Energy Efficiency & Demand Response in Competitive Electricity markets

Energy Efficiency & Demand Response in Competitive Electricity markets: Opportunities & Challenges for Energy Managers

Rahul Walawalkar, Ph.D., CEM, CDSM, CSDP : Customized Energy Solutions Ltd.

Bruce Colburn, Ph.D., CEM, CDSM, GBE : EPS Capital Corp. Rick Gilkey, CEM, CDSM, CEP : Customized Energy Solutions Ltd.

Abstract: Various electric grid independent system operators (ISOs) and Regional Transmission Organizations (RTOs), along with FERC have been promoting policies to increase demand response capabilities in the deregulated energy markets in recent years. Commercial & Industrial (C&I) customers are one of the key targets for achieving significant demand response in the deregulated electricity markets, due to their size, and the potential for a small number of users representing a large percentage impact on demand reduction on the grid. Various ISOs such as NYISO, PJM, ISO NE have developed demand response programs that offer financial incentives to end users under the umbrella of Emergency and / or Economic Demand response programs. However, thus far participation by the C&I sector in these programs has fallen far short of their true potential. As a result, industry is losing out on a useful cash flow stream, while simultaneously the entire grid suffers with higher than needed energy costs. This is a case where Industry ignoring these programs does not just keep the playing field level, it actually causes increases in the electric charges, not only for that industry, but everyone, and therefore some of these demand side response programs offer the industrial sector not only the opportunity to be paid for controlling demand, but in fact as a result further reduce what otherwise would be higher electric KWH charges. To cost-effectively change part of this paradigm of thinking, an integration of demand response technologies with more traditional energy efficiency projects is in order. To effect this, an integration of the energy efficiency side with the demand response side in concert with the new energy conservation measures (ECMs) which result from careful evaluation of joint opportunities can lead to better benefit

streams to the industrial plant than tend to be currently available. The revenue streams available from grid Demand Response programs tend to be variable in length, and amounts of money, as the incentive programs depend on the wholesale energy market dynamics. This uncertainty of revenue has strongly discouraged meaningful capital investment in this area, instead relying more on manual load dropouts upon notification, a very inefficient and unreliable scheme. These ISO programs (Emergency and Economic Demand Response Programs) are independent of the programs from the local utility and therefore may require action of the plant at times when the local grid is not peaking, but the regional grid is. Therefore, integrating new ECMs with the more stable and predictable energy efficiency measures, as a combined program, can provide a more stable financial base from which to put in place methods, equipment, and procedures which together can reap financial rewards from pure energy savings as well as demand side management, whether that DSM is from the local utility or from the ISO grid. This paper will explore some currently available ISO Demand Response Programs, differentiating them from local power company programs, and then analyze their impact on commercial & industrial customers. The potential impact on the utility charges to that same industrial customer will be covered, along with the impact of a direct participation, since “base case” conditions actually lead to higher cost – doing nothing” costs more than being a direct participant.

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Analyze.Simplify.

Implement.

Energy Efficiency & Demand Response in Energy Efficiency & Demand Response in Competitive Electricity Markets: Competitive Electricity Markets: p yp y

Opportunities & Challenges for ESCOsOpportunities & Challenges for ESCOsPresented by

Rahul Walawalkar Ph.D., CEM, CDSM, CSDP

Bruce Colburn Ph.D., P.E., CEM, DGCP, CSDP, GBE, CEA

Presented on 6th November 2009 at

1

Analyze.Simplify.Implement.

OutlineOutline

Overview of Competitive Electricity Markets

Need for Demand Response in Competitive Markets

Overview of current Demand Response Programs and opportunities for Energy Efficiency Projects

Value of DR with Energy Efficiency Projects for ESCO Projects

Win‐Win‐WinFinancial Benefits to ESCO, Host, and CSPs

ESCO Example, and Summary Data

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Organized Electricity MarketsOrganized Electricity Markets

Source: FERC: http://www.ferc.gov/industries/electric/indus‐act/rto/rto‐map.asp


NYISO Net Load NYISO Net Load ‐‐ 20062006

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S1S5S9S13S17S21Days in Year

Hrs in Day

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Short Run Marginal Cost Curve & Price Duration CurveShort Run Marginal Cost Curve & Price Duration Curve

* This price duration curve shows only the wholesale energy prices corresponding to the generation component of customer’s electricity bill. T&D costs are added onto these wholesale energy costs.


