Solar and battery storage are commonly noted as the biggest threats — and opportunities — for the utility business model, but a new report shows that when consumers use their electricity may matter just as much to utilities as if they produce it themselves. 

The potential for utility customers to dramatically reduce their energy consumption with less than a $1,000 dollar investment in home energy management devices could put a big dent in utilities’ bottom lines unless they figure out how to leverage the new technologies in a way that benefits both consumers and themselves

“The key to changing the balance of power between utilities and their customers is the customers' ability to control when and how they use electricity and for that demand flexibility is very important,” explained Rocky Mountain Institute (RMI) Principal James Mandel, co-author of the new report "The Economics of Demand Flexibility; How “Flexiwatts” Create Quantifiable Value for Customers and the Grid."

Flexiwatts come from demand flexibility (DF), which is using “communication and control technology to shift electricity use across hours of the day.”

The premise is to use smart technology to move things like air conditioning, water heating, and electric vehicle charging to times when load is lower and electricity is cheaper. Devices now have the capability to control those functions and can be programmed to know when the lower price periods are.

“Demand flexibility need not complicate or compromise customer experience," RMI reports. “Technologies and business models exist today to shift load seamlessly while maintaining or even improving the quality, simplicity, choice, and value of energy services to customers.”

This is the third paper in RMI’s series on how solar PV and batteries are can lead to load defection by electricity users and, ultimately, grid defection by customers if utilities do not adjust.

The first analysis predicted increasing load defection, which is the growing use by customers of electricity they generate with their onsite distributed generation and save in their onsite storage.

The group also forecasted the possibility by the 2020s and 2030s of increasing grid defection, which is customers moving to 100% self-supply. That could happen, the papers suggested, if utilities’ only response to falling costs for distributed energy resources [DERs] like solar PV plus batteries is increased electricity rates.

A utility business model that accurately values DERs "can potentially lower system wide costs while contributing to the foundation of a reliable, resilient, affordable, low-carbon grid of the future,” the load defection study explained. But if utilities’ plan for the future is just to build more infrastructure on both sides of the meter, their costs could be significant.

Customers are going to invest in DERs, Mandel said. If utilities don’t send the right price signals, customers will invest “in a way that serves their own best interests instead of a way that serves system-level best interests.”

The money in demand flexibility

To make demand flexibility work, customers must have some form of time varying pricing, Mandel said. It could be time-of-use pricing, which increases the price of electricity during the highest priced daily periods. Or it could be real-time pricing, which sets hourly electricity prices, or critical peak pricing, in which the grid operator reserves the right to increase the price sharply at certain peak hours.

“The best pricing is pricing that reflects utility costs,” Mandel said. “Real time pricing is an example of that. Demand charges sometimes are and sometimes aren’t.”

Technology specific pricing is shortsighted, he added. “Pricing consumers can use to their advantage should be an option for all customers.”

Customers can have demand flexibility with minimal investment, Mandel said in talking about the new analysis. With 65 million electricity customers already on some kind of time varying rates, the savings could be substantial.

The paper assumes only four shifts, all relatively uncontroversial, in electricity use: The use of smart thermostats and programmable timers on clothes dryers, EV chargers, and water heaters.

The total cost of such a system would likely be less than $1,000. With it, the analysis estimates, “demand flexibility could offer customers net bill savings of 10% to 40%.”

RMI modeled net bill savings in a variety of real-world utility scenarios. For the Commonwealth Edison real-time pricing scenario, consumers were predicted to save $250 million per year, a 12% savings. For the Salt River Project residential demand charge scenario, it was $240 million per year, a 41% savings. For a proposed Hawaii Electric Companies no-export-compensation for solar rate, it was $110 million per year, a 33% savings. And for Alabama Power’s avoided cost compensation for exported PV rate, $210 million per year, an 11% savings.

These bill reductions could put a dent in bottom lines across the electricity delivery system. But by adapting to what customers are likely to do anyway, utilities and system operators could save much more. They can “avoid $9 billion per year in traditional investments, including generation, transmission, and distribution,” the analysis shows.

Another $4 billion in savings is available from optimizing for hourly energy prices and from using demand flexibility for ancillary grid services. In all, the RMI researchers concluded that about $13.3 billion per year could be saved across the nation if demand flexibility practices took hold. 

