Demand Flexibility's Dynamic Duo: Time-of-Use Rates and Aggregated Grid Value Are Better Together

March 28, 2023

The ongoing debate between advocates of retail versus wholesale price signals as a means to drive demand flexibility is misplaced. Both can work together to deliver the optimal customer experience that reduces risk and equity issues while maximizing customer bill savings and grid reliability.

It is increasingly clear that as the energy supply on the grid is decarbonized and buildings and transportation electrified, flexing when energy is used is critical to control costs and reduce emissions.

Flat rate pricing has long been a barrier to encouraging the types of behavior, technologies, and business models necessary to align demand for energy to the times when it is cheap and clean.

The traditional school of thought has been to use time of use (TOU) or even real-time energy pricing to create a customer incentive to flex demand. However, sending a strong enough retail signal to encourage flexibility creates a host of unintended consequences.

Building owners are far removed from their meters and pricing, spending at most a few minutes a year thinking about their utility. People work and live in buildings and homes where the goal is productivity, comfort, and cold beer and warm showers, not reducing energy and capacity costs for their utility.

Sending a strong enough price signal to get the attention of every customer turns us all into energy traders, infrastructure investors, and building managers – a job most home and building owners didn't sign up for. There is a reason most customers pay for their cell phones by the month, not the minute, and prefer health insurance over a first aid kit. Most consumers prefer simplicity and avoid risk when given a choice.

Complex retail pricing also has the potential for significant equity impacts. Not all customers are equally prepared or able to shift demand. The prototypical example of this can be observed in Texas. Energy retailer Griddy, which gave their customers direct access to wholesale ERCOT prices, was a great deal for homeowners until the 2021 Texas deep freeze, where wholesale prices shot up to $6,000 per MWh. Suddenly, customers were paying thousands daily for power, and Griddy was forced to shut down. 

Focusing on a retail approach concentrates all the risk and potential reward on each customer without giving them the tools and acumen to manage it. Expecting each customer to sort it out on their own is like giving someone an illness and then sending them a medical device catalog so they can cure themselves. At the same time, this approach eliminates the incentive for companies to invest in developing the business models and technologies we need to achieve the potential of demand flexibility and virtual power plants through an awesome customer experience. 

The alternative approach has been to keep retail rates simple and rely on a demand response or a FLEXmarket price signal to aggregators rather than customers. This approach enables stronger price signals and insulates end customers from complexity, risk, and potential equity implications. Aggregators with large portfolios can deal with outliers, manage risk, and forecast results.

FLEXmarket and Market Access programs send 8760 (every hour of the year) price signals to aggregators, with the difference between nighttime prices and summer peaks being as high as 800%. Similarly, demand response signals can be called in hours, and aggregators can manage their customers' fleets without the customer needing a full-time energy manager to keep track of energy markets and price signals coming their way.

However, while these two approaches are often on different sides of the debate (see #energytwitter), they are complimentary.

Modern Advanced M&V, such as the CAISO Tariff approved FLEXmeter, can measure the impact of both long-term energy efficiency (EE) and demand response (DR) events and can separate, using comparison groups of non-participants, the effect of price signaling and even flex alerts on the ratio, from the additional response due to a wholesale signal to market aggregators.

Retail TOU and real-time rates and wholesale Demand Flexibility price signals can work together.

Time-of-use rates are needed because end customers need to have some awareness that it's cheaper and better to use clean, low-cost energy. However, given that energy customers have a massive information disadvantage, these retail TOU rates should be simple, stable, and not extreme.

Stacking a wholesale pricing signal on top of consumer-friendly TOU rates allows aggregators to capture the total grid value for long-term energy efficiency and dispatchable demand response.  By leveraging FLEXmeter, it is possible to measure only the additional flexibility these aggregators generate with their customers beyond the effects achieved through a retail time-of-use rate.

In this way, we can maximize the value of virtual power plants and demand flexibility while keeping energy simple for end customers who are in no position to keep track of energy markets, manage complex technology, or make what amounts to grid infrastructure investments in their homes and businesses. 

Simple customer-facing retail time-of-use price signals and fully aggregated wholesale demand flexibility value are a perfect match. We can give customers a rate they understand that aligns with the grid without expecting every homeowner to be a rocket scientist or surgeon. At the same time, companies and markets are rewarded for investing in advanced business models and technologies to make every building part of a virtual power plant.

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