Introduction to (Electricity) Demand Response

Demand Response is a way to make electricity demand respond to conditions on the supply side to balance the flow of power. Generally, this means that customers would reduce their load in response to price signals during critical times when the demand is expected to surge.

Typically, the ratio of average load to the peak load (i.e. the capacity factor) is around 40%. This means that on an average only 40% of all the available capacity is used to supply the electricity. Usually, the peaking power plants are  more expensive than the base load production plants. Demand response can be thought of as an alternative to peak power plants that are more efficient and 100% clean. Instead of bringing expensive peak plants online during the periods of high demand, a utility can initiate a DR request and ask customers to reduce the load in such an event.

In competitive power markets operated by ISOs/RTOs, there are a number of market instruments that allow demand response provider and industrial as well as residential customers to supply demand response without having to own transmission resources. There are four broad categories of demand  response -

• Capacity - Capacity resources commit (usually for a term of year or longer) to reduce load when directed by ISO/RTO. This is the largest segment of DR and is now nearly 10% of the peak demand. 
• Ancillary Services - In ancillary services market, DR typically provides non spinning reserves. 
• Energy Prices - Resources that commit to reduce consumption based on price on a short-term basis
• Energy Voluntary - Resources are compensated for reducing consumption during emergency conditions but are not obligated to do so. 

According to a study published by ISO New England, a 500 MW increase in DR cuts cost by $32 million / year. A 5% reduction in peak electricity demand during the top 1% of the hours of the year would have a net present value of about $60 Billion in benefits.