The demand response "Catch-22" (and how to fix it)

Posted: March 2013

Mark England, Sentec CEO, discusses why the business model for Demand Response is broken and how to fix it in Smart Grid News

Demand response technologies, such as smart appliances, thermostats and home energy management systems, could revolutionise our energy consumption. By encouraging consumers to buy controls or appliances that can automatically reduce or shift power use during peak demand periods, demand response (DR) solutions can deliver benefits in many areas, including pricing and grid reliability.

In principle this sounds fine, but the problem is it’s the consumers and appliance manufacturers who are expected to invest and the utilities industry and government who reap the benefits by delaying investment in additional capacity or avoiding running up additional short-term generator resources.

The challenge with the smart appliance industry is not technology or the availability of smart metering.  Technologically, we are capable of designing appliances now with all the functionality to deliver DR. The problem is that the business model is broken and needs a complete rethink to motivate and incentivize investment, as well as encourage manufacturer and consumer participation.

The business obstacles

The biggest roadblock for DR is the lack of motivation for the consumer. Inevitably a smart appliance enabling DR will be more expensive than a standard one, meaning consumers would be expected to pay more for something that, in principle is potentially less functional than the standard one (e.g. it may not “run” exactly when they want it to).

Finding a way to create a consumer benefit is essential to the success of DR. If the consumer has no way of benefiting themselves from using a smart appliance they will have no interest in buying one. Therefore, there is no business incentive for potential smart appliance manufacturers to invest in product design in the first place, as there is

 

no market to sell them.  Hence today the average consumer can’t actually buy a smart appliance, so there is no opportunity to create a business around selling DR services - a classic “Catch-22” situation.

An example of a new approach

What if a consumer friendly brand, for example a favorite online retailer or supermarket chain, were to become an aggregator of DR services, acting as the middle-man between millions of consumers with smart appliances and the electricity generators and network operators.  The ability to reduce the cumulative loads from millions of smart appliances during peak times could be sold by these aggregators for a good price, and then a fair fraction of this revenue could be passed onto the participating consumers. This would be clearly separated from the bills that they normally receive from their energy suppliers or network operators. Ringfencing the rewards from DR, rather than applying small discounts to existing energy bills, would allow consumers to measure the benefits of their smart appliances, and to choose how to spend these rewards with their favorite retailers on items or services that they are most interested in.

How would it work?

 

This approach could work in a number of ways. The first stage could involve an initial incentive where a consumer could go along to a retail store and buy a smart appliance, advertised to have a cash or voucher rebate for registering it with a particular DR aggregator. This initial sign-up rebate scheme could offset the additional cost of a more expensive smart appliance. 

Once they get the appliance home they would hook it up to their own Wi-Fi network and register it to the aggregator’s DR service over their home broadband network. They could then receive their initial rebate, and start receiving credit on their account for ongoing participation in DR events. The credit could be in the form of a reward or voucher scheme that they may already be using with their favorite retailer.  One of the key benefits for an online retailer as opposed to an energy company being involved would be the draw to the website, increasing traffic and as a result increasing trade.

Every time the smart appliance is used for DR, further credit would be added to the consumers account, accumulating rewards in the same way as they receive from their other purchases. Provided the appliance remains connected to the network and the consumer doesn’t override the DR events, the consumer would automatically receive credit for each DR event. At the same time the aggregator would have certainty of the availability of an exact known amount of DR capacity which they can sell to the generators or network operators when it has most value.  This is a win-win for both the consumer and aggregator.  Of course, appliance manufacturers could also sell additional convenience benefits directly to consumers, such as remote monitoring or control of appliances via the network connection.

Making this approach a success

For this approach to be successful it is important that the online retailer or supermarket chain that acts as an aggregator is a trusted consumer-facing brand with a strong enough relationship with the consumer to de-risk the development of new smart appliances by appliance manufacturers. The aggregator would be expected to have negotiated deals with all the network operators in a particular region, so that the appliance manufacturers can see a large enough market. 

This is just one example of how DR could be driven. The fact of the matter is, unless consumers get on board and buy smart appliances, DR for residential energy consumers will never take off.  The hurdles are all about business, rather than technical innovation - there is no link with the roll-out of smart metering for example.

As a first step, the network operators and energy suppliers need to encourage approaches from aggregators by establishing clear metrics for the monetary benefits that DR is worth to them across different parts of their networks.  If the potential benefits are large enough, this could open up opportunities with enough aggregators to create a genuine market for smart appliances, and trigger appliance manufacturers to create a wave of new products to satisfy it.  Until then, DR will remain nothing more than a pipe dream.

