Ken Silverstein EnergyBiz Insider Editor-in-Chief

Lawmakers understand the need to educate consumers and to enlighten them that power prices are tied to supply and demand. In fact, the Energy Policy Act of 2005 signed last August requires utilities to offer each of its customer classes within 18 months a so-called time-based rate that reflects the utility's cost of generating or procuring electricity. That sounds like a mouthful, but it really means that homes and businesses would be penalized or rewarded for using power at certain times on the hottest or coldest days.

"Market-based signals are being embraced up and down the production, supply and consumption curve," says Peter Corsell, CEO of Washington, D.C.-based Gridpoint. "For larger industrial and commercial customers, demand response will continue to grow." Gridpoint installs a box on customers' premises that stores power to be used during peak demand. The power inside the box is replenished in the middle of the night when prices are lower, saving consumers as much as 20 percent on their electric bills.

A Federal Energy Regulatory Commission-financed study reported that a moderate amount of demand response could save about $7.5 billion annually by 2010. A Rand Corp. study reached similar conclusions and said that the utility industry could save between $50 billion and $100 billion over the next two decades if demand response becomes the norm.

By understanding their consumption patterns and the costs tied to them, consumers can make smarter choices that will conserve energy and save money -- not just for themselves but also for utilities, which must oftentimes procure power at expensive times. State regulators understand the potential. Texas, for example, is working with utilities to find ways to monitor meters as often as hourly for commercial and industrial customers.

Utilities are open to the idea and many of the larger ones have taken it on. And, further, many independent system operators and regional transmission organizations that dispatch available generation over the grid are encouraging demand response. Cost pressures, however, still stand in the way.

But a relatively quick payback may be possible. With advanced metering, for example, utilities are given greater control over load management. Dispatchers would monitor weather forecasts and the subsequent demand for their energy. Using that information, they can reduce consumer demand if that becomes less expensive than generating power or buying it on the spot market. Consumers who use these services pay a monthly fee so that they have the ability to reduce their usage and receive lower bills.

"Consumers need to understand their consumption habits to better control their costs," says Glenn A. Pritchard, with Exelon's meter reading technologies unit in Philadelphia. "Regulators should create programs that incent consumers to participate in demand response programs. Likewise, there need to be mechanisms and/or processes for the utility or supplier to recover the cost of the demand response program."

Volatile Markets

Two types of electricity demand response programs are now in use: market-based, which enable consumers to respond to changing electricity prices, and reliability-driven programs. Those permit either consumers or grid operators to adjust electricity usage when supplies are tight or when system reliability is a concern.

Changes in consumption pattern could have a huge affect on the electric utility industry, which takes in annually about $224 billion. But forward looking utilities with sound balance sheets are motivated to control peak load -- a force that controls their generating capacity as well as the cost of their power generation. Georgia Power, a regulated utility, offers a voluntary real-time pricing program to thousands of customers that equates to thousands of megawatts of demand.

Meantime, Tampa Electric customers can choose lower-priced electricity by using a programmable thermostat. Allegheny Energy is doing the same. The utility sends real-time pricing signals to certain residential thermostats. During periods of high demand, such access can promote energy management and prevent the utility from having to buy wholesale power on the spot market when the cost could be high.

"Shifting electric loads off the peak periods makes good economic sense for ratepayers and all utilities...," says Robert Chiste, CEO of Comverge. "We are seeing many utilities re-visit load management programs in light of today's volatile energy markets and reduced communications costs."

Despite the motivating factors, a study performed by the General Accountability Office says that there are three main barriers to implementing such programs: state regulations that shield consumers from price fluctuations; a lack of equipment at customers' locations; and a limited awareness about the programs and their benefits. In essence, customers generally do not respond to variations in demand and supply because they are protected from wide price swings through set pricing schedules.

But many larger industrial and commercial customers must now manage their demand and they are therefore looking into ways they can cut their heating and cooling costs. And some utilities are encouraging this: Florida Power & Light, for example, subsidizes the costs of some energy-saving products.

"Some customers have nearly doubled their energy costs," says Jeff Siegel, president of Intellicoat in New York City. "For those customers, demand response programs are at the top of their pile."

The most prolific offerings on the market are those related to lighting, Siegel says. But, many such programs are available including ones tied to cool-roofing technologies that his company offers. "We'll compete for budget dollars but the most effective ones are those that offer a payback within two to four years."

While volatile energy markets are motivating change, the transition toward time-of-use energy policies has been a long one. Simply, adapting new technologies is often costly and uncertain. But market forces along with Congressional mandates passed last summer may just push the idea into the mainstream.