We Must Start Investing in Demand Flexibility Today

This blog post was co-authored with my colleague Robert Harding, previous Schneider Fellow at NRDC and co-author of the study.

To stave off the worst effects of the climate crisis, we must urgently transition from polluting fossil fuels to emissions-free energy. Demand flexibility--shifting electricity consumption to coincide with times when electricity is clean and cheap--is quickly becoming a necessary pillar to achieving this transition alongside renewable energy, energy efficiency, and the electrification of our buildings and vehicles.

However, the widespread deployment of such “demand flexibility” still faces substantial challenges. Our new report published today, Use It When We Have It: How To Use More Clean Energy And Decarbonize The Grid With Demand Flexibility, examines the challenges facing demand flexibility programs and focuses on the technologies, policies, market mechanisms, and equity strategies that can enable demand flexibility for all communities, leading toward an equitable and affordable clean economy for everyone.

Credit: iStock/sl-f

How it works

Many electric devices in our homes—water heaters, heat pumps, chargers for electric vehicles (EVs), and in-home batteries—can be made “flexible” so that utilities can remotely modulate them up and down to meet customer energy needs (demand) based on the availability of low-cost electricity generated from emissions-free resources like wind and solar—often without us noticing,.

For example, a utility could remotely preheat water in a customer’s water heater or schedule an electric vehicle to be charged at night when wind energy is abundant and largely unused as opposed to daytime hours when demand on the grid could be high and electricity expensive. The water will be hot and the EV charged when the customer awakes.

Demand flexibility can deliver significant cost savings to customers by tapping into low-cost available power and by reducing the need to build expensive electricity generation and transmission infrastructure that increases everyone’s utility bills.

Experts at the Rocky Mountain Institute and the Brattle Group estimate that cost-effective demand flexibility programs could help increase our use of clean energy by 40 percent and avoid up to $15 billion in electricity system costs each year, by 2030. The savings are mainly driven by reduced electricity prices and avoided investments in generation capacity and electricity transmission and distribution infrastructure.

Making electricity demand more malleable is critical

Today, electricity generation mostly follows customers’ demand for it. Utilities and grid operators turn on power plants when customers choose to turn on their lights and appliances. This one-way relationship between supply and demand does not constitute a smart use of electricity given that customers generally switch things on regardless of  expensive and polluting electricity is. Instead, we need a much more dynamic interaction between electricity supply and demand as we start transitioning our vehicles and buildings from operating on electricity rather than fossil fuels, which is a fundamental pillar to cleaning up our economy.

Electricity demand is projected to increase significantly--two- to fourfold compared to today--if the U.S. economy is to achieve net-zero greenhouse gas emissions by 2050. This underlines the critical need for smart management of electricity demand-- which can be done via demand flexibility programs--to reduce the need to build costly new power plants and electricity transmission and distribution infrastructure.

A roadmap to unlock demand flexibility

Demand flexibility is not some futuristic idyll. Utilities across the country are running successful small-scale flexibility programs demonstrating the potential. And appliances that can be rendered flexible--like heat pump water heaters--are becoming ever more common in America’s homes.

However, we need large-scale adoption of demand flexibility programs starting today to reduce costs for customers, decrease electricity emissions, and pave the way for a cost-effective, highly electrified economy.

Our report shows how utilities, state legislators, utility regulators and the federal government can overcome four categories of obstacles to unlocking demand flexibility’s potential:

  • Technical: We need more “smart” appliances

In order for a utility to pre-heat the water in a customer’s home to tap into clean and cheap electricity, it needs internet access to the water heater. This requires the appliance to have a communication port (which functions like a USB port) to plug in a utility-provided small communications device, or module. However, many water heaters don’t have the proper port to accommodate this device. To remedy this, policymakers should pass appliance standards requiring all new water heaters to have a universal port. Washington State recently passed such a standard, effective  next year.

  • Social: No more program signing up—automate enrollment

Large-scale adoption requires participation by all or most customers. Standards need to be developed so that smart appliances can be installed in demand flexible mode by default, saving customers money on their bills with no reduction in service.

  • Economic: We need more accurate price signals in the electricity markets

Accurate real-time price signals in the electricity markets are necessary for utilities to shift customer demand to times where electricity is clean and cheap. Although many customers pay a flat rate for electricity, utilities often buy it in a real-time electricity market, where the price rises and falls throughout the day, depending on supply and demand. However, in many markets, electricity prices do not accurately reflect real-time supply and demand and are affected by external factors that muddle the real price. As our report details, policymakers and grid operators can maximize the benefits from demand flexibility by encouraging electricity market designs that send accurate price signals in real time. 

  • Political: Utility commissions should review policies

For a utility to launch a new program, the latter must pass a “cost-benefit test.” The utility decides if the program is worthwhile by estimating the costs to launch and run the program compared to the benefits it will provide. Unfortunately, the math often excludes important benefits to the environment and customers, leading to lopsided evaluations that underestimate demand flexibility’s benefits. Our report recommends a fresh framework for cost-benefit analyses for utility commissions to consider.

  • Prioritize under-resourced communities

To fully unlock demand flexibility, many parties must come together, and in a just and equitable manner. Utilities should also partner with local organizations to learn more about the needs of the community they serve and establish shared goals for tracking progress and measuring success. Utilities should also provide outreach materials in multiple languages and host information sessions both online and in-person, at multiple times, to explain demand flexibility programs to customers.

The 2020s must be a game-changing decade in our fight against climate change; policymakers and utilities should start enacting the right demand flexibility standards and programs today to pave the way for a clean economy that is also cost-effective and equitable.

About the Authors

Rachel Fakhry

Policy Analyst, Climate & Clean Energy Program

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