ENS4445/ENS5445

SUSTAINABILITY AND
RENEWABLE ENERGY
$$$
Lecture 3: Economics of Distributed Resources
Textbook Reading: Appendix A (2nd ed.), 9.4, 9.5

Chapter 5 (1st ed.)

Purpose of this Lecture

 To introduce techniques needed to evaluate

the economics of both sides – demand and

supply - of the electric meter.

 To present the fundamentals of demand side

management, load reduction, and relevant

approaches.
 Integrated Resource Planning
 When we focus on what we want energy for, rather than how many kilowatt
hours are usually needed, important perspectives emerge.
 Our focus is on distributed resources that are relatively small in scale and
located somewhat near the end-user.
 Improving efficiency is an important energy resource on both sides –
generation and demand - of every electric power system.
 Electric Utility Rate Structures

 Critical factors for customers evaluating a

distributed generation or energy efficiency
project intended to reduce electricity purchases.

 Vary considerably, depending on both the utility

and the customer electrical characteristics.

 For a residential customer typically includes a

basic fee to cover costs of billing, meters, and
other equipment – supply (service) charge -
plus an energy charge based on the number of
kilowatt-hours of energy used – electricity
charge.
Electric Utility Rate Structures

 Declining block rates

make electricity
cheaper as the
customer’s demand
increases, which
discourages
conservation.
Electric Utility Rate
Structures

 Inverted
(inclining) block
structure to
discourage
excessive
consumption in
peak season.
 Time-of-use rates
to encourage
customers to shift
their loads away
from the peak
demand times.
 Demand charges that apply to commercial and industrial customers are
based on the peak demand in a given day or month.
 The utility needs more generation, transmission and distribution capacity to
serve the customer with the lower load factor. Energy charges won’t
differentiate between the two, but demand charges will. It will encourage
customers to shed some of their peak power.
 The Case For Real-Time Pricing (RTP)
 Compared to flat (non-time-varying) rates, dynamic pricing can
lower power system costs (by improving the system load factor)
and raise economic efficiency
 It does this by clipping off the highest peak loads during the
year which can account for anywhere from 7 to 17 percent of
system load
 The Case For Dynamic Pricing
 Conclusive findings from recent pricing pilots:
• Customers respond to price by lowering peak usage
• Response rises with prices but at a diminishing rate
• Enabling technologies boost response
• Hotter temperatures lift response values
• Response does not wilt in a heat wave
• Response persists across years
• Response varies by region and customer class
• Informational feedback leads to energy conservation
 Customers respond to informational feedback but
• By how much is still somewhat uncertain (wide range of impacts)
• The impact on peak demand is uncertain (conflicting results)
• Whether this response would persist over time is also uncertain
 Customer preferences for various time-varying and non-time-varying rate options is
an under-researched area
• Most of today’s evidence comes from focus groups and attitudinal surveys
• In focus groups, customers express concern about price volatility but the vast
majority of pilot participants indicate that they would remain on the rate upon
completion of the pilot
 What are the Impacts Across Customers?
 Load shapes vary by customer
• Different customers impose different cost on the power system
 However, today’s flat rates ignore this principle
• Everyone’s “shopping cart” incurs the same average rate
 The result is significant cross-subsidization
• Customers with poor load factor (large homes with central air conditioners and
swimming pools) are subsidized by those with high load factor
• Subsidy could be in the range of $4 billion for a population of 10 million
customers over a 10-year period
 Dynamic pricing would eliminate these subsidies
• Under the right regulatory and market conditions, dynamic pricing can create win-
win outcomes for the overwhelming majority of customers
 Customers will have an incentive to reduce peak usage by curtailing and/or shifting
usage to off-peak periods
• The level of load shifting is dictated by many factors, a primary one being the
price signal
 This is not just a theoretical conjecture but backed by a wide range of pilot programs
 North America, Europe and Australia/New Zealand
How Can Customers Reduce Peak Usage?
Distribution of Real-Time Pricing Impacts
 Energy Economics Basics
 Financial evaluation: The capital cost of equipment, the
operation and maintenance costs, and the fuel costs must be
combined in some manner so that a comparison may be made
with the costs of not doing the project.
 Simple Payback Period:

• Advantage: the easiest economic measure to understand

• Disadvantages: makes an investment look worse than it is, does not
include anything about the longevity
 Initial (Simple) Rate-of-Return:

