Volatile energy prices demand new form of management

You might baulk at the idea of letting your energy provider decide when some of your electronic devices should operate - but despite the obvious cause for concern some companies are already doing this. What's more, a new approach to the energy demand management market could see you making those power decisions yourself, based on the current price of power.

Energy demand management has traditionally involved abdicating some control of a customer's electrical devices to the utility, so that it is able to power them down during critical times, such as at periods of peak demand. In the US, at least, this concept has been around for a decade or more. Energy companies have operated voluntary programmes in which customers have given over control of devices such as water heaters and air conditioners. When the utility company is overstretched, and begins to worry that it may not be able to meet demand, it can power down those energy hungry devices, regulating demand and avoiding a brownout.

Toronto Hydro, the monopoly energy distributor in Ontario, is one example of an energy distributor that has bought into such programmes. Its peaksaver initiative, open to both business and residential customers, allows it to install an energy control device at a customer's premises, adjusting air-conditioning operation for short periods of time to offset spikes in demand. The organisation has signed up 40,000 of an estimated 100,000 eligible customers to the programme, and spokeswoman Tanya Bruckmueller estimates that the firm can reduce demand by up to 40 megawatts during emergency periods.

This aspect of energy demand management - also known as load management or load shaping - may have been around for a while, but environmental and financial concerns are starting to drive new developments in the field, explains Dr Martin Kushler, director of the utilities programme at the American Council for an Energy Efficient Economy. "The emphasis on climate change and carbon reduction will increase, " he predicts. "To that extent, we need to reduce energy consumption, and for that you need energy efficiency and demand management."

As with many other areas of business, the energy sector has already opted to let the markets take care of the electrons that make their way to your power sockets. We have seen very swift deregulation in multiple markets, including the UK, which ushered in the process at the start of the 90s. Why not similarly let the market drive efficiencies into energy demand management? This is the question now being asked by analysts and vendors alike as prices in the deregulated markets exhibit more volatility.

Roughly 85 per cent of energy in the UK, for example, is purchased on long-term contracts, according to Geoff Smith, technical director of UK energy consultancy and energy market broker Inenco. There may be relatively little liquidity in energy pricing there, but "the other 15 per cent of the market is bought within a very short time frame - typically just a day or even half an hour ahead," he explains. "In that case, the company is taking the risk that the supply situation is good and that energy prices will stay low."

Several companies are now trying to apply price-based demand management to the energy sector, creating scenarios in which a company may decide to cut back on energy consumption at points when prices are high, or perhaps even use its own generators when it becomes more economical to do so. Comverge provides 'smart' metering systems linked to energy markets in the US, while Enernoc does something similar and also operates an energy exchange. Smith says that Inenco has worked with companies like JP Morgan to enable their own generators to kick in at times of peak demand, providing cheaper energy than current market prices allow.

Controlling the patterns of energy demand is a valuable activity to explore, says Hans Nilsson, chair of the International Energy Agency's Demand Side Management programme, but it is important to consider the other side of energy demand management, which concentrates on energy efficiency at the point of consumption. "One involves handling the shape of the load, and the other is to handle the level of the load," he explains.

Controlling the time windows in which energy is used will only introduce a certain level of efficiency into the system. If the devices consuming energy are inherently wasteful, then turning them off for certain periods at peak load times will only serve to mitigate that waste, and doesn't really get to the heart of the problem. Reducing the overall level of consumption is a priority and a critical part of the demand management operation, analysts assert.

Designing buildings to be energy efficient at the outset could help drive those energy efficiencies deep into the infrastructure of the business. "For example, sophisticated buildings will have daylight-optimised lighting systems, " predicts Kushler. "There is some good potential for energy savings there." Many such developments may only be feasible if designed into a building by architects before it is built, but there are other energy-efficiency benefits to be gained by retrofitting simpler solutions. "Activity sensors are pretty easy, " he adds.

Emerging technologies such as Zigbee, a radio technology designed for very low power, long-life sensors, could be used to establish mesh networks in a building, creating easily-installed links between sensors within the workplace and the systems managing energy-hungry activities such as heating, ventilation and air conditioning (HVAC) and lighting. Sensors indicating a lack of movement in a room for a certain period of time could automatically turn off the lights, and perhaps lower the temperature in that part of the building.

The market for price-based demand management is still relatively small, but Craig McDonald, managing director at Navigant, a consulting firm that guides clients through their dealings in industries undergoing substantial regulatory change, insists that as the sector becomes more mature new pricing models could gain traction. "To me it's analagous to the phone companies who used to charge us using all these different metrics like the time of day, where we were calling and so on," he says. "That all became much simpler. We're at the stage now where we're making things more complex for companies [in demand management] but in the future things will be simpler."

But even as we try to drive simplicity into what could be a complex proposition for many customers, ongoing developments could make the whole thing more volatile. The final piece of the puzzle could be net metering. The idea of companies generating their own electricity using renewable resources and selling it back to the grid is becoming more popular, as firms like Google and Wal-Mart jump on board. This could close the loop for companies trying to deal with wholesale energy markets using price-based demand management mechanisms; not only would they be consumers of energy, but potentially sellers, as well.

This is all going to take time - Inenco's Smith says that there's nothing to stop businesses doing this now, but predicts a window of five or ten years before price-based demand management really kicks in for residential customers. While utilities and customers alike mull this over, however, smart metering specialist Comverge's initial public offering this April indicates that the markets are more than interested in the idea. Its stock price traded at 16 per cent above the offering price on the first day of trading, and at the time of writing, shares had hit double the IPO price. Clearly, the markets have a part to play - and could fuel the fortunes of those selling the infrastructure to make all this work, as well as those trying to save money on what is becoming an increasingly expensive commodity.