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Our previous posts in this DSM series discussed the benefits associated with Demand-Side Management (DSM). These benefits range from freeing capital and deferring investments, to minimizing costs and reducing carbon footprint. We also talked about the challenges and barriers to DSM implementation such as a lack of technological infrastructure, many administrative issues, and poor customer engagement. But, what exactly does a DSM program look like? What are the most common objectives and tactics of program implementation? In this post, we will go more in-depth into DSM Programs and their execution.

The main objective of DSM is to influence the electricity demand (load) and to match it as close as possible to electricity generation. In doing so, the grid becomes more reliable and it operates more efficiently. An efficient grid results in economic benefits such as deferring (or shifting) capital investments, savings in fuel costs, and reducing costs in maintenance and equipment replacement. But how do utilities implement DSM? There are three major components to DSM: Demand Response (or Load Management), Energy Efficiency, and Energy Conservation. Due to the extensive content of this topic, we will address these three components in two posts. Below is the Demand Response portion of Demand-Side Management.

Demand Response (DR)

In simple terms, the purpose of Demand Response (DR) is to modify electricity consumption behavior in customers with price signals or incentives¹. So, if the price of electricity increases significantly, the utility notifies the customer. Customers then adjust their behavior according to the price or incentive provided.

This is a similar principle as the one used commonly in most markets where manufacturers seek to influence customers’ behavior by changing the price of goods. Think of clothing manufacturers influencing shoppers’ behavior through seasonal sales, Black Friday deals, or clearance items.

However, unless the price of electricity changes drastically, consumers may not be motivated enough to change their actions- and utilities know that. So, electricity rates can vary by 2X, 4X, 8X or more during specific intervals, such as peak or critical peak periods, to get the right amount of influence over consumers ².  With regards to incentives in this format, DR programs are divided into two categories: Incentive-Based Programs and Price-Based Programs.  

Incentive-Based Programs

In Incentive-Based Programs, as the name illustrates, utilities motivate consumers financially through incentives such as rebates, subsidies, or other financial tools but not necessarily by a lower electricity price. There are different types of Incentive-Based Programs implemented by utilities, but some examples are:

Direct Load Control Program–  In this type of program, utilities enroll customers and their equipment [appliances, machinery etc.]. Then, customers grant the utility permission to turn that equipment off when needed. In most programs, consumers can override utility control, but they are penalized for doing so ³.

Load Curtailment Programs– In these programs, utilities incentivize the customer to curtail, or limit, their energy consumption when requested. For example, a utility notifies a group of 10 customers to limit their consumption by a specific amount for tomorrow from 2PM to 4PM. A contract between the utility and the customers is drafted ahead of time so those who do not participate are fined ³.

Emergency Demand Reduction Programs- These programs are relatively similar to the two above. However, utilities incentivize consumers substantially more. These programs are exercised more infrequently and they are usually a result of an emergency condition in the grid caused by equipment malfunction, generation issues or weather related factors.

Other Incentive-Based Programs are Demand Bidding/Buy Back Programs, Capacity Market Programs, and Ancillary Service Programs ⁴. However, those discussed are the most common programs used.  

Priced-Based Programs

Price-Based Programs are characterized by different electricity rates applied to customers consumption ³. There are variations to this concept which represent different types of programs:

Time-Of-Use (TOU)– As the name defines it, customers are charged different rates depending on the time of day the electricity is consumed. For example, from 8AM to 6PM electricity Rate A is applied, and any other time, Rate B is applied. Some utilities may have a weekend rate and a holiday rate as well ⁴.

Critical Peak Pricing (CPP)– Utilities invoke these types of programs for an extremely limited number of hours annually. However, when they do, the customer benefits substantially for participating ⁴. These programs are called as a result of a critical condition in the grid that requires quick correction.

Real-Time Pricing (RTP) Programs– In these programs, customers get a different electricity rate usually every hour. Ideally, customers who can shift their demand when they receive a day-ahead or hours-ahead notification are greatly benefited. However, customers must be flexible in their electricity consumption and their ability to shift their electricity use. The price of electricity is usually dictated at the wholesale market level and utilities signal their highest consumers as soon as this pricing information becomes known⁴.

Other Price-Based Programs exist such as Block Rate, where after an energy consumption threshold is achieved, the customer enters a different block (tier). However, the listed above is a representative group for Price-Based DR Programs.

Demand Response Programs vary depending on the applicable regulation in the state or region, utility ambitions, and overall available budget. Also, the ability to evaluate program performance varies largely. Methods of evaluation suggesting performance indexes and overall grading criteria have been developed. However, these performance measuring tools have not been widely embraced by the industry⁵. It is still up to each utility program’s manager and leadership team to evaluate the program’s success and to decide the program’s continuation.

Please join us in our final post related to DSM programs in which we will discuss Energy Efficiency and Energy Conservation. See you next time! 

We encourage you to find out more about this topic. Start by checking the following references:

• [1] Carley, S. (2011). Energy demand-side management: New perspectives for a new era. Journal of Policy Analysis and Management, 31(1), 6-32. doi:10.1002/pam.20618
• [2]  Faruqui, A. (2012). The Ethics of Dynamic Pricing. Smart Grid, 61-83. doi:10.1016/b978-0-12-386452-9.00003-6
• [3] Jordehi, A. R. (2019). Optimisation of demand response in electric power systems, a review. Renewable and Sustainable Energy Reviews, 103, 308-319. doi:10.1016/j.rser.2018.12.054
• [4] H. Aalami, G. R. Yousefi and M. Parsa Moghadam, “Demand Response model considering EDRP and TOU programs,” 2008 IEEE/PES Transmission and Distribution Conference and Exposition, Chicago, IL, 2008, pp. 1-6, doi: 10.1109/TDC.2008.4517059.
• [5] Dharme, A., & Ghatol, A. (2006). Demand Side Management Quality Index for Assessment of DSM Programs. 2006 IEEE PES Power Systems Conference and Exposition. doi:10.1109/psce.2006.296172