Types of DR ProgramsTypes of DR Programs

Energy Efficiency

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DR Options Available From ESCOsDR Options Available From ESCOs

Thermal Ice Storage Building Automation

Emergency Generators

Lighting Controls

Variable Speed Drives

Energy Efficient Motors

Air Compressor System


Opportunities for DR Program ParticipationOpportunities for DR Program Participation

Customer Type

Equipment / Building

ComponentControl Strategy

DR Programs

Emergency (Capacity)

Economic (Energy)

Ancillary Regulation & Reserve

Residential

Air Conditioners Cycling/Forced Demand SheddingWater Heaters CyclingPool Pumps Cycling

CommercialChillers

Demand limiting during on peakperiod

ChillersHVAC

Pre-cool bldg over night- storageDX Forced Demand Scheduling

Refrigerator/ Prioritized Demand Shedding

LightingScheduled dimming of selectedi it

g gcircuits

Industrial

Chillers Demand Limiting on time Schedule

Electric FurnaceDemand Limiting through HeatStages

Electric FurnaceVSDs

Curtail (during peak period)Limit Output on Scheduled basis

Production Eqpt Prioritized demand on selected units

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Why Demand Response With Energy Efficiency ??Why Demand Response With Energy Efficiency ??

• For Customer: • DR can result in an appreciable reduction in system marginal costs of production

during peak time which result in long term cost reduction for consumersduring peak time, which result in long term cost reduction for consumers.

• DR also presents a way to earn added revenues for implementing EE measures and having flexible controls incorporated in operations;

• Simultaneously helps to improve grid reliability

• In spite of such financial benefits, DR participation in PJM programs was only 0.2% during the all time system peak in 2006.

• There has been a recent growth in DR participation in Emergency DR• There has been a recent growth in DR participation in Emergency DR programs that provide capacity payment for peak load reduction

• Significant opportunities still exist in integrating energy efficiency and flexible control capabilities for maximizing economic & ancillary service DR participation


Benefits Benefits of of DR For ESCOs and EE Projects:DR For ESCOs and EE Projects:

Additional revenue for energy efficiency with little incremental capital costs to enhance DR capabilities

CSPs can aggregate/automatically handle dispatching, planning, and market settlements

Additional incremental revenue stream at relatively low risk

Added revenue can either allow more infrastructure hardware, or greater profits

Provides more options for customer in terms of controlProvides more options for customer in terms of control, generation, curtailment as Owner wishes

CSP adds a level of risk protection for ESCO who is more focused on energy efficiency, and not DR or electricity markets

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DR DR Programs Programs for Energy Efficiency Workfor Energy Efficiency Work

ESCO can participate in multiple programs by partnering with CSPs

Receive Capacity payments for Emergency ProgramG d L d D d i 10 ll d b PJMGuaranteed Load Drop during up to 10 events called by PJM

Direct measurement of Load Drop through emergency generation

Energy Efficiency: permanent load reductions

PJM follows 3 year advance registration for capacity resources as part of Reliability Pricing Mechanism (RPM) required before revenues begin

Receive Energy Payments for Emergency and / or Economic and / or Ancillary Service ProgramAncillary Service Program

Requires typical M&V procedures for developing customer baselines

Customer could bid to ISO, but can have aggregators / CSPs to bid DR on behalf of customers, control process, renewals and facilitate payments

Ancillary Service program participation may require real time communication and control capabilities


It’s A Team Effort: WinIt’s A Team Effort: Win‐‐WinWin‐‐WinWin

Customer / Energy ManagerMain beneficiary and determines the operating parameters Facilitates execution for both EE and DR projectsp jCan communicate new opportunities with management to determine ways to maximize participation

ESCO / Performance Contracting CompanyProvides technical, engineering and financing expertiseCan use additional DR revenue to expand scopeEvaluate investments based on incremental costs, that can add significant capabilities for DR participationPro ide a technical bridge bet een c stomer goals and market opport nitiesProvide a technical bridge between customer goals and market opportunities identified by CSPs

Curtailment Service ProviderProvides functional & market expertise as well as interface to wholesale electricity markets