 Advantage: can serve as “minimum threshold” indicator

 Disadvantage: makes an investment look too good
 Net Present Value
 Takes into account the time value of money!
 converts a future value F into a present
worth P
 The discount rate d can be thought of as the interest rate
that could have been earned if the money had been put into
the best alternative investment.
 Deciding just what is an appropriate discount rate for an investment in
energy efficiency or distributed generation is often the most difficult and
critical step in a present value analysis!
 The present value P of a stream of annual cash flows A, for n years into the
future, with a discount rate d:
 The present value function:

 The present value of all costs, present and future, for a project is called the
life-cycle cost.
 The difference between the life-cycle cost of two investments is the net
present value (NPV) of the lower-cost alternative.
 Internal Rate of Return
 The discount rate that makes the net present value of the energy investment
equal to zero.
 The IRR allows the energy investment to be directly compared with the
return that might be obtained for any other competing investment.
 Annualizing the Investment
 The capital required for the energy investment can be a loan
that converts the extra capital cost into a series of equal annual
payments that eventually pay off the loan with interest:
Levelized Bus-Bar Costs
 A present value
calculation is first
performed to find an
equivalent initial cost, and
then that amount is spread
out into a uniform series of
annual costs.
 The ratio of the equivalent
annual cost to the annual
electricity generated is
called the levelized, bus-
bar cost of power.
Levelized Bus-Bar Costs
Energy Conservation
Supply Curves
 CCE has greater
application as a
policy tool for energy
forecasters, who can
estimate the total
energy reduction that
might be achievable
at a cost less than
that of purchased
electricity.
 Energy Conservation
Supply Curves
 If all 12 were implemented,
they would reduce building
electricity consumption by
1/3 at an average cost of
2.4c/kWh.
 Demand Side Management
 Demand Side Management
(DSM) is the process of
influencing customer demand
throughout 24 hours by
encouraging use of electrical energy when prices are low or by
assisting customers to employ conservation measure such that
their overall energy bill is acceptably low
 Introduced in 1981 by Clark Gellings, Electric Power Research
Institute (EPRI)
 Introduced to Australia in 1990 by the former State Electricity
Commission of Victoria (SECV)
 Currently used for abatement of greenhouse gas emissions
 Targeted to achieve network-related objectives is currently
growing in importance in Australia.
Demand Side Options
 Several options exist for the consumers to

contribute to the economic efficiency of

the whole power system. These include:

• use of alternative fuels (fuel substitution)

• self-generation or private contract purchase of

electricity

• improvement of end-use efficiency

• lifestyle changes to achieve conservation practices

• end-use energy storage

(such as hot and cold air storage, compressed gases)
 Demand Side Management
 Main problem in competitive environment is of these desirable
goals reduce the income to the supplier.
Regulatory measures must be imposed to achieve set
targets, usually associated with
• environmentally sustainable developments or
• socially desirable practices
Demand Side Management

 Approaches can be divided into two categories

Load Reduction

• Implementation of conservation technologies to

reduce total energy use

Load Levelling

• Used to smooth out peaks and dips in energy

demand to maximize use of efficient base-load
generation and reduce need for “spinning reserve”
 Peak Clipping (Load Levelling)

 To implement this:
Residential and commercial customers accept
direct control of air-conditioners and water heater
• Either by local controllers or by load
management agreements direct with supplier
Industrial customer subscribe to interruptible rate
• Cheaper electricity at cost of decreased
reliability of supply
 Valley Filling (Load Levelling)

 Customer options required

• Residential customers use off-peak hot water
systems
• Commercial buildings use hot-water storage to
augment space heating
• Industrial customers schedule night operation
 Load Shifting (Load Levelling)

 To achieve this:
• Residential users subscribe to time-of-use rates
• Industrial customers shift operations from day-
time to night-time
 Strategic Conservation (Load Reduction)

 Examples of implementation
• Residential users may be required to supplement
home insulation or better solar protection and
natural cooling
• Commercial premises can reduce lightning
• Industrial customers may be required to install
more efficient processes
Benefits of DSM

Reduction of peak demand =

producing savings

Avoidance of load shedding

Improved load factor

Better load forecasting

Lower supply costs/improved

cash flow
Limitations on DSM Implementation
 Key factors limiting effectiveness of implementation
Load profile and coincidence of peak loads in different
geographical groups
Need to differentiate between groups by consumer
type
Ability to reconfigure supply system to avoid
overloads
Effective strategies to maintain customer participation
• Loyalty cards
Pricing mechanisms that assist customers in their
change of energy use habits
• Discounts for energy saving devices
Cost of communication link between suppliers and
customers
• Difficult to implement the required link for a price
comparable to average domestic electricity bill
DSM Characteristics

 Timing

• At particular times of day

 Pre- or post-contingency

• Either prior to contingency or response to particular

event

 Geographical locations

• Targeted to specific locations

 Market segments

• Targeted to specific segments

 DSM Types
 Environmentally-driven

• Achieves environmental / social goals by reducing energy use

leading to increased energy efficiency / reduced greenhouse
gas emissions.

