THROUGH DEMAND-RESPONSE PROGRAMS, UTILITY
COMPANIES PAY A REGULAR REVENUE STREAM TO
SCRAPYARDS WILLING TO SHUT DOWN OR SCALE BACK
ELECTRICITY USE DURING HIGH-DEMAND PERIODS.
BY LAURIE WIEGAND-JACKSON
M
ake money, protect the environment,
and contribute to national infrastructure security. No, that’s not the latest
campaign slogan of one of the presidential candidates. Those are the benefits of participating in a demand-response program with
your electricity provider.
The concept is simple: Scale down your operations when the electrical grid is constrained and
in jeopardy of experiencing blackouts, and your
electricity provider will pay you for being a
resource that has improved the reliability of that
grid. The electricity that companies free up by
participating in these programs gives the utility
the equivalent of an extra power plant or extra
transmission line when it needs it most, so the
utility pays what that power is worth on the
wholesale market. That’s right—you get paid for
the value of the electricity you’re not using.
Demand-response participants also get paid for
volunteering for the program, whether the utility
calls on them to cut back or not. Yes, you get paid
just for being available to help. And if you know
your major equipment will be offline during a
peak period—for maintenance or upgrades, for
instance—you might get paid for that, too.
Scrapyards participating in demand-response programs are finding the demands are reasonable
and the revenue streams can be tens or hundreds
of thousands of dollars a year.
SUPPORTING THE FRAGILE POWER GRID
Electrical power infrastructure development in the
United States has not kept pace with the country’s
growth. Industry restructuring, community
activism, environmental concerns, and multiple
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layers of regulation have slowed or stopped the
construction of new power plants and new transmission lines. As a result, the electrical grid is
more often strained to its maximum capacity,
which has led to more frequent power outages and
higher electricity prices. With the demand for electricity growing an average of 1.5 percent to 4.5 percent a year, depending on region, and the difficulty
of securing an increased supply, the utilities are
turning their attention to meeting their needs with
resources on the demand side of the equation.
Much of the growing demand for electricity is
weather-dependent—people need more heat or air
conditioning as the weather in this country gets
more extreme. The most pressing supply issue,
then, is not meeting greater overall demand, but
meeting greater peak demand needs for electricity
on the hottest summer days and coldest winter
days. Rather than construct new power plants—
which often burn fossil fuels, which create climate-damaging emissions—to meet peak demand
needs a few times a year, a dedicated group of
experts in the energy industry has been advocating the use of demand response.
Here’s how it works: The grid operator in a
region predicts or experiences a surge in demand,
due either to extreme weather conditions or to a
supply shortfall such as a generator failure. The
operator or a third party contacts demand-response
program participants and asks them to curtail their
use of electricity for a specified period. Those able
to respond receive a payment of the real market
value of that unused electricity, an amount that
fluctuates from day to day and region to region.
Demand-response programs are spreading across
the country, starting in the most congested areas.
They exist in New England, New York, the MidAtlantic region, California, and Texas; a Midwestern
utility will launch its program this fall. They have
provided thousands of megawatts of virtual supply
into the grid, keeping the lights on in New York in
summer 2006 and preventing service disruptions in
Texas when a wind farm lost power this February.
Demand-response programs have one other benefit: they might help keep down electricity prices.
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As electricity costs go up about 10 percent to 15
percent a year—and in some regions, as much as
50 percent in one year due to deregulation—
actions that depress prices become more important. According to a U.S. Department of Energy
report to Congress in February 2006, utilities run
their most costly power plants only during periods
of peak demand. If demand-response programs can
lower peak demand levels, the utilities won’t need
to operate those plants, which could lower electricity production costs and system capacity
requirements, creating savings that the utilities
could pass on to their retail customers. The
Federal Energy Regulatory Commission is encouraging each of the independent wholesale grid operators and local utilities across the United States to
develop demand-response programs.
ISTOCKPHOTO.COM/KIYOSHI TAKAHASE SEGUNDO
DEMAND RESPONSE IN THE SCRAPYARD
Both wholesale grid operators and local utilities
operate demand-response programs, and the
opportunities vary by region. By enrolling in a
program, a scrapyard agrees to idle or shut down
certain equipment—typically shredders, balers,
shears, and conveyor systems—to reduce its electricity load when the grid needs it because of
peak transmission congestion, peak demand, or
the sudden loss of a major power-generating unit.
The payment the scrapyard receives for taking
that action is equivalent on a per-megawatt basis
to the utility’s cost to develop and operate generators and transmission lines, which can be significant sums. More important, many programs will
pay participants just for being “on call,” whether
or not the utility ever needs the help. These revenues vary based on the scrapyard’s location, its
load-reduction capabilities, and the nature of the
program, but they also can be substantial.
Scrapyards can sign up to provide any of three
types of demand-response resources: peak day
capacity, emergency reserves, and energy resources.
Peak day capacity. Utilities call upon peak day
capacity resources during the hottest days of the
year (or, in New England and New York, during
the coldest days of the winter) to reduce their
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usage on weekday afternoons. The call might go
out as much as 21 hours or as little as two hours
in advance of when the shutdown is needed, and
the interruption is typically between four and
eight hours long. How often the calls go out
depends on the utility—Southern California’s
program will call up to four times a month,
whereas a Mid-Atlantic program estimates calling
up to 10 times in the June-September plan period.
Companies that sign up to be peak day capacity
resources receive payments whether or not the
utility calls a peak day event and additional payments when they are called upon and participate.
The Southern California program estimates that
customers receive $75,000 to $100,000 per
megawatt capacity per year for participating in the
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program and an additional $250 per megawatt
hour for responding to a called event. Some
regions’ programs offer more than that, others less.