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Benefits of Using CSPs in ISO DR Process by ESCOsBenefits of Using CSPs in ISO DR Process by ESCOsCSPs are registered market participants in the ISOs

Involves paying ISO registration fees, Employing and training staff to know ISO rules and regulationsFulfilling credit requirements for market participationVerify that projects meet the ISO program criteria to ensure payment

ISO based programs have evolved over past decade and still undergoing changes

important to be an active market participant to maximize valueCSPs can provide in depth market knowledge and domain expertise to maximize the revenue potential from DR participation

i S l id 2 * i l d lCertain CSPs can also provide 24*7 operational support and control capabilities that could be vital in optimizing revenues from economic and ancillary service programsIt is important to choose the right partner to compliment the skills available within ESCOs and ensure that the goals of all partners are aligned to maximize benefits for all


ESCO Project & DR Program ParticipationESCO Project & DR Program ParticipationBenefit of ISO programs is they tend to not interfere with the energy efficiency and cost savings plans of normal ESCO project plan

Offers payments from ISOs for the system benefits of EE projects, thusOffers payments from ISOs for the system benefits of EE projects, thusAugment the energy cost savings on utility bills with

Capacity payments for permanent load reductions and energy payments for flexible controls

Some ISO programs can begin to pay for energy reductions and ancillary services from day one, even though Capacity payments are delayed for 3 years after registration approval

Risk of loss of capacity payment for failure to perform, but this is ESCO expertise & CSPs can help compliance with ISO requirementsexpertise & CSPs can help compliance with ISO requirements.

CSP can assist ESCO in securing funding, and maximizing on going cash flows

CSPS can also help ESCOs monitor changing market scenarios to prepare for any fluctuations in potential market revenues by keeping track of supply / demand variations, fuel prices and transmission upgrades or market rule changes

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Hospital ESCO ExampleHospital ESCO Example

Variety of Energy Efficiency and Cost Reduction Measures, integrated on a bundled basis

Includes non revenue, “Infrastructure Enhancement” measures deemed important by the Hospital

Allows integration of standard energy efficiency + other ECMs, as well as specific ISO DR program measures. They can co‐exist.

Utility costs highly dependent on the location of the Host Site with respect to grid regions.

Location affects both utility rates, as well as the prices paid by ISO for Host implementing DR programs

Neither Host nor the ESCO have interfaced with electricity markets in past


Example Hospital ProjectBEFORE: Utility RatesPeak Summer KW for Med Complex 33,640Annual MWH for Med Complex 132,608,880

Hospital ESCO Measures: ExampleHospital ESCO Measures: Example

Discount Factor, for NPV Calculations 5.0% Incremental KWH $0.042Debt Pymt Period, years 10 ISO EE Payment, $/KW/Month $3.450Construction Period 12 Months ISO DR Payment, $/KWH $0.200Interest Rate on Debt 7.0% ISO Payment, $/KWH $0.120CSP Fees 33.3% DR Funds Earned Nat Gas, $/MMBTU $9.120DSM Run Hrs/Yr- Generator 60 Dmd, $/KW/Mo $12.100DSM Run Hrs/Yr- Controls 600Regulated Medical Waste is cost reduction, at .37/lbGenerator expense reworked due to need of DR plus, upgrade for Hospital

ESCO Ann'l Elec EE Pk Shve Curtail Ann'l Fuel IncrntlSale Price Svngs Dmd Svg Pk Shvng KWH/Yr KW Svngs Maint

Revenue Producing Items KWH KW/Month KW/Mo (Controls) MMBTU Svngs/Yrg ( ) g

Complete Lighting Retrofit $3,224,600 11,222,650 2,940 0 $7,500New RMW System $1,510,400 -97,222 -24 -7,968 $0Exhaust system heat recovery $312,200 1,389,000 11,333 $0Direct Contact heat exchanger $660,000 -19,500 -30 51,780 -$10,000Controls Schedules Modifications/pts $1,630,000 3,341,675 150 = fixed 104,700 1,745 41,430 -$8,000Add VSD to AHUs (7) $132,000 2,906,700 21,433 -$10,000Generators/controls for ISO Credit $39,600 0 6000 360,000 -5,040 -$5,400Infrastructure ItemsEmergency Generator System Upgrade $1,480,000 0 0

