The Sunvestment Energy Group Blog

Could Demand Response Markets be the Next Wave of Solar Financial Opportunities?

Posted by Chris Flynn on Mar 14, 2016 7:30:00 PM

As anyone who works in the solar world knows, ours is a complex industry.  We all work to understand and communicate the varying incentives, sophisticated financial structures, and ever-evolving rules and regulationsto find the best possible solutions for our clients.  Another piece of the puzzle that may be important to grasp is how energy is traditionally generated, transmitted, and the varying demand managed.  

Every day in the United States, electrical demand peaks around 5:30 p.m.  Both residential and commercial usage spikes for about half an hour most weekdays as people start getting home from work.  Think of it like rush hour on the highway when it seems everyone is trying to get somewhere.

electric_meter1.jpgIn the mid-Atlantic region, parts of the Northeast, and the Midwest, a single grid operator, PJM, is responsible for the movement of electricity across the single largest Regional Transmission Operator (RTO) on Earth.  Every state in this RTO is a completely deregulated electric market, which means utilities own and operate the delivery of power to homes and businesses, but they do not own the power plants themselves.

This separation of delivery and generation has allowed for the development of Renewable Energy Portfolio Standards--mandated increases in the amount of energy generated by renewable methods--across most of the states in the RTO.  Also known as RPSs, these standards have made it possible for homeowners and businesses to become generators of their own electricity, primarily through the deployment of solar photovoltaics (PV) with owners generating Solar Renewable Energy Credits (SRECs), and receiving a payout based on market demand.

This additional, dispersed generation capacity has added a wrinkle to the way power moves across the grid. Nearly 100% of these PV systems are grid-tied, meaning that when they overproduce, the power is fed back into the grid. Plus, when the power goes out, the PV system shuts down.  Balancing power sources and demand is a complex process, and having effective solutions in place to handle times of large demand is important for successfully keeping the grid operating. Enter the demand market.

During July and August, the late-day peak demand spike can be 10-20x greater than any other time of the year. Fortunately, solar PV production is also peaking during these long summer days, so many PV systems are exceeding the needs of the busisolar-parks-lohnende-und-rentable-finanzierung-und-investment-640x360-baywa-re.jpgnesses and homes where they are located.

The excess power from these arrays is sold to the grid, albeit at very low rates compared to what the utility is charged in the demand market.  In order to moderate demand during these peak times, utilities--primarily in deregulated states--turn to Demand Response and Curtailment.  This practice of reducing energy usage during periods of high traffic in light of time-based rates or other incentives allows consumers to play a role in grid operation.

During times of peak demand, in other words, utilities pay large users to reduce power usage.  These agreements are brokered through the demand market run by PJM. Currently there is no peaking power market for electricity generated by behind-the-meter solar electric power, but if there was, solar owners could benefit.

Think about this way: on a typical day, a utility pays $10 an hour for the electricity it uses. On a peak demand day, that same utility might pay $130~$150 an hour at the time of greatest demand. Imagine if the gasoline you used to sit in rush hour traffic cost $50 a gallon--no fun for the buyer, but very lucrative for the seller.

The less well known or understood piece of the back-and-forth regarding the moving of electricity across the grid is the real impact that low-cost solar is having on utilities’ bottom lines. Even if solar takes just 1~2% off of the peak, you can see based on pricing that it saves the utilities millions of dollars.

Rather than acknowledging this beneficial effect of solar for the utilities, we more commonly hear that SRECs are more than compensating PV system owners, and that PV production is intermittent. Eventually, as SRECs reach the end of their lifetime, there will be an opportunity for the demand market to take their place; and, as PJM looks to improve the overall grid operation, PV system owners should be paying close attention to how demand markets evolve.

In a few years, after the stimulus value has been wrung out of PV, there will still be a demand market for electricity.  If you are a PV array owner with excess generation capacity, there is a chance that you could benefit from this peak demand, with the outcome being even greater solar savings!

Chris Flynn, who underwrote and aided in the funding of more than $40 million of renewable energy projects for the Sustainable Energy Fund, is also one of the co-innovators behind Sunvestment Energy Group.  He is a former professor with Penn State University’s John A. Dutton Institute, where he created a course on sustainable energy entrepreneurship.  Today he serves as SEG’s VP of Strategy, coordinating new strategic investment sources, project underwriting, and brand strategy.

Topics: renewable investment opprtunities, solar pv, Demand Response

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