A3. Demand Response
While much of this thesis focuses on the technologies and policies necessary to support an improvement in generation and transmission infrastructure, shaping the demand side of the power grid will also be crucial. Demand response refers to shifting various electricity loads away from peak usage hours to lower-usage hours. Multiple programs fall under the broad umbrella of demand response. In most scenarios, the program involves creating financial incentives to drive voluntary shifts [i]. Some utilities (most notably, those in California) already offer such plans to residential customers, sometimes as opt-in programs and sometimes as opt-out [1].
Time of use pricing is fairly straightforward: based on the time of day, users pay different prices. For example, an electricity retailer might sell power for 10 cents/kWh, though that rate might spike to 15 cents/kWh during the evening hours (when demand is highest) or drop to 5 cents/kWh during nighttime hours (when demand is lowest). Real-time pricing takes this a step further, generally by adding more resolution to prices and times; for example, real-time pricing might change electricity prices every hour of the day, whereas time-of-use pricing may have static prices across hours-long blocks. Furthermore, real-time pricing tends to not define prices in advance – prices reflect the then-current state of the electricity market. Variable-peak pricing combines these two programs; generally speaking, prices are defined for off-peak hours while prices are guided by markets for peak demand hours [ii].
Figure 26: Comparison of Demand Response Tariffs [iii]
Certain flexible loads (e.g. heating and cooling, EV charging, etc.) could then be run during hours with cheaper rates. This results in peak load reduction, which in turn reduces capacity requirements (since the power grid must be built to accommodate peak demand) and reduced electricity costs (electricity is almost always [2] produced from the cheapest sources that are available at any given moment). A program in Illinois, for example, found that enrolled customers saved roughly 15% on their electricity bills [iv]. Such programs might also incentivize residential energy storage, as customers can charge their home battery systems when prices are low to serve as an electricity source for when prices are high (though the savings don’t frequently enable a rapid payback period).
[1] The opt-out programs, in which customers default to being enrolled in the time-of-use plans, often have far higher adoption rates. I’d recommend Sunstein and Thaler’s Nudge for an exploration of how important defaults are.
[2] I say “almost always” to cover any edge cases where this doesn’t happen, though if any exist, they’re certainly rare.