July, 2008

Through demand response programs, utility companies pay a regular revenue stream to scrapyards willing to shut down or scale back electricity use during high-demand periods.

By Laurie Wiegand-Jackson

Make money, protect the environment, and contribute to national infrastructure security. No, that’s not the latest campaign slogan of one of the presidential candidates. Those are the benefits of participating in a demand response program with your electricity provider.

The concept is simple: Scale down your operations when the electrical grid is constrained and in jeopardy of experiencing blackouts, and your electricity provider will pay you for being a resource that has improved the reliability of that grid. The electricity that companies free up by participating in these programs gives the utility the equivalent of an extra power plant or extra transmission line when it needs it most, so the utility pays what that power is worth on the wholesale market. That’s right-you get paid for the value of the electricity you’re not using.

Demand response participants also get paid for volunteering for the program, whether the utility calls on them to cut back or not. Yes, you get paid just for being available to help. And if you know your major equipment will be offline during a peak period-during maintenance or upgrades, for instance-you might get paid for that, too. Scrapyards participating in demand response programs are finding the demands are reasonable and the revenue streams can be tens or hundreds of thousands of dollars a year.

Supporting the Fragile Power Grid
Electrical power infrastructure development in the United States has not kept pace with the country’s growth. Industry restructuring, community activism, environmental concerns, and multiple layers of regulation have slowed or stopped the construction of new power plants and new transmission lines. As a result, the electrical grid is more often strained to its maximum capacity, which has led to more frequent power outages and higher electricity prices. With the demand for electricity growing an average of 1.5 percent to 4.5 percent a year, depending on region, and the difficulty of securing an increased supply, the utilities are turning their attention to meeting their needs with resources on the demand side of the equation.

Much of the growing demand for electricity is weather-dependent-people need more heat or air conditioning as the weather in this country gets more extreme. The most pressing supply issue, then, is not meeting greater overall demand, but meeting greater peak demand needs for electricity on the hottest summer days and coldest winter days. Rather than construct new power plants-which often burn fossil fuels, which create climate-damaging emissions-to meet peak demand needs a few times a year, a dedicated group of experts in the energy industry has been advocating the use of demand response.

Here’s how it works: The grid operator in a region predicts or experiences a surge in demand, due either to extreme weather conditions or to a supply shortfall such as a generator failure. The operator or a third party contacts demand response program participants and asks them to curtail their use of electricity for a specified period. Those able to respond receive a payment of the real market value of that unused electricity, an amount that fluctuates from day to day and region to region.

Demand response programs are spreading across the country, starting in the most congested areas. They exist in New England, New York, the Mid-Atlantic region, California, and Texas; a Midwestern utility will launch its program this fall. They have provided thousands of megawatts of virtual supply into the grid, keeping the lights on in New York in summer 2006 and preventing service disruptions in Texas when a wind farm lost power this February.

Demand response programs have one other benefit: they might help keep down electricity prices. As electricity costs go up about 10 percent to 15 percent a year-and in some regions, as much as 50 percent in one year due to deregulation-actions that depress prices become more important. According to a U.S. Department of Energy report to Congress in February 2006, utilities run their most costly power plants only during periods of peak demand. If demand response programs can lower peak demand levels, the utilities won’t need to operate those plants, which could lower electricity production costs and system capacity requirements, creating savings that the utilities could pass on to their retail customers. The Federal Energy Regulatory Commission is encouraging each of the independent wholesale grid operators and local utilities across the United States to develop demand response programs.

Demand Response in the Scrapyard
Both wholesale grid operators and local utilities operate demand response programs, and the opportunities vary by region. By enrolling in a program, a scrapyard agrees to idle or shut down certain equipment-typically shredders, balers, shears, and conveyor systems-to reduce its electricity load when the grid needs it because of peak transmission congestion, peak demand, or the sudden loss of a major power-generating unit. The payment the scrapyard receives for taking that action is equivalent on a per-megawatt basis to the utility’s cost to develop and operate generators and transmission lines, which can be significant sums. More important, many programs will pay participants just for being “on call,” whether or not the utility ever needs the help. These revenues vary based on the scrapyard’s location, its load-reduction capabilities, and the nature of the program, but they also can be substantial.