The Mid-Atlantic program only called one event
in 2007, so most program participants that year
earned their regular fee without ever having to
shut down. Participating companies can always
opt not to participate in a specific peak day event.
Emergency reserves. Utilities call upon emergency
reserves resources when a power plant supplying
electricity to the grid has a sudden mechanical
failure, which could be any day or time. They
call these events with as little as 10 minutes’
notice, and the interruption could last 30 minutes
in some programs, up to four hours in others. The
frequency of emergency calls can vary as well,
though my company, a demand-response aggregator, limits them to one 30-minute shutdown per
facility per month.
Like peak day programs, emergency reserves
programs generate payments whether the utility
calls for help or not—between $35,000 and
$100,000 per megawatt per year in the MidAtlantic program—and an additional payment for
shutting down in response to a call. The New
York program offers $500 per megawatt hour or
the real-time price for electricity, whichever is
greater. Opting out of a particular event is possible here as well.
Energy resources. Energy resource customers
approach the utility with a stretch of time they
expect to be offline—for equipment maintenance
ONE SCRAPYARD’S DEMAND-RESPONSE EXPERIENCE
Every electricity-intensive business should participate in a
demand-response program, says John Sprague, comptroller of
Fairless Iron & Metal (Morrisville, Pa.). His company has found that
it provides an economic benefit, helps protect the Morrisville community, and gives them another “green” credential, he says.
Fairless became a customer of North America Power Partners in
January 2007, when it brought online a new 8,000-hp megashredder that requires 6 mW of electrical capacity. The company is
strategic in its power use already by running the shredder only during off-peak hours. That means it doesn’t qualify for the peak
reserve capacity program. Instead it participates in NAPP’s emergency reserves and energy resources programs.
Here’s how the emergency reserves program works: Say that
lightning hits a transformer and knocks out power to hundreds of
residences in Morrisville one evening. Pennsylvania Electric Co. has
the phone numbers of five Fairless workers on shredder duty. When
it needs emergency power, it starts calling those numbers until it
reaches someone, and it gives that person notice that the company
has 15 minutes to switch off the shredder. The shut-down process
“takes seconds. The operator just presses one big red button,”
Sprague says.
The effects of a brief shutdown are not a concern, Sprague
says. The downstream conveyors are computer-controlled to
match the shredder speed. The shredder rotor will keep spinning
for quite a while after the power is cut, thus bringing the shredder
back up to full speed takes as little as 30 minutes. And “there’s
always enough work” elsewhere in the yard to keep the employees
occupied.
Sprague touts the community and environmental benefits of
participating in the emergency reserves program. By allowing an
emergency shutdown, “that power can be utilized throughout the
community,” he says. That’s a much more cost-effective and environmentally sound solution than the utility “having an extra generator on standby,” he says, which would both increase the utility’s
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costs and generate greenhouse gases, if that generator burned
fossil fuels.
But the primary reason for participating, Sprague says, is economic. The company saves money it would have spent on electricity
during the shutdown period, it receives a payment of what that
reserve electricity is worth to the utility during that period, and it
receives a quarterly payment—“thousands of dollars”—for participating in the program. “We have a relatively small electric bill each
month because we’re already running off-peak,” Sprague says, but
“every little bit helps.”
That last revenue stream is all Fairless has received so far: In
the 18 months that it has participated, PECO has not yet requested
an emergency shutdown. (The company and NAPP did one test run
to ensure their procedures and equipment could respond when
needed.) Sprague notes that, if the company were unable to shut
down when requested, it would forgo that month’s regular payment
but would not incur any other penalties.
Fairless also participates in NAPP’s energy resources program.
When the company knows it won’t be running the shredder for a few
hours, it can sell its capacity back to PECO at market rates. It has
done so about two dozen times in 18 months, selling back as little
as a 4-hour shift or as much as 10 or 12 hours. Though PECO has the
option not to accept the bid, Sprague says the company has successfully sold its excess capacity every time, sharing the proceeds
with NAPP per the terms of its contract.
Sprague sees opportunities to get even more value out of participating in the energy resources program by carefully monitoring the
company’s peak energy use. “We can go [online] and see at what
time during our production schedule we peak, shut off during that
period, and save an exorbitant amount of money.” Further, he says,
“if we are diligent enough, we can sell that period of time back to
the market … and not only can we save on our power bill, we’ll get a
layer of return from selling our reserves. That’s a way to maximize
the program.” -Rachel H. Pollack, Scrap editor
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or replacement, for example. This volume of
unused electricity becomes a bid in the real-time
energy market, and if a utility accepts it, the customer gets paid for the actual electricity load that
it reduces. The bid can go out as short as 30 minutes or as much as one day ahead of the shutdown, depending upon the program, and the revenue it generates will be based on the price of
electricity at the time.
What’s the bottom line? One large shredder
operator in the Mid-Atlantic region signed up for
5- to 9-mW load reduction capacity. The facility
receives $50,000 quarterly payments for becoming
an emergency reserve and energy resource and
another $25,000 per quarter for participating in
the peak day capacity program, a total of $300,000
in annual revenue just for participating. Another
facility in the same region signed up just for the
emergency reserve program, offering 2 to 4 mW of
load reduction, and receives $50,000 a year.
THE ROLE OF DEMAND-RESPONSE AGGREGATORS
It’s possible for a retail electricity consumer like a
scrapyard to join the wholesale electricity market
and work directly with the utilities to implement
a demand-response program, but doing so makes
the company subject to the rules, regulations, and
penalties of that marketplace. Further, most utilities and grid