The business case of Demand Response (DR) is enhanced under free markets, innovation, and probabilistic (risk) mindsets. DR is poised to be the demand side risk management tool to complement the traditional "LOLP" supply side risk management tool. There are two sides on the DR coin. On one side, system crashes are mitigated by a least cost mix of supply and demand risk management tools that may be applied in time and space. On the other, DR is the key to the segmentation of customers supply security (a kind of insurance). Because of its fine grain nature, DR can help mitigate delays (intended or not) of lumpy investments in generation, transmission, and distribution.
Contrary to the belief expressed on the November 2004 Issue of the IEEE Spectrum, under the theme of “Right and Wrong,” the late Professor Fred C. Schweppe, of MIT, brilliantly predicted a mayor tech breakthrough in electric power, when he said that "There is a good chance that by the year 2000 the term blackout (societal definition) will be considered to be a term out of the Dark Ages." The chance has been there all along, except that a powerful lobby has delayed it, by keeping the natural monopoly of distribution related or integrated with non monopoly retail marketing. It took the august 2003 blackout and several others in developed countries to initiate a Demand Response Resources project at the International Energy Agency, which I strongly believe will be useful and functional, only if the distribution monopoly is kept totally independent of commercial retail.
Professor Schweppe "envisioned a world of customer-based electrical generation and storage," which has been happening in the Dominican Republic, for quite some time, missing only the Demand Response System and a truly competitive retail deregulation to fulfilled the dream of a country without blackouts. There is an example of the airline industry that will help explain the importance of DR. The DC-10 initiated commercial air travel at the time of the Great Depression, it happened when all required technologies became available, and were tightly integrated.
In that same sense, electric power systems will also “fly” reliably (a very low frequency and duration of crashes) and experience commercial quality electricity under complete deregulation, when Demand Response gets tightly integrated with AMI and other existing technologies under a proper market design. DR will enable the system to operate within the Normal Operating State, returning back as soon as possible from the Alert and Emergency States with Demand Response actions. This is poised to be the End-State of the electricity industry for the long run.
A new supply chain is required in the power business for commercial activities, from generators and wholesale brokers, to competitive retailers, to end-users; while transmission and distribution monopolies are forbidden to interfere with those activities, charging a toll for their services. This is an essential element of the market design.
I believe that the End-State of the power industry needs to keep the wires monopolies completely separate from the competitive generation and retail businesses. In that sense, the DR domain belongs to the retailer, which substitutes the two existing intermediaries – the distributor and the regulator (that negotiate prices on behalf of retail customers). The retailers compete with each other for customer services and will be prepared to buy (and sell) electricity to generators to be sold (and purchased) to (from) customers. The result is a much simpler value chain, typical of most business activities. The result is also a promising business model. However, I don't discount the possibility of a better business model to emerge in the future. Therefore, the assumption of a value chain identical to the supply chain is an unnecessary restriction of the paper.
I also believe that the business model of distribution utilities that control retail activities is close to their useful life. I recently attended the AMRA Autovation Symposium and learned that distribution utilities need to undergo large and risky reengineering programs to reap the benefits of AMI. Retailers, however, can develop their business models from a clean slate. In particular, reading the paper I come to a different conclusion: most distribution utilities will find themselves stocked with old CIS technology. The time is ripe for the new value chain, where customer can chose the minimum cost plan from a portfolio of options available through competitive retailers. Retail customer will segment themselves to purchase (and sell) watts, vars, and supply security in a completely deregulated market. The solution is thus customer driven. It is a completely different ball game.
There is no need whatsoever to keep customers business activities associated with distributors. Demand Response then becomes a condition of service, where the lowest supply security standards substitute the need for a provider of last resort, which is a means to maintain the status quo. I learned from Professor Carlos Rufin, that retailers regulating framework should be a prudential similar to the financial institutions. The Georgia gas deregulation can serve as a successful model. I don't discount market confusion developing at the outset, even with incumbent distributors barriers totally eliminated.
Most wholesale deregulation efforts have been a failure. Professor Schweppe had a different idea. He and his colleagues wrote in the book "Spot Pricing of Electricity": "We believe the deregulation which considers only the supply side of the supply-demand equation is dangerous and could have very negative results." It has taken a long time and a lot of value destruction to understand the above insight. The doors to innovative solutions in the power industry will be wide open when these concepts are finally understood.
Demand Response is no just load shifting and conservation, but a demand side risk management tool for the whole power system. Most IOUs have invested dearly in capacity, making the business case unattractive at the moment. That is not the case of developing countries with a very low reliability track record, like the Dominican Republic (another DR!). Here a very large independent free market for individual supply security has developed just outside the power system, which can be integrated to the power system with DR technology.