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Cash Flows Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10Gross Revenues w/ ISO Pymts $2,651,454 $2,651,454 $2,651,454 $3,169,787 $3,169,787 $3,169,787 3,169,787 3,044,097 3,044,097 3,044,097Debt Service $2,044,345 $2,044,345 $2,044,345 $2,044,345 $2,044,345 $2,044,345 $2,044,345 $2,044,345 $2,044,345 $2,044,345

PROJECT CASH FLOWS PROJECT CASH FLOWS –– 10 YEAR BASIS10 YEAR BASIS

Debt Service $2,044,345 $2,044,345 $2,044,345 $2,044,345 $2,044,345 $2,044,345 $2,044,345 $2,044,345 $2,044,345 $2,044,345Debt Coverage Ratio 1.30 1.30 1.30 1.55 1.55 1.55 1.55 1.49 1.49 1.49CSP Fees $0 $0 $0 $172,605 $172,605 $172,605 $172,605 $130,750 $130,750 $130,750Remainder $607,109 $607,109 $607,109 $952,837 $952,837 $952,837 $952,837 $869,002 $869,002 $869,002Net Free Cash Flow NPV-10 yrs $6,253,802

Gross Revenues w/o Any ISO Pymts $2,525,814 $2,525,814 $2,525,814 $2,525,814 $2,525,814 $2,525,814 $2,525,814 $2,525,814 $2,525,814 $2,525,814Debt Service Ratio 1.24 1.24 1.24 1.24 1.24 1.24 1.24 1.24 1.24 1.24Remainder $481,469 $481,469 $481,469 $481,469 $481,469 $481,469 $481,469 $481,469 $481,469 $481,469$ , $ , $ , $ , $ , $ , $ , $ , $ , $ ,Net Free Csah Flow NPV-10 yrs $3,717,777

DSM Program NPV Benefit Increase-10 yrs $2,536,026


Energy Savings

Energy and Demand Savings due to ECMs and DREnergy and Demand Savings due to ECMs and DR

Demand Savings

86%

14%

0%

68%9%

23%

AFTER KWH

KWH Reduction due to EEKWH Rediuction due to DR

AFTER KW

KW Redctn due to EE

KW Redctn due to DR

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Gross Revenue Breakdown

Contribution of DR revenues on Project EconomicsContribution of DR revenues on Project Economics

M

10 yr revenue w/o ISO

10 yr revenue of KW ISO

10 yr revenue of KWH ISO

% increase in gross revenues with ISO payments 13.6%% Increase in Net Revenues to ESCO/Host with ISO Payments 71.1%


SummarySummary

Competitive Electricity markets provide new opportunities for monetizing DR capabilities of traditional EE projects

Additional revenues can be shared between ESCO and HostIncrease per year of over $256,000 on an NPV basis.

DR program participation increased Net Cash After Cost by 71% in example

After debt service covered, about 10% increase in annual average revenues in 1st year, but substantially more over life than without DR

With help of CSP, this could be further enhanced through it i d h d k t d f ti t idmonitoring day ahead energy markets and forecasting to avoid

“Demand Hit” due to failure to perform during “Event Period”

Conclusion: By partnering with CSPs, ESCO can add meaningful economic value for customers through DR program participation for the system level benefits of these projects.

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AcknowledgementsAcknowledgements

We would like to thank following individuals for their inputs & review comments

Rick Gilkey, VP, DR and Fuels, Customized Energy Solutions

Rick Mancini, Director ‐ NYISO, Customized Energy Solutions

Stephen Fernands, President, Customized Energy Solutions

Thomas K. Dreessen, President, EPS Capital Corp.

Analyze.Simplify.

Implement.

QUESTIONS ???QUESTIONS ???Dr. Rahul WalawalkarDr. Rahul Walawalkar

215215--875875--94409440rahul@[email protected]

Dr. Bruce Colburn Dr. Bruce Colburn 610610--525525--44384438

[email protected]@epscapital.comwww.epscapital.com www.epscapital.com

2222

Author Bios: Rahul Walawalkar Ph.D., CEM, CDSM Dr. Rahul Walawalkar leads the Emerging Technologies practice for Customized Energy Solutions with focus on energy storage, demand response, renewables and smart grid technologies. He is an internationally acclaimed expert in areas covering energy management, electricity markets, emerging technologies and new product development.