 Network-driven

• Reduce demand in ways which maintain system reliability in

the immediate term and over the longer term defer the need
for network augmentation.

 Market-driven

• Provides short-term responses to electricity market conditions

The Development of DSM in Australia

47
 Load Reduction
 Refers to the reduction of electricity by means of the installation of energy
saving technologies and other forms of energy reduction methodologies, for
example, load reduction agreements with customers.
 Voluntary Load Reduction
• Reduce peak load with short notification;
• More suited to certain industrial customers;
• Manufacturing plants with energy intensive processes that are not time
sensitive are good contenders;
• The customers are only paid when they actually defer their operations;
• Limitations on the number of times and duration
 Involuntary Load Reduction
• When the voluntary curtailment procedures is not sufficient to alleviate the
power shortage;
• Non-critical or unimportant customers will be interrupted on a rotating basis;
• Customers which serve critical loads will be required to curtail the non-
critical portion of their loads;
• Significant customers will be interrupted when an area must be dropped to
Load Shedding

 Only taken when need to reduce demand and return the

system to balance;
 System security is a higher priority than reliability;
 Supply is withdrawn from some regions affected by the
shortfall in proportion to the demand levels at the time
the shortfall began.
 The proportioning process determines the amount of
load shedding for each affected region up to the point
where interconnectors are operating to their maximum
transfer capacity.
 Once the interconnectors reach maximum transfer
capacity, the importing region must bear any additional
load shedding locally.
 Smart Metering
 Interval meters
• Record the quantities of energy consumed
• Frequent time intervals
 Smart meters
• Basic functions of Interval meters
• Include one-way or two-way communications between the energy supplier and
the meter
 Functionalities
• Automated and remote meter reading;
• Remote connection and disconnection of the energy supply;
• Outage detection to monitor the status of the energy supply;
• Tamper detection to identify theft of energy from the network;
• Monitoring of power quality;
• Remote time synchronization to keep the meter's internal clock accurate;
• An interface for a display unit in the end-user’s premises that shows the current
level of energy consumption, the cost of the energy being consumed, and other
information;
• An interface for load control devices that can remotely switch appliances and
equipment on and off.
Advanced Metering Infrastructure System

51
Case - Binda Bigga Fuel Substitution Project
 Binda and Bigga are two small rural settlements in
Australia;

 Overall load growth on the line that runs from Binda to

Bigga was relatively low but, as peak electricity use
increased in the area, line was reaching maximum
capacity;

 Fault levels and voltage levels were a concern along

the line;

 Aim to defer the need for the upgrade by reducing

demand during the winter evening peak periods.
Binda Bigga Fuel Substitution Project

53
 Binda Bigga Fuel Substitution Project
 The local distributor, Country Energy developed a package that
enabled local residents to affordably switch from electric to gas
appliances; the package offered residents:

• Discounted gas room heaters and cooking stoves

• Free installation of gas appliances and gas bottles, and

removal of electrical appliances for metal recycling

• Gas credits of AUD 170 per appliance

 Overall 70 customers purchased an Energy Saver Package,

installing 106 appliances in total; this exceeded the target load
reduction of 200kVA
Binda Bigga Fuel Substitution Project

55
Binda Bigga Fuel Substitution Project

56
Supply Side Options

 Most important option: price

 Scheduling generation to maximize income

 Investing in new plant for future returns

 Purchasing energy from other utilities or local

generators

 Diversifying the business (e.g. supplying heat,

aggregates from ash, by-products of flue cleaning)
Cost Effectiveness Measures of DSM
Energy Conservation Supply Curves
Conservation measures
Greenhouse gas abatement curves
Summary

 In this lecture, we have studied:

• Electric Utility Rate Structures

• Energy Economics

• Energy Conservation Supply Curves

• Demand-side Management

• Load Reduction

• Management Methods

• Case Study

• Cost Effectiveness Measures