Scrapyards can sign up to provide any of three types of demand response resources: peak day capacity, emergency reserves, and energy resources.

Peak day capacity. Utilities call upon peak day capacity resources during the hottest days of the year (or, in New England and New York, during the coldest days of the winter) to reduce their usage on weekday afternoons. The call might go out as much as 21 hours or as little as 2 hours in advance of when the shutdown is needed, and the interruption is typically between 4 and 8 hours long. How often the calls go out depends on the utility-Southern California’s program will call up to 4 times a month, whereas a Mid-Atlantic program estimates calling up to 10 times in the June-September plan period. Companies that sign up to be peak day capacity resources receive payments whether or not the utility calls a peak day event and additional payments when they are called upon and participate.

Emergency reserves. Utilities call upon emergency reserves resources when a power plant supplying electricity to the grid has a sudden mechanical failure, which could be any day or time. They call these events with as little as 10 minutes’ notice, and the interruption could last 30 minutes in some programs, up to 4 hours in others. The frequency of emergency calls can vary as well, though my company, a demand response aggregator, limits them to one 30-minute shutdown per facility per month.

Energy resources. Energy resource customers approach the utility with a stretch of time they expect to be offline-for equipment maintenance or replacement, for example. This volume of unused electricity becomes a bid in the real-time energy market, and if a utility accepts it, the customer gets paid for the actual electricity load that it reduces. The bid can go out as short as 30 minutes or as much as one day ahead of the shutdown, depending upon the program, and the revenue it generates will be based on the price of electricity at the time.

What’s the bottom line? One large shredder operator in the Mid-Atlantic region signed up for 5- to 9-mW load reduction capacity. The facility receives $50,000 quarterly payments for becoming an emergency reserve and energy resource and another $25,000 per quarter for participating in the peak day capacity program, a total of $300,000 in annual revenue just for participating. Another facility in the same region signed up just for the emergency reserve program, offering 2 to 4 mW of load reduction, and receives $50,000 a year.

The Role of Demand-Response Aggregators
It’s possible for a retail electricity consumer like a scrapyard to join the wholesale electricity market and work directly with the utilities to implement a demand response program, but doing so makes the company subject to the rules, regulations, and penalties of that marketplace. Further, most utilities and grid operators don’t want to work with retail customers. The best bet for most businesses is to use a demand-response aggregator or third-party provider.

Such companies manage customers’ participation in demand response programs by handling the notifications and the transactions between the customer and the grid operator or utility company. They track a wide variety of electric-market data, including hourly locational prices, grid congestion, capacity prices, and plant maintenance schedules and outages, and they provide market forecasts of prices. Last year, for instance, my company sent out an alert on July 10 that the next day’s electricity prices in the Mid-Atlantic region would be unusually high due to a heat alert, making it a good day to schedule maintenance or otherwise shut down and bid to become an energy resource.

These service providers place bids on their customers’ behalf, just as large electricity generators do, into the energy, capacity, and reserve markets. They install meters at the customer’s facility and track usage data to establish baselines and to verify the load reduction in a format and process that has the approval of the grid operator or utility company. And they invoice the utility for payments and process all of these transactions. Demand response providers perform all of these services behind the scenes to make participation in the program easy and uncomplicated for the retail customer.

Scrapyards are participating in demand response to save money, increase revenues, and to further their environmental and sustainability goals. One large scrap company estimates its multiyard participation in demand response resulted in greenhouse-gas savings equal to removing 466 cars from the road for one year-not to mention all the revenue it received through program participation. That’s called doing well by doing good. •

Laurie Wiegand-Jackson is president of North America Power Partners (Mount Laurel, N.J.), which provides demand response services to customers throughout New England, New York, California, the Mid-Atlantic, and the Midwest. Reach her at 888/ISOPROGRAMS, 856/439-0800, or lwj@northamericapowerpartners.com.