Rahul has been involved in evaluating economics of emerging technologies in deregulated electricity markets since 2004. His research and consulting activities have covered complete range of demand response and energy storage technologies. Rahul currently serves on the Board of Directors of Electricity Storage Association and is involved in providing inputs for the demand response and energy storage policy to FERC & various state agencies. He also serves as a Lead Analyst for "Global Energy Assessment" initiative of the International Institute for Applied Systems Analysis (IIASA) as part of an international team of experts. Rahul holds a Ph.D. in Engineering and Public Policy from Carnegie Mellon University. Rahul conducted research on “economics of emerging energy storage and demand response technologies in deregulated electricity markets” under the guidance of Dr. Jay Apt, Dr. Lester Lave, Dr. Granger Morgan and Dr. Rahul Tongia at the Carnegie Mellon Electricity Industry Center. He also holds Masters in Energy Management from New York Institute of Technology and undergraduate degree in Electrical Engineering from Walchand College of Engineering. He is recipient of numerous awards including Computer Society of India’s Young IT Professional Award, Demonstration of Energy Efficiency Developments scholarship from American Public Power Association and is also recognized as one of the Legends in Energy by Association of Energy Engineers.

Bruce Colburn Ph.D., CEM, CDSM, GEB Dr. Bruce K. Colburn is licensed both as an electrical and as a mechanical engineer in several states. He holds a Bee, MS and Ph.D. in Electrical Engineering. In addition to 39 years of engineering design and analysis experience, he is certified as a Green Buildings Engineer, PE, CEM, DGCP, CSDP, and CEA and various other certifications, including NCEES national engineering registration. He has over 70 publications to his record, including contributions to 6 books, and was inducted into the AEE International Hall of Fame in 2004. He has received numerous honors and awards from various engineering societies, including AEE, IEEE, ASHRAE, and AIST, and is A Member of the Energy Committee of the Association of Iron and Steel Technology. He has worked on a variety of industrial, commercial, and institutional projects in 28 countries, including design, retrofit troubleshooting, commissioning, forensic engineering work, energy engineering, and related aspects. Dr. Colburn has also been a lecturer at a number of energy training programs sponsored by various state energy agencies, the US Department of Energy, Portuguese government, ASHRAE and AEE. Prior to entering the consulting field, Dr. Colburn was Associate Professor of Electrical Engineering at Texas A&M University. He is a Charter Member of AEE, member of IEEE, ASHRAE and AIST and is associate editor, reviewer, awards committee member, director and advisor for numerous technical journals and engineering organizations, and on the Board of the Distributed Generation Institute of AEE. Past industry awards include the AEE Energy Professional Development Award, Sigma Xi Research Award, IEEE Prize Paper Award and Houston Chapter AEE Achievement Award. He is a Chartered Legend in Energy of AEE.

Rick Gilkey CEM, CDSM, CEP Richard (Rick) Gilkey is the VP Fuels and Demand Response for Customized Energy Solutions. He is responsible for assisting clients in developing and selecting cost-reducing energy supply strategies in wholesale and retail markets for electricity and natural gas. As well as, supporting clients in RFP processes including data analysis document preparation, coordination of wholesale and/or retail suppliers, bid evaluations, RTO coordination of supply, and contract negotiations Rick oversees the Demand Side Response programs for end use customers as well as our partner clients who contract with us for back office DSR support services, including energy, capacity and ancillary service market operations and coordination functions for clients with behind-the-meter generation and demand resources. Rick also assists clients in developing and selecting cost-reducing energy supply strategies in wholesale and retail markets for electricity and natural gas as well as RFP processes including data analysis document preparation, coordination of wholesale and/or retail suppliers, bid evaluations, RTO coordination of supply, and contract negotiations. Rick received his MBA from Widener University. He also completed a BS in Chemical Engineering at Rensselaer Polytechnic Institute in addition to a BS in Chemistry from Dickinson College. He is an active member of The Association of Energy Engineers. Rick is also recognized as a Certified Energy Manager, Certified Demand Side Manager and Certified Energy Purchaser in conjunction with The Association of Energy Engineers.

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Energy Efficiency & Demand Response in Competitive Electricity markets