DER - Solar

How customers, connected devices, and demand flexibility drive the clean energy transition

How customers, connected devices, and demand flexibility drive the clean energy transition
(Credit: Octopus Energy)

Contributed by Michael Lee, CEO, Octopus Energy US

Renewables are clearly the future of the energy system. One only needs to look at the log-jammed interconnection queue to know there is only one outcome for transforming our generation stack.

Renewables have a double-edged sword for how they interact with the grid; they often produce amazing and abundant low-cost electrons. However, sometimes when they do so, they can overwhelm the grid, and during these times we see frequent and significant curtailment in the system because there is no need for the additional electron.  

In a single 24-hour period, we can go from this bumper crop of electrons to grid tightness and sometimes even calls for energy conservation. This inflexibility of both supply and demand is meeting a breaking point and retail rate design is central to unlocking the next phase of renewable energy growth while reducing costs for the “electrification of everything.”

Incentives

The challenge is that traditional fixed-rate plans do nothing to incentivize customers to use power when the grid has abundant electrons. Time-of-use rates are a step in the right direction to solve this problem but they have two significant deficiencies: first, customers often have fatigue and stop thinking about the on/off-peak time periods after several months (because life is busy and thinking about power is not what most people do) and second, even a “perfectly” formulated time-of-use rate is not adaptable to a real-time grid condition.

That overnight cold spell where the wind doesn’t show up and temps are extreme, well, you’re incentivizing the wrong behavior during extreme events. That atmospheric river that causes solar to underperform may also misalign mid-day time-of-use products. These rapidly changing grid conditions, leading to tension on the grid, will be ever-frequent challenges as we move from a molecule-based world to an electron-based world.

Interestingly, the tools to solve this are literally at our fingertips – computers and customers.  

Computers and customers

When most people think of their relationship with their energy provider, the usual response is simple – “What relationship?” Customers should not simply be “ratepayers” or “billpayers.” They are customers and customers have preferences. They are also acquiring heat pumps, batteries, EVs, and smart thermostats – growing household electricity consumption by 200-400% over the coming years. All these assets have controllability via APIs that load-serving entities can use to interact with the wholesale power system.

Traditional forms of load-serving entities like investor-owned utilities (IOUs), municipalities, and retailers have historically aligned with ‘bulk power’ – the more they buy, the cheaper the rate. The reality is the grid is changing. The future of energy means we must use technology to fluctuate usage during optimal times to balance the grid, absorbing as much of this low-cost renewable energy as possible.

To unlock much of this potential, we need to tap into the customer experience to drive education around demand response. When we do so, the future of low costs will no longer be “buying in bulk” but instead “buying at the right times of the day.”

Demand response

While some states have experimented with demand response programs funded by state budgets, the reality is wholesale power markets can provide clear and abundant signals for load management that is infinitely scalable by the load-serving entity.  

Imagine a world where energy rates lowered every time you bought a controllable device that was aligned to our electric future (smart thermostats, EVs, heat pumps, solar w/ battery). Smart rates are the best of both rate designs: simplicity of a flat rate but automated load shaping to match the abundance of the grid. Technology automates the process by making incremental adjustments to when and how people use energy in the background with very little impact on the customers’ experience in their homes (such as bumping smart thermostats up only a few degrees or optimizing times for charging).

This type of “integrated” demand response rate plan must become the norm as we stop using dirty fuels and instead balance the demand for cheap and abundant renewable power. This new paradigm fully aligns to a high-renewable future and is infinitely scalable without subsidies because it leverages existing wholesale power markets. It actually lowers rates for customers in a world where power prices have only increased for many years in a row.

Cheaper prices are possible because it automatically moves flexible demand into the hours where renewables are abundant and through these smart rates, we can create an agile grid. This is where the disruptors are heading. Dinosaur traditional plans that lack this technology are bad for customers and will not help us tackle future blackouts or cost inflation. 

What’s next

Competitive retailers are prime to be early movers in creating these flexible loads to absorb low-cost renewables and translate as an extremely cheap power price because creating flexibility directly impacts their cost of sales and margins. Our current world of retail energy 1.0 – of marketing and games – should end. This world of retail energy 2.0 – of automation, flexibility, and customer-centricity – cannot come fast enough.

The customer needs to be the epicenter of change. We can drive down the cost to the customer and use the timing of how and when people use power to navigate a changing energy system. The cheapest customers on the grid will be those who have the most flexibility. With customer demand flexibility, we can have energy abundance, low costs, and grid reliability if we work collaboratively.

Utilities, municipalities, and co-ops will be fast followers, learning from the rapid experimentation and prototyping culture of startups and retailers that have access to both wholesale power markets and deep technology expertise. Often, many of these companies may even choose to partner with a disrupter, as we’ve seen in other international markets.

Ultimately, smart rates are an amazing pairing with renewables. They bring new loads and time them to match the hour-to-hour production of renewables, providing a market incentive in wholesale power markets to build more wind and solar, even in markets that feel fully saturated by renewables today. That’s because GW of load can move in and out of select time periods to match the production of new wind and solar that otherwise wouldn’t have a place to go.

Smart rates bring a beautiful trifecta: lower costs for customers, signals to build more renewable energy, and a more agile and resilient grid. Many states offer the building blocks for these smart rates to be offered today, whereas others need a bit of regulatory reform at the state level for innovative rate design to flourish.

Either way, smart rates are an essential path to bridge the reality of an ever-growing yet inflexible renewable supply and the growing needs of the “electrification of everything” we see customers adopting. 

Originally published in Power Grid International.