While most demand response activity is currently going on in the United States, a new report from Navigant finds spending is set to take off worldwide as emerging technologies and a push to limit energy use expand the global market.

Global demand response spending will grow from $183.8 million this year to more than $1.3 billion in 2024, the report from the energy consulting firm concludes, and the United States will see its leadership position in the DR space erode as pilot programs start up worldwide.

Right now United States spending makes up almost all of North America's contribution, which is 85% of the world market. But according to Brett Feldman, senior research analyst with Navigant Research, within a decade North America's share of global spending will decline to about 45% as more countries integrate demand response into their energy mix.

“There is a big change over time, mostly from Asia Pacific and Europe,” Feldman said.

The most rapid growth is likely to occur in the Asia Pacific region, where many distinct markets have different drivers for demand response growth. In Europe, Navigant found there is a “more unified story of moderate, methodical advancement based on a combination of opening market opportunities and renewable resource integration.”

Europe will likely not experience the rapid expansion that will occur in Asia Pacific, but it will have a faster growth pace than in North America “as new market opportunities open and DR-friendly rules are instituted," the report predicts.

And those “friendly” regulations are at the heart of the United States' largest point of uncertainty. While demand response will play a role in energy markets regardless of the outcome, the Supreme Court's eagerly-awaited decision on whether DR can participate in wholesale markets could potentially cause a “huge disruption” in the short term, Navigant said.

Demand response will grow regardless of Order 745

In the United States, demand response exists in a place of deep uncertainty. The Supreme Court could hear oral arguments this fall, with a decision expected early next year, as to whether federal energy regulators have jurisdiction to set rules for demand response at the wholesale level.

The outcome of that case, based on FERC Order 745, “could drastically alter the DR landscape in the United States,” the report finds, but Feldman said that likely means more of a disruption than a long-term hit to the market.

Navigant research shows demand response resources delivered an estimated 72,000 MW of load reductions across the U.S. in 2011, or about 9.2% of peak demand. A FERC report in 2013 estimated that over 32,000 MW of those 2011 DR reductions may have come from efforts in the wholesale markets. That means almost 60% of potential demand response reductions that year came from markets not impacted but the FERC Order 745 dispute. 

“If it turns out demand response is not allowed in the wholesale market I don't think there will be an immediate transition to something new, I think there will be some short-term shakeout,” Feldman said.

Last year, GTM Research found that if Order 745 remains overturned, it could cut the growth rate for demand response through 2023 nearly in half — from 8% to 4.9%. But looking longer term, Feldman said, the push to modernize the grid and reduce energy consumption will win out as states and regional markets develop alternative methods for the resource to participate.

Even if there is not participation in the wholesale markets, Feldman said “there could be more value on the retail side, looking at what New York and California and some other states are doing.”

But he cautioned that “not every state is going to follow that path. Some will be followers, but I think there is potential for long-term gain.”

Market drivers

The growth of demand response is being driven by several factors, including a mix of market needs, carbon regulations and technological innovation.

The federal government's Clean Power Plan, which targets a 30% reduction in carbon emissions by 2030, will bring DR into play as the new regulations are expected to force a wave of coal plant retirements, which will increase the need to reduce peak demand. And while the CPP is in the spotlight, by some estimates 12,000 MW of coal-fired generation will be taken offline this year because of Mercury and Air Toxics Standards rules that went into effect in April.

“Demand response will be a part of that solution, but not 100% certainly,” Feldman said.

A push for greater grid resiliency will also lead to demand response growth, Feldman said, including addressing aging infrastructure and responding to natural disasters.

“Look at ConEd's Brooklyn-Queens demand management program where they're using demand response and energy efficiency to defer capital investment into the load pocket that is brewing,” he pointed out.

New York has been aggressively modernizing its utility grid through the Reforming the Energy Vision initiative, and Consolidated Edison is attempting to delay more than $1 billion in investment by deploying demand management technologies.

“It's the whole idea of grid modernization,” Feldman said. “California has all kinds of distributed generation and demand response dockets going. It's state by state.”

The DR 'end game': Faster response time

While market factors show a need for demand response, it is technological innovation which is allowing the resource to grow rapidly. 

A new wave of thermostats, capable of bi-directional communication, will change the business model for utilities involves in residential DR, Navigant concluded. In the past, utilities had to directly install specialized thermostats for customers, but now thermostats available in stores are compatible with utility programs — changing the economics for utilities and simultaneously broadened the market.

The Bring Your Own Thermostat model “can vastly reduce the acquisition costs for programs and lead to greater customer satisfaction since the customers are the parties choosing their own devices and initiating the participation process,” Navigant's report said.

And the increasing adoption of standards is allowing greater communication between devices as well as allowing more companies to compete in the space. Startups as well as larger established companies are offering software solutions for demand response management, Navigant concluded, meaning less investment from the utility, fewer technological hurdles and faster deployment.

Today, your typical demand response programs are operating on a couple of hours to a day-ahead scheme, “where you don't need too much automation. But as you get into faster response and ancillary services, that's where you need more of the immediate control,” Feldman said. “Smaller companies are coming up with  innovative technologies to get to faster response.”

Electric water heaters offer significant demand response potential, with more than 50 million installed in the United States. Emerging two-way communications allows the water heaters to be controlled so precisely they can provide ancillary services, "which are more real-time grid capabilities," Feldman said.

Frequency regulation would require a response time of 4 to 5 seconds. “That's really the end-game, but it's never going to be a mass market opportunity,” Feldman said.