What Is Demand Response, and How Does It Work?

Massive changes in technology and policy are altering the topography of the electrical grid. Grid operators are retiring dispatchable plants like natural gas and coal across the country and interconnecting renewable and energy storage installations en masse. Weather events are also growing in frequency and magnitude, increasing the challenges of balancing the grid. Demand response offers a flexible solution to help address many of these challenges.

Independent system operators (ISOs) are developing new products and mechanisms across their market regions to manage increasing congestion, diverse ramping needs, and the state of charge of rapidly growing battery energy storage system (BESS) fleets. Regions like the Western US, Midwest, and the Northeast are leading the charge to decarbonize, electrify business and transportation sectors, and invest in electrical stability. The question is – how do we succeed in our goals and bridge the transition from the traditional model of the electrical grid to a new, more flexible, and sustainable one? 

While some mechanisms to achieve these goals are in their infancy, others have been part of deregulated markets for decades. One such technology we are seeing an ever-growing interest in is demand response. What is demand response, and how does it work? Here’s how you can utilize this demand-side mechanism to help enable the most efficient grid possible and get paid for it. 

What Is Demand Response?

In essence, demand-side management, or demand response, is flexible energy consumption – geared towards reducing load on the grid overall but especially during peak hours and when grid integrity is jeopardized (FERC). Incentive payments encourage consumers to use less energy during times when electricity costs are high and the grid is strained. In its most basic form, demand response can reduce the load on the electrical system during peak hours of the day, reducing the chance of major wholesale price spikes or brownouts (a drop in voltage) during morning and evening peaks. 

Based on changes in the price of electricity over time, consumers can respond by reducing their energy consumption during hours when it is more expensive to use electricity. This shifts their load to other periods of the day when it is cheaper to run large appliances. During these periods, consumers can take advantage of lower energy costs to pre-cool or pre-warm their homes, or even charge their Behind the Meter (BTM) Battery Systems or electric vehicles (see how Tesla Electric customers can use renewable energy to do this). With increasing electrification in our homes, shaving peak demand and shifting consumption to lower-cost hours is becoming a must across power markets, where much of the expensive, dispatchable generation fleet (natural gas, coal, oil) is rapidly transitioning to intermittent, renewable resources and grid-scale battery energy storage systems (BESS). 

These changes in electrical usage patterns (often referred to as energy efficiency measures) are smoothing demand curves across a broader timeline. But, in the short term, the incentive payments serve two more purposes – encouraging lower electricity usage during price spikes and when system reliability is jeopardized, which improves grid reliability in times of stress and reduces wholesale prices. Both of these functions benefit customers by lowering their electricity bills and the risk of interruptions to their electrical supply. For consumers, the flexibility to reduce their electricity usage can put extra money in their pockets. For the grid as a whole, it can reduce the likelihood and intensity of grid failures.

With some current demand response programs, users can view in real time the wholesale energy market’s locational marginal prices (LMPs) at their location. This puts the power in their hands, creating a new layer of information and transparency into wholesale energy markets. This gives customers the ability to make informed decisions about their energy consumption, both during high prices and threats to grid reliability and during normal operations.

How Does Demand Response Work?

Most markets now use a demand response mechanism to alert consumers when grid reliability is in jeopardy. The California Independent System Operator (CAISO) issues a flex alert, urging customers to curtail their energy use during intervals when forecasted demand levels are higher than available supply, or when all supply resources are already committed into the market. When this alert sounds, customers receive a notification asking them to reduce their energy usage to preserve grid reliability.

*CAISO source image

The compensation methods for flex alerts or other market-wide demand response requests can vary between markets; for more details on ISO DR programs check out these links: CAISO Flex Alerts, NYISO DR, ISO-NE PRD, MISO DR program, PJM DR, and ERCOT demand response. Demand response programs operate in many ISO and regulated markets, but depending on what kind of customer you are and where you are located, these will look different. 

What Is a Demand Response Program, and How Does It Work?

Demand response programs provide compensation to those willing and able to reduce or alter their energy consumption patterns. ISOs and utilities compensate customers for their flexibility since this is much more cost-effective than building new, expensive means of generating electricity. For residential customers, altering your consumption patterns can look like turning down your air-conditioning during peak hours (usually between six and nine p.m.) on a hot day. For commercial customers, this could be making energy efficiency improvements in your office or retail space. We can leverage many of the technologies that we have in our homes today to cut or shift our energy consumption, including utilizing smart thermostats, heat pumps, or PowerWalls.

Utilities or third-party demand response providers primarily operate these programs. While demand response is geared towards reducing peak and overall system loads, the programs and mechanisms vary depending on the type of demand response program you join. Some programs pay you for reducing your overall energy consumption, others for shaving peak levels when grid operators request it. 

San Diego Gas & Electric (SDG&E) offers demand response through their utility program (Power Saver Rewards Program), and through third-party providers like OhmConnect, Leap, and Enel X. Programs are often tailored for specific types of customers or technologies (Enel X is for residential customers with a focus on electric vehicle charging). Here are some further details on just a few of the available DR programs and their participation models:

• Ohm Connect – This program involves automated smart device energy reductions with weekly energy payments for saving energy. It’s available for commercial and residential customer types.
• Leap – This is an automated, event-driven, flexible load and battery participation model. It’s available for commercial and residential customer types across numerous ISO markets.
• Enel X – This program offers cash incentives toward smart electric vehicle charging (Enel X Juicebox) optimization.
• ConEdison Smart Usage Rewards – This is a utility program offering cash incentives to reduce energy usage during summer peaks.
• NUENERGEN – This is based on participation options for both utility and ISO programs in several ISO markets.  

Just as customer types in the energy market vary (residential, commercial, industrial, or agricultural), so do the programs developed to serve them. The more effective programs and participation options available, the more consumers can help bolster grid reliability and sustainability.

Demand Response: Technology and Systems for Today

Demand response and energy efficiency measures have been around for quite a while in ISO and regulated markets alike. But with the development of new and more effective technologies and programs, demand response is becoming increasingly powerful and influential on the overall function of the grid. 

More robust software and systems allow for quicker data transfer and communication for grid operators and demand response program engineers to average consumers. Along with developments in demand response technology and distributed resource modeling, the evolving nature of the grid is putting grid and systems reliability under higher scrutiny and showing the need for more flexibility on both sides of the equation – supply and demand. Flexibility on the consumer’s end is now critical to managing both summer and winter demand peaks, as we saw during CAISO’s July 2023 Energy Emergency Alert 1 and the resulting call for demand response. 

CAISO Net Demand Trend During EEA 1 call - July 20, 2023 (Source)

Historically, energy supply is intended to match demand in real time, or the system suffers consequences like the widespread blackouts seen in ERCOT during the 2021 Winter Storm Uri. In the age of natural gas and coal plants (dispatchable resources) coming online in force, it was much easier for the energy offered into the markets to outpace the forecasted load growth and required reserve margins. But in the landscape of our modern grid, the onus of flexibility is increasingly on the consumer’s side.

What Are the Benefits of Demand Response, and Why Does It Matter? 

Flexible and responsive demand helps balance the grid. Some electrical customers are highly flexible and can respond quickly to price changes or DR calls. Together with others doing the same, this can have large impacts on system flexibility and resiliency.

As North America continues to decarbonize and electrify consumer sectors, customers can play a role in balancing the grid. Demand response puts the power in our hands to make actionable decisions and to improve the performance of the largest machine in the world from day to day and even hour to hour. 

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