources become more
  constrained (e.g., transmission congestion, and
  natural gas availability and prices)
• 2. Need to dimension uncertainty around future
  outcomes.
• Simple planning paradigms such as 1 in 10 year
  events are not very useful in assessing option
  and hedge values as they only represent one
  point.
• Different approaches are needed for dimensioning
  uncertainty if new tools are to be useful.

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1. Resource Characterization

• Appropriately characterizing a demand-side
  resource means capturing the value of the
  component characteristics.
• Characteristics
• Defining the resource Size, cost, persistence,
  spatial distribution, peak / off peak, etc.
• Values of the resource characteristics
• Flexibility
• Lack of correlation with supply-side resources
• Locational values
• Values from the market

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1. Resource Characterization

• Values can include
• Increased system reliability through investments
  at load centers, i.e., the locational value of
  the resource.
• Market benefits -- Creating efficient markets
• Demand reductions as a curb on supply-side
  reliance and market power.
• Reduced regional prices
• Efficient markets created by the interaction of
  demand and supply.
• Flexibility -- Creating options to address
  unexpected changes, e.g., lower growth rates in
  demand allows for more time to assess options.
• Risk management by allowing customers to manage
  part of the price and commodity risks.
• Environmental benefits by promoting efficient use
  of resources.
• Customer services through increased comfort,
  customer choice and reward for energy management
  -- NEBs.
• Other

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Problem to be Solved

• Values accrue to different entities
• Distribution companies in terms of deferred
  maintenance and new facilities, plus contingency
  avoidance.
• Transmission owners through reduced capacity and
  maintenance.
• Reliability managers through lowered costs of
  better Loss of Load Probabilities (LOLPs).
• Customers who now are able to receive payment for
  their ability to use electricity flexibility.
• A key attribute of consumption is now given a
  value.
• SO -- Values accrue to many and to the market at
  large, but costs are concentrated at the program
  level.
• Value is segmented with no one group is willing
  to provide full value for DR, but generators can
  be consolidated opponents.

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2. Dimensioning Uncertainty

• Expressing and dimensioning uncertainty for use
  in analyses.
• Uncertainty is what makes hedges and options
  valuable.
• If we could use point estimates and were certain
  about their values, there is no need for options
  or hedges since the optimal solution would simply
  be picked.
• Industry has used few tools to express
  uncertainty
• Key problem -- How to dimension uncertainty for
  use in planning analyses (simplest to more
  complex)
• 1. Scenario analyses
• 2. Range estimates -- construct confidence
  intervals based on key inputs.
• 3. Range estimates with the range filled in with
  likelihood estimates to provide a rough-cut
  probability distribution.

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Scenarios Versus Distributions
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Application of Portfolio Analyses

• Today's planning environment requires analyses
  that
• Uncertainty be incorporated in the analyses.
• Risk mitigation options must be identified and
  valued.
• Appropriately credit Demand Response (DR) and
  Energy Efficiency (EE) for risk management and
  other values.
• Hedging values as expressed in reduced mean peak
  period prices and price volatility -- both
  influence forward price curves.
• Direct price impacts in spot market transactions
  (gas and electric).
• Other values (market power, innovation, customer
  values).
• Address the value of information and learning
  over time.
• Assess the value of flexibility, i.e., creation
  of real options to address future contingencies
  (some may not yet be known).
• Continue to appropriate analyze supply-side
  economics.

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Application of New Tools

• Need to dimension uncertainty.
• Assess Value at Risk from different options.
• Fully address the portfolio of demand-side and
  supply-side options.
• Need to work with distributions of outcomes
• Closed form solutions and analytics.
• Monte Carlo methods.
• Decision-tree variants.
• Must incorporate time steps to address
  flexibility.
• New models such as _at_RISK and Crystal Ball allow
  for analyses based on representations of market
  uncertainties.

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-- Simplified Example -- Applied as a Decision
Tree
Time Period T 1
SupplyPortfolio2
SupplyPortfolio3
Other Time Steps
SupplyPortfolio1
Objective MinimizeRevenue Requirementsover 10
years. Time Step Two-year steps over a 10-year
period. Proxy Example Real applicationwould
includedistributions instead of single
probability nodes.
SeasonalEnergyDemandMetrics
GasPrices or Hydro
PeakDemandMetrics



High .6
Low .4
High .7



High .5
Low .3



High .5
Low .5



High .5
Low .5



Low .5
High .5



High .4



Low .5
Low .6



NPVVAR
NPVVAR
NPVVAR
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Example DistributionStochastic Price Forecasts
48
Example DistributionForecasted Bill Changes
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Conclusions

• The tools exist to assess portfolio of
  supply-side and demand-side options.
• This requires
• 1. Appropriate resource characterization.
• 2. Representations of the uncertainty around key
  factors in the analysis.
• Need to change perspectives and to get planners
  to move out of their comfort zone to develop
  better (i.e., more accurate) representations of
  uncertainty.
• Representing uncertainty and the value of
  information over time is the key challenge as
  both contribute to the value of options and
  hedges.
• This is new to planners, but necessary -- there
  are tools and processes that will allow for these
  analyses.

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Project Products

• Case studies using DR in a resource adequacy and
  portfolio analysis.
• Guidelines for DR in resource adequacy planning
  for different types of electricity markets.
• Tools that can be used.

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• CONTACT
• Daniel M. Violette
• Principal, Strategy Practice
• Summit Blue Consulting
• 1722 14th Street
• Boulder, Colorado 80302
• Phone [phone]
• E-Mail dviolette_at_summitblue.com