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For electricity markets to function in a truly competitive and efficient manner, it is not enough to focus solely on improving the supply of power. Customers must also be able to respond to changing supply conditions by modifying their demand for electricity. To the extent that this demand is flexible for an individual customer, he or she will buy less electricity when it is more expensive and shift demand to periods when electricity is cheaper—washing clothes and dishes in the late evening or on weekends instead of midafternoon, for example.
Allowing customers to manage their loads (or have their loads managed for them) in response to system conditions can be thought of as a power reliability resource because it would enable a closer match between demand and supply on a continuous basis and thereby reduce the need for power outages. Not only would this increase the stability of the electricity grid, but it would also reduce extreme price spikes.
Two types of electrical load are also resources:
- Price-responsive load requires real-time pricing, in which the customer sees the fluctuating price of energy during the day and chooses whether he would like to buy at that price. When generation is in short supply and prices rise, more and more customers with accurate pricing information are likely to turn off loads. At some point, load will match generation without resorting to voltage reductions or rolling blackouts.
- Emergency-responsive load can be thought of as an ancillary service like spinning or supplemental reserves. In this case, the customer can bid his load into the operational reserve market for that day and, if called upon, turn the load off within 10 minutes if his load was specified as a spinning reserve and within a half hour if his load was specified as a supplemental reserve. The customer is paid for the reserve capacity whether or not it is called upon. This type of load is commonly thought of as a reliability resource.
To implement price-responsive load as a resource, the customer must be provided with price signals and a means to respond to these signals, preferably automatically.
For emergency-responsive load, some form of load aggregation and a means of certifying that the load was available to turn off and that it indeed was turned off when requested might be needed. Some loads, such as water heating, can respond immediately to act as spinning reserve. Other loads might not be able to respond as quickly but may still qualify as supplemental reserves that can be dropped within a half hour.
For either price- or emergency-responsive loads, markets must be designed to give the customer the correct signal for participation in competitive energy and/or ancillary services markets in an efficient manner.
This concept is thus quite complicated to implement because it requires a variety of technological and procedural innovations, including:
- Real-time pricing — When the supply of electricity is insufficient to meet overall demand, the price of wholesale power from electricity generators goes up. Today, such variations in price are hidden from most electricity customers, who typically pay their utilities a fixed rate for each unit of electricity consumed, regardless of the time it was used. Real-time pricing means passing fluctuations in the true cost of electricity on to customers so they have the pricing information they need to adjust their consumption of electricity.
- New communication and control technologies — Electricity system operators would require more precise information about the myriad fluctuations in demand. Operational control systems that can respond to load reductions on par with power generation need to be developed.
- New end-use technologies — Some electrical equipment, such as induction motors and various power electronics devices, create challenges for reliable grid operation. Such equipment needs to be redesigned or operated in a way that will reduce these effects on the grid.
These improvements in utility pricing structures, power grid control technologies, and electrical equipment are naturally complementary to some of the other new power grid concepts.
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