Demand Response as a Real-Time, Physical Hedge for Retail Electricity Providers: The Electric Reliability Council of Texas Market Case Study

Andrew Blohm,Steven A Gabriel,Jaden Crawford

doi:10.3390/en14040808

Abstract

Residential demand response (DR) programs are generally administered through an electricity distribution utility, or an electric grid operator. These programs typically reduce electricity consumption by inducing behavioral changes in the occupants of participating households. We propose implementing a wholesale-price-sensitive residential DR program through the retail electricity provider (REP), who has more naturally aligned incentives to avoid high wholesale electricity prices and maintain customer satisfaction, as compared to distribution utilities, grid operators, and the average residential consumer. Retail electricity providers who serve residential consumers are exposed to substantial price risk as they generally have a portion of their portfolio exposed to variable real-time wholesale electricity prices, despite charging their residential customers a fixed retail electricity price. Using Monte Carlo simulations, we demonstrate that demand response, executed through internet-connected thermostats, to shift real-time residential HVAC load in response to real-time prices, can be used as an effective physical hedge, which is both less costly and more effective than relying solely on financial hedging mechanisms. We find that on average a REP can avoid USD 62.07 annually per household using a load-shifting program. Given that REPs operate in a low margin industry, an annual avoided cost of this magnitude is not trivial.

Highlights

Demand response (DR) refers to deliberate actions taken by or on behalf of electricity consumers to change the amount of grid electricity that they would otherwise have consumed over a specific period of time in response to wholesale market prices or dispatch signals from the DR program administrator
For the purpose of this analysis we assume that the retail electricity provider (REP) only uses the real-time market
Reliability Council of Texas) day-ahead and real-time energy markets, which they resell to their retail customers

Summary

Introduction

Demand response (DR) refers to deliberate actions taken by or on behalf of electricity consumers to change the amount of grid electricity that they would otherwise have consumed over a specific period of time in response to wholesale market prices or dispatch signals from the DR program administrator. Time-based rates include interruptible service rates, which require the ratepayer to curtail usage on short notice, or in specific intervals, in exchange for a lower rate, and time-of-use (TOU) rates, which vary electricity prices as a function of time, usually for periods more likely to have higher demand, more grid stress, or higher prices [9]. Incentive-based programs usually provide end-users participation incentives separate from the retail electricity rate and can include such programs as emergency demand response programs, capacity market programs, and system peak shaving programs

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Conclusion