Permanent Load-Shifting Incentives

By Published On: December 10, 2010

As California’s investor-owned utilities prepare plans to permanently shift load to non-peak times to avoid building expensive new power plants, a groundbreaking study focuses on the likely costs. The technologies at issue consist primarily of thermal and battery energy storage devices, plus equipment that permanently changes the energy use profile of buildings and manufacturing operations. Utilities plan to invest in permanent load shifting technologies in future California Public Utilities Commission-ordered demand response programs, notes the Dec. 1 report by Energy & Environmental Economics and StrateGen. Over a 15-year lifetime, the energy storage technologies can prevent expenditures on new sources of energy valued at about $2,200/kW, the researchers found. Yet, while some of the available technologies break even on cost--such as pre-cooling systems for warehouses, chilled water, and medium-sized ice-based storage--that may not be enough to get businesses to actually install the equipment. What’s more, the cost of installing many of the technologies--like battery systems--exceeds the “avoided cost” of developing new peak power supplies. As a result, reasoned the researchers, utility customers will need incentive payments to install these new technologies, just like homeowners get rebates for new energy efficient air conditioning systems or refrigerators. To pinpoint the size of the incentives needed, the researchers asked two questions. First, what level of incentives can utilities afford to pay out for the various permanent load shifting systems that are “ratepayer neutral,” that is, do not create cross-subsidies by one group of customers of another? Second, beyond that incentive, would utility customers need more to make it worth their while to actually install the new systems? Here’s what they found out. Ratepayer neutral incentives generally fall in the $800 to $1,600/peak kW range, depending upon the utility. The researchers noted that as long as the incentives do not exceed this level, cross-subsidies can be avoided. However, to get businesses interested in actually installing the systems, higher incentives may be needed. That’s because most businesses want to see a payback on their permanent load shifting technology investment (such as savings on energy use priced at peak rates) within three to five years. Specifically, the researchers found that businesses are unlikely to install the permanent load shifting systems without incentives ranging up to $1,000/kW for thermal storage systems with a five year payback and up to $1,800 to hit a three-year payback. Battery systems likely will need premium incentives ranging up to $5,000/kW to achieve a three-year payback. To overcome this economic reality--which the report notes points to a “struggle to attract customers, particularly in today’s challenging economy”--the researchers recommend splitting incentive money into two pots, one aimed at mature technologies and the other aimed at emerging technologies, like batteries. They further suggest that the California Public Utilities Commission create a variety of tariff mechanisms that shield companies that install the permanent load shifting technologies from future rate hikes, such as grandfathering them into existing time-of-use rates and creating “super” off peak rates for storing energy between midnight and 2 a.m., when the grid is awash in excess generation. These strategies could help convince companies they will reach payback on permanent load shifting technologies within their preferred three-to-five-year time period.

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