Load reductions and leaky grids: The overlooked T&D benefits of demand response

Demand response resources can play a valuable role in overcoming the grid's transmission and distribution (T&D) challenges.

Imagine if every Amazon delivery truck had a package-sized hole in its rear door. As the truck rumbles across America’s bumpy back roads to deliver its cargo, a couple of packages slip out the back and break apart on the blacktop. It’s not a huge hole - if there are 80 boxes in the truck, maybe four fall out during the trip. But that still means four out of every 80 boxes shipped never reach the people that bought them. 

If you knew that Amazon would be sending your package in this faulty truck and you had the option to buy locally instead, would you be more inclined to choose the latter?

A situation like this actually occurs every time you plug an appliance into one of your home’s electrical outlets. To get power to your toaster or iPhone, your utility takes electricity generated at a centralized location, like a wind farm or gas plant, and transports it over the pole-mounted wires you see next to the road on your drive home from work. But these wires aren’t 100% efficient at transporting that electricity, and some of it gets lost on the journey from the power plant to your home. The amount of electricity lost depends on the quality of the wires, but in general, roughly 5% of the power generated never actually makes it to its intended user. 

This is where demand response (DR) offers a better option.

Those familiar with DR are already aware of its primary benefits - how it reduces the need to generate electricity by instead reducing customer load when needed, providing a cheaper and cleaner way to match electricity supply and demand. However, there’s an added benefit in this equation. Since load is reduced at the customer’s home or facility, it also avoids any T&D losses that would have occurred if that electricity had instead been generated hundreds of miles away. 

In other words, if a power plant generates 100 MW of electricity, only around 95 of those MW will ever get to the end user. If a DR resource provides 100 MW of load reduction, all 100 MW of that load reduction will be “delivered” to customers. 

Electricity markets effectively treat that lost 5 MW as a kind of “cost of doing business,” and utilities will over-procure capacity to make up for these losses. For example, if a utility only needs 95 MW to meet electricity demand, it might pay a power plant for 100 MW, knowing that a portion of that power will never actually reach customers. This is largely considered the fairest way to deal with this issue - after all, a power plant has no control over how much of its energy is lost through the wires. 

However, buying that power from a DR provider instead would deliver exactly the 95 MW needed, allowing the utility to avoid paying for extra power that will ultimately just disappear into the void. As a result, DR resources provide a stronger value proposition not just to customers, but to the grid as a whole, which often faces constraints on how much power its wires can transport. In its most recent Liftoff report, the U.S. Department of Energy (DOE) notes that DR resources “can help overcome T&D congestion challenges, especially in high load conditions.”

Do DR resources get paid for the value they provide in reducing T&D line losses?

In most major electricity markets, the answer is “yes.” For example, in New England, a DR resource gets an 8% “adder” to the capacity it’s paid for - that is, a resource providing 100 MW would be paid for 108 MW, which is based on the expected line losses in that region of the country. In PJM, this adder has historically been closer to 6%, while in New York it depends on where on the grid the DR resource is located. And although Texas doesn’t have a specific adder, T&D losses can be incorporated in the supply and demand curves it uses to determine the prices that DR is paid in its Emergency Response Program. 

Whatever the method, the goal is the same: to create a level playing field between DR and traditional generation by ensuring that DR providers are paid the same as a power plant when providing an equivalent amount of capacity.

However, this is not the case everywhere. California, for example, only partially compensates DR for the line losses it avoids. Specifically, CAISO has an adder to account for avoided losses that would have occurred on the distribution system, but not one for the transmission system. 

This is a new development. Until earlier this year, CAISO also had an adder to account for DR’s transmission benefits, but this was removed as part of a California Public Utilities Commission (CPUC) decision on Resource Adequacy reform. The decision to recognize distribution benefits but not transmission benefits is strange and a little confusing (the CPUC cited only “administrative burden” to explain its decision), as it makes California somewhat of an anomaly: a market that has always acknowledged the T&D benefits of DR but now chooses not to fully compensate them anyway. 

In the (long) list of benefits that DR can provide, the ability to avoid T&D line losses is one that often goes overlooked, but it’s an important part of the overall value these resources offer to customers. Although the U.S. electrical system is getting more efficient, there will always be some amount of energy loss when transmitting electricity across long distances - that is, there will always be at least a small hole in the truck. 

As a result, there will always be a benefit to meeting demand with local resources, like those that Leap’s platform is able to leverage. As decarbonization efforts increase electricity demand across the country, the need to reduce grid strain is only becoming more urgent. As the DOE pointed out, DR resources have a key role to play in managing this strain. Ensuring that those resources are compensated for that service is the first crucial step to making sure they’re deployed in the numbers needed to make a difference. 

Keep an eye out for Part 2 of this blog series, where we’ll discuss how DR can avoid costs not just from transporting electricity across the grid, but also from building the wires that transport it.