How Demand Response Works

Demand Response Impacts

Refurbishing aging electrical infrastructure will help power companies keep up with demand.
Refurbishing aging electrical infrastructure will help power companies keep up with demand.
Don Farrall/Stockbyte/­Getty Images

­As it exists now, the energy industry faces a myriad of infrastructure issues. To keep up with the lo­ad demand and its expected rise, the industry needs to relieve the increased stress on the aging grid and build new power plants and transmission power lines while working to reduce greenhouse gas emissions and the skyrocketing costs of energy.

In 2003, the United States used 3,883 billion kWh -- with a population of 280 million people, that's the equivalent of 13,868 kWh used by each person [source: U.S. Department of Energy]. Of course, energy consumption is not spread equally from state to state. Larger states with many people will use more electricity than smaller states, or states with fewer people. Residents in Southern states might use more power to cool their homes and businesses in the summer than a state in the Pacific Northwest, where the climate is cooler.

Brownouts, rolling blackouts and blackouts, such as the one that hit the both Europe and the eastern United States and Canada in 2003, happen when the power supply is lost, usually caused by a malfunctioning electrical grid or component or by a supply-demand discrepancy. Blackouts aren't just inconvenient, they're also money pits. It's been estimated the 2003 blackout cost New York City alone up to $750 million in lost revenue [source: USA Today]. For businesses across the United States, power outages mean at least $50 billion in lost revenues annually [source: Samson].­

The industry is looking at demand response programs, big and small, as an important piece to the infrastructure solution. Automatic direct response systems could sense imminent demand load problems and divert or reduce power in strategic places, removing the chance of overload and the resulting power failure. These programs also have the potential to help both the providers and consumers save money; they could eliminate the need to build additional power plants and delivery systems -- specifically, those for use during peak times only -- as well as the potential to lower wholesale energy costs.

The U.S. Department of Energy estimates the average home uses about 11,000 kilowatt-hours (kWh) annually. When you buy electricity, you're buying kilowatt-hours. One kilowatt-hour is equal to 1000 watts of electricity used in one hour.

On average, consumers spend 8.3 cents per kWh, so that adds up to each household spending about $900 on electricity every year [source: U.S. Department of Energy].

The rate you pay per kWh consumed is determined by a combination of factors, including regulations, fuel costs, weather (storms, extreme temperatures), time of day and consumer demand. While the rate determination is complicated, calculating your own home's daily cost of operation is not. And without automatic demand response systems in place, you're on your own to manually reduce your consumption.

Two residential-level ideas, dynamic pricing and time-of-use rates (TOU), work similarly to buying off-peak airline fares. If you want to fly during peak times, you pay more. If you want to use your dishwasher during peak times, you pay more. With dynamic pricing, consumers are offered rate discounts during normal usage periods and charged higher rates during peak times. Alternatively, TOU allows consumers to shift their usage patterns from high-price peak hours to less expensive off-peak hours by sharing information to make smart adjustments: A TOU meter at home tracks the total kWh energy usage over a period of time (day, year). You save money, and the grid saves power.

­What about larger-scale demand response systems, something that doesn't leave the consumer to manually cut loads? In addition to residential efforts, there are companies emerging with the sole purpose of demand response. Companies called aggregators are stepping in to reduce grid loads by collect negawatts. A negawatt is a unit of power that is no longer needed, and aggregators sell them to regional Independent System Operators (ISOs) who use them to reduce the load on a specific part of the grid.