July/August 2008
Through demand response programs, utility companies pay a regular revenue stream to scrapyards willing to shut down or scale back electricity use during high-demand periods.
By Laurie Wiegand-Jackson
Make money, protect the environment, and contribute to national infrastructure security. No, that's not the latest campaign slogan of one of the presidential candidates. Those are the benefits of participating in a demand response program with your electricity provider.
The concept is simple: Scale down your operations when the electrical grid is constrained and in jeopardy of experiencing blackouts, and your electricity provider will pay you for being a resource that has improved the reliability of that grid. The electricity that companies free up by participating in these programs gives the utility the equivalent of an extra power plant or extra transmission line when it needs it most, so the utility pays what that power is worth on the wholesale market. That's right—you get paid for the value of the electricity you're not using.
Demand response participants also get paid for volunteering for the program, whether the utility calls on them to cut back or not. Yes, you get paid just for being available to help. And if you know your major equipment will be offline during a peak period—during maintenance or upgrades, for instance—you might get paid for that, too. Scrapyards participating in demand response programs are finding the demands are reasonable and the revenue streams can be tens or hundreds of thousands of dollars a year.
Supporting the Fragile Power Grid
Electrical power infrastructure development in the United States has not kept pace with the country's growth. Industry restructuring, community activism, environmental concerns, and multiple layers of regulation have slowed or stopped the construction of new power plants and new transmission lines. As a result, the electrical grid is more often strained to its maximum capacity, which has led to more frequent power outages and higher electricity prices. With the demand for electricity growing an average of 1.5 percent to 4.5 percent a year, depending on region, and the difficulty of securing an increased supply, the utilities are turning their attention to meeting their needs with resources on the demand side of the equation.
Much of the growing demand for electricity is weather-dependent—people need more heat or air conditioning as the weather in this country gets more extreme. The most pressing supply issue, then, is not meeting greater overall demand, but meeting greater peak demand needs for electricity on the hottest summer days and coldest winter days. Rather than construct new power plants—which often burn fossil fuels, which create climate-damaging emissions—to meet peak demand needs a few times a year, a dedicated group of experts in the energy industry has been advocating the use of demand response.
Here's how it works: The grid operator in a region predicts or experiences a surge in demand, due either to extreme weather conditions or to a supply shortfall such as a generator failure. The operator or a third party contacts demand response program participants and asks them to curtail their use of electricity for a specified period. Those able to respond receive a payment of the real market value of that unused electricity, an amount that fluctuates from day to day and region to region.
Demand response programs are spreading across the country, starting in the most congested areas. They exist in New England, New York, the Mid-Atlantic region, California, and Texas; a Midwestern utility will launch its program this fall. They have provided thousands of megawatts of virtual supply into the grid, keeping the lights on in New York in summer 2006 and preventing service disruptions in Texas when a wind farm lost power this February.
Demand response programs have one other benefit: they might help keep down electricity prices. As electricity costs go up about 10 percent to 15 percent a year—and in some regions, as much as 50 percent in one year due to deregulation—actions that depress prices become more important. According to a U.S. Department of Energy report to Congress in February 2006, utilities run their most costly power plants only during periods of peak demand. If demand response programs can lower peak demand levels, the utilities won't need to operate those plants, which could lower electricity production costs and system capacity requirements, creating savings that the utilities could pass on to their retail customers. The Federal Energy Regulatory Commission is encouraging each of the independent wholesale grid operators and local utilities across the United States to develop demand response programs.
Demand Response in the Scrapyard
Both wholesale grid operators and local utilities operate demand response programs, and the opportunities vary by region. By enrolling in a program, a scrapyard agrees to idle or shut down certain equipment—typically shredders, balers, shears, and conveyor systems—to reduce its electricity load when the grid needs it because of peak transmission congestion, peak demand, or the sudden loss of a major power-generating unit. The payment the scrapyard receives for taking that action is equivalent on a per-megawatt basis to the utility's cost to develop and operate generators and transmission lines, which can be significant sums. More important, many programs will pay participants just for being "on call," whether or not the utility ever needs the help. These revenues vary based on the scrapyard's location, its load-reduction capabilities, and the nature of the program, but they also can be substantial.
Scrapyards can sign up to provide any of three types of demand response resources: peak day capacity, emergency reserves, and energy resources.
Peak day capacity. Utilities call upon peak day capacity resources during the hottest days of the year (or, in New England and New York, during the coldest days of the winter) to reduce their usage on weekday afternoons. The call might go out as much as 21 hours or as little as 2 hours in advance of when the shutdown is needed, and the interruption is typically between 4 and 8 hours long. How often the calls go out depends on the utility—Southern California's program will call up to 4 times a month, whereas a Mid-Atlantic program estimates calling up to 10 times in the June-September plan period. Companies that sign up to be peak day capacity resources receive payments whether or not the utility calls a peak day event and additional payments when they are called upon and participate.
The Southern California program estimates that customers receive $75,000 to $100,000 per megawatt capacity per year for participating in the program and an additional $250 per megawatt hour for responding to a called event. Some regions' programs offer more than that, others less. The Mid-Atlantic program only called one event in 2007, so most program participants that year earned their regular fee without ever having to shut down. Participating companies can always opt not to participate in a specific peak day event.
Emergency reserves. Utilities call upon emergency reserves resources when a power plant supplying electricity to the grid has a sudden mechanical failure, which could be any day or time. They call these events with as little as 10 minutes' notice, and the interruption could last 30 minutes in some programs, up to 4 hours in others. The frequency of emergency calls can vary as well, though my company, a demand response aggregator, limits them to one 30-minute shutdown per facility per month.
Like peak day programs, emergency reserves programs generate payments whether the utility calls for help or not—between $35,000 and $100,000 per megawatt per year in the Mid-Atlantic program—and an additional payment for shutting down in response to a call. The New York program offers $500 per megawatt hour or the real-time price for electricity, whichever is greater. Opting out of a particular event is possible here as well.
Energy resources. Energy resource customers approach the utility with a stretch of time they expect to be offline—for equipment maintenance or replacement, for example. This volume of unused electricity becomes a bid in the real-time energy market, and if a utility accepts it, the customer gets paid for the actual electricity load that it reduces. The bid can go out as short as 30 minutes or as much as one day ahead of the shutdown, depending upon the program, and the revenue it generates will be based on the price of electricity at the time.
What's the bottom line? One large shredder operator in the Mid-Atlantic region signed up for 5- to 9-mW load reduction capacity. The facility receives $50,000 quarterly payments for becoming an emergency reserve and energy resource and another $25,000 per quarter for participating in the peak day capacity program, a total of $300,000 in annual revenue just for participating. Another facility in the same region signed up just for the emergency reserve program, offering 2 to 4 mW of load reduction, and receives $50,000 a year.
| One Scrapyard's Demand Response Experience
Every electricity-intensive business should participate in a demand response program, says John Sprague, comptroller of Fairless Iron & Metal (Morrisville, Pa.). His company has found that it provides an economic benefit, helps protect the Morrisville community, and gives them another "green" credential, he says. Fairless became a customer of North America Power Partners in January 2007, when it brought online a new 8,000-hp Hammermill megashredder that requires 6 mW of electrical capacity. The company is strategic in its power use already by running the shredder only during off-peak hours. That means it doesn't qualify for the peak reserve capacity program. Instead it participates in NAPP's emergency reserves and energy resources programs. Here's how the emergency reserves program works: Say that lightning hits a transformer and knocks out power to hundreds of residences in Morrisville one evening. Pennsylvania Electric Co. has the phone numbers of five Fairless workers on shredder duty. When it needs emergency power, it starts calling those numbers until it reaches someone, and it gives that person notice that the company has 15 minutes to switch off the shredder. The shut-down process "takes seconds. The operator just presses one big red button," Sprague says. The effects of a brief shutdown are not a concern, Sprague says. The downstream conveyors are computer-controlled to match the shredder speed. The shredder rotor will keep spinning for quite a while after the power is cut, thus bringing the shredder back up to full speed takes as little as 30 minutes. And "there's always enough work" elsewhere in the yard to keep the employees occupied. Sprague touts the community and environmental benefits of participating in the emergency reserves program. By allowing an emergency shutdown, "that power can be utilized throughout the community," he says. That's a much more cost-effective and environmentally sound solution than the utility "having an extra generator on standby," he says, which would both increase the utility's costs and generate greenhouse gases, if that generator burned fossil fuels. But the primary reason for participating, Sprague says, is economic. The company saves money it would have spent on electricity during the shutdown period, it receives a payment of what that reserve electricity is worth to the utility during that period, and it receives a quarterly payment—"thousands of dollars"—for participating in the program. "We have a relatively small electric bill each month because we're already running off-peak," Sprague says, but "every little bit helps." That last revenue stream is all Fairless has received so far: In the 18 months that it has participated, PECO has not yet requested an emergency shutdown. (The company and NAPP did one test run to ensure their procedures and equipment could respond when needed.) Sprague notes that, if the company were unable to shut down when requested, it would forgo that month's regular payment but would not incur any other penalties. Fairless also participates in NAPP's energy resource program. When the company knows it won't be running the shredder for a few hours, it can sell its capacity back to PECO at market rates. It has done so about two dozen times in 18 months, selling back as little as a 4-hour shift or as much as 10 or 12 hours. Though PECO has the option not to accept the bid, Sprague says the company has successfully sold its excess capacity every time, sharing the proceeds with NAPP per the terms of its contract. Sprague sees opportunities to get even more value out of participating in the energy resource program by carefully monitoring the company's peak energy use. "We can go [online] and see at what time during our production schedule we peak, shut off during that period, and save an exorbitant amount of money." Further, he says, "if we are diligent enough, we can sell that period of time back to the market...and not only can we save on our power bill, we'll get a layer of return from selling our reserves. That's a way to maximize the program." |
The Role of Demand-Response Aggregators
It's possible for a retail electricity consumer like a scrapyard to join the wholesale electricity market and work directly with the utilities to implement a demand response program, but doing so makes the company subject to the rules, regulations, and penalties of that marketplace. Further, most utilities and grid operators don't want to work with retail customers. The best bet for most businesses is to use a demand-response aggregator or third-party provider.
Such companies manage customers' participation in demand response programs by handling the notifications and the transactions between the customer and the grid operator or utility company. They track a wide variety of electric-market data, including hourly locational prices, grid congestion, capacity prices, and plant maintenance schedules and outages, and they provide market forecasts of prices. Last year, for instance, my company sent out an alert on July 10 that the next day's electricity prices in the Mid-Atlantic region would be unusually high due to a heat alert, making it a good day to schedule maintenance or otherwise shut down and bid to become an energy resource.
These service providers place bids on their customers' behalf, just as large electricity generators do, into the energy, capacity, and reserve markets. They install meters at the customer's facility and track usage data to establish baselines and to verify the load reduction in a format and process that has the approval of the grid operator or utility company. And they invoice the utility for payments and process all of these transactions. Demand response providers perform all of these services behind the scenes to make participation in the program easy and uncomplicated for the retail customer.
There are no up-front fees to enroll and participate in demand response programs through an aggregator. Instead, the aggregator takes a percentage of the revenue the customer receives from the utility company or the grid operator. Note that in some cases, the utility will impose penalties for nonperformance. The Southern California peak day capacity program, for example, imposes penalties for saying no to more than 50 percent of its requests. Typically, the penalty is that the customer will not receive the regular revenue for that period. Often the service provider will absorb this risk, though, making the program totally voluntary and a risk-free way to generate a recurring revenue stream. Several companies provide demand response services, and what each one offers is slightly different, so it's important to know what you're getting and to what you're committing.
Scrapyards are participating in demand response to save money, increase revenues, and to further their environmental and sustainability goals. One large scrap company estimates its multiyard participation in demand response resulted in greenhouse-gas savings equal to removing 466 cars from the road for one year—not to mention all the revenue it received through program participation. That's called doing well by doing good. •
Laurie Wiegand-Jackson is president of North America Power Partners (Mount Laurel, N.J.), which provides demand response services to customers throughout New England, New York, California, the Mid-Atlantic, and the Midwest. Reach her at 888/ISOPROGRAMS, 856/439-0800, or lwj@northamericapowerpartners.com.
Through demand response programs, utility companies pay a regular revenue stream to scrapyards willing to shut down or scale back electricity use during high-demand periods.