Flexibility Benefits of Demand-Side Programs in Electric Utility Planning*

Abstract

Electric utilities face a variety of uncertainties that complicate their long-term resource planning and acquisition. Many utilities deal with these uncertainties by pursuing flexible strategies that allow changes to be made incrementally with little difficulty and at low cost. Thus, utilities today avoid construction of large, baseload power plants because of their long construction times and high capital costs. On the other hand, utilities view combustion turbines as flexible because they have small unit sizes, take only a few years to build, are inexpensive, and can later be converted to combined-cycle units (to increase capacity and improve performance). Energy-efficiency and load-management programs, because of their inherently small unit size and opportunities to adjust participation over time, are attractive for the same reasons. My paper compares the benefits of flexibility provided by resources with short lead times and small sizes with the costs of these alternatives. The focus is on utility demand-side management programs, primarily because the flexibility benefits of such programs have not yet been quantified. Utilities can adjust participation in their demand-side programs over time. This flexibility yields substantial economic benefits because these electricity savings can closely match future load growth.