“The $13 billion per year saved from the projected $80-plus billion in annual grid investment is a conservative estimate," the paper reports, "because we analyze a narrow subset of flexible loads only in the residential sector, and we do not count several other benefit categories."

While U.S. electricity demand is flat to fading, the country is expected to spend an estimated $1.5 trillion over the next 15 years on grid infrastructure because of an increasingly “peaky” demand profile, explained RMI Transportation and Electricity Manager Jesse Morris. In the past, the solution has been fast-ramping fossil fuel “peaker” plants. More recently, there is some use of grid-scale storage.

“That is supply flexibility,” Morris said. “This paper says forget about supply flexibility and turn demand down with these kinds of smart devices. It is much cheaper. Our calculations show that with just the four devices, we can save 13% of that $1.5 trillion.”

Whether it is peaker plants or grid-scale storage, this is a cheaper asset than supply flexibility, Mandel added. “Grid investments are likely to raise prices and increase sunk costs, whether they are for traditional or renewable central station generation. Cutting investments with demand flexibility saves consumers money. Using both supply and demand flexibility is a smarter way to run a grid.”

Flexible demand and customer-sited solar

What utilities must recognize, the analysts said, is that while widespread solar-plus-storage is likely years off for many of them, demand flexibility is available to customers now and makes load defection an increased reality.

Demand flexibility is a critical third technology along with solar and battery storage, Mandell said. “For many of the things batteries can do for a customer, it can do them much cheaper.”

Demand charges are already common for commercial-industrial customers and are increasingly being imposed on residential customers, Mandell said. A residential demand charge imposes a bulk fee, often between $10 and $50, for every kilowatt the customer consumes during the highest 15 minute or 30 minute period of usage during the month.

Demand charges make battery storage an economic option even at today’s high prices and limited capacities. But demand flexibility can provide more of that same service today at a much lower cost.

“In our load defection analysis, there were timelines for customers to self-generate a portion of their electricity,” Mandel said. “Those timelines are accelerated by five to ten years if you include demand flexibility as a third resource for those customers.”

Where utilities are fighting solar PV with cuts to net energy metering or demand charges, demand flexibility makes it a more economic option because it allows the use of more of the solar kilowatts on site.

In the grid defection context — completely cutting the cord from the utility — demand flexibility dramatically lowers the cost in combination with PV and batteries.

In the load defection scenario, demand flexibility helps customers use as much as 90% of the solar energy-generated electricity on site.

“It is a way for a customer to manage their solar generation on site as opposed to relying on things like net metering to make their economics work out,” Mandell said.

“Instead of buying a battery, it is possible to make sure appliances turn on when the sun is shining and not when it is not,” Morris added. “That can be done with automation and no sacrifice of comfort. It provides the same service as the battery without the battery.”

How utilities and regulators can respond

The opportunity is available equally to vertically integrated investor owned utilities, deregulated transmission and distribution providers, and retail electricity providers in deregulated markets. The keys are offering rates that encourage changes in customer behaviors and to take advantage of the changes they make, the paper reports.

Utilities need to understand flexiwatts as a way to get to grid cost reductions, not just a threat to revenues. They can then construct rates reflecting utility marginal costs to “ensure that customer bill reduction (and thus, utility revenue reduction) can also lead to meaningful grid cost decreases.”

Having taken these steps, utilities should be able to see where demand flexibility will take them and “harness enabling technology and third-party innovation” to build customer-facing business models that target both lower bills for their customers and reduced sunk costs.

State regulators can support utilities in making a transition by pushing them to see demand flexibility as an opportunity instead of a threat, the paper explains. They can frame demand flexibility as “a potentially lower-cost alternative to a subset of traditional grid infrastructure investment.”

They can also support the introduction of new rate structures that balance “the potential complexity of highly granular rates against the large value proposition for customers and the grid” and facilitate utility-private sector partnerships likely to lead to innovation.

“Given the benefits,” the paper says, this “should be a near term priority.”

It is, Mandel added, “economic today with technology priced very conservatively. And the rate structures exist today. It is a big opportunity and a cost-effective opportunity.”