Mark England, Sentec CEO, discusses why the business model for Demand Response is broken and how to fix it in Smart Grid News

Demand response technologies, such as smart appliances, thermostats and home energy management systems, could revolutionise our energy consumption. By encouraging consumers to buy controls or appliances that can automatically reduce or shift power use during peak demand periods, demand response (DR) solutions can deliver benefits in many areas, including pricing and grid reliability.

In principle this sounds fine, but the problem is it’s the consumers and appliance manufacturers who are expected to invest and the utilities industry and government who reap the benefits by delaying investment in additional capacity or avoiding running up additional short-term generator resources.

The challenge with the smart appliance industry is not technology or the availability of smart metering.  Technologically, we are capable of designing appliances now with all the functionality to deliver DR. The problem is that the business model is broken and needs a complete rethink to motivate and incentivize investment, as well as encourage manufacturer and consumer participation.

The business obstacles

The biggest roadblock for DR is the lack of motivation for the consumer. Inevitably a smart appliance enabling DR will be more expensive than a standard one, meaning consumers would be expected to pay more for something that, in principle is potentially less functional than the standard one (e.g. it may not “run” exactly when they want it to).

Finding a way to create a consumer benefit is essential to the success of DR. If the consumer has no way of benefiting themselves from using a smart appliance they will have no interest in buying one. Therefore, there is no business incentive for potential smart appliance manufacturers to invest in product design in the first place, as there is

 

no market to sell them.  Hence today the average consumer can’t actually buy a smart appliance, so there is no opportunity to create a business around selling DR services - a classic “Catch-22” situation.

An example of a new approach

What if a consumer friendly brand, for example a favorite online retailer or supermarket chain, were to become an aggregator of DR services, acting as the middle-man between millions of consumers with smart appliances and the electricity generators and network operators.  The ability to reduce the cumulative loads from millions of smart appliances during peak times could be sold by these aggregators for a good price, and then a fair fraction of this revenue could be passed onto the participating consumers. This would be clearly separated from the bills that they normally receive from their energy suppliers or network operators. Ringfencing the rewards from DR, rather than applying small discounts to existing energy bills, would allow consumers to measure the benefits of their smart appliances, and to choose how to spend these rewards with their favorite retailers on items or services that they are most interested in.

How would it work?

 

This approach could work in a number of ways. The first stage could involve an initial incentive where a consumer could go along to a retail store and buy a smart appliance, advertised to have a cash or voucher rebate for registering it with a particular DR aggregator. This initial sign-up rebate scheme could offset the additional cost of a more expensive smart appliance. 

Once they get the appliance home they would hook it up to their own Wi-Fi network and register it to the aggregator’s DR service over their home broadband network. They could then receive their initial rebate, and start receiving credit on their account for ongoing participation in DR events. The credit could be in the form of a reward or voucher scheme that they may already be using with their favorite retailer.  One of the key benefits for an online retailer as opposed to an energy company being involved would be the draw to the website, increasing traffic and as a result increasing trade.

Every time the smart appliance is used for DR, further credit would be added to the consumers account, accumulating rewards in the same way as they receive from their other purchases. Provided the appliance remains connected to the network and the consumer doesn’t override the DR events, the consumer would automatically receive credit for each DR event. At the same time the aggregator would have certainty of the availability of an exact known amount of DR capacity which they can sell to the generators or network operators when it has most value.  This is a win-win for both the consumer and aggregator.  Of course, appliance manufacturers could also sell additional convenience benefits directly to consumers, such as remote monitoring or control of appliances via the network connection.

Making this approach a success

For this approach to be successful it is important that the online retailer or supermarket chain that acts as an aggregator is a trusted consumer-facing brand with a strong enough relationship with the consumer to de-risk the development of new smart appliances by appliance manufacturers. The aggregator would be expected to have negotiated deals with all the network operators in a particular region, so that the appliance manufacturers can see a large enough market. 

This is just one example of how DR could be driven. The fact of the matter is, unless consumers get on board and buy smart appliances, DR for residential energy consumers will never take off.  The hurdles are all about business, rather than technical innovation - there is no link with the roll-out of smart metering for example.

As a first step, the network operators and energy suppliers need to encourage approaches from aggregators by establishing clear metrics for the monetary benefits that DR is worth to them across different parts of their networks.  If the potential benefits are large enough, this could open up opportunities with enough aggregators to create a genuine market for smart appliances, and trigger appliance manufacturers to create a wave of new products to satisfy it.  Until then, DR will remain nothing more than a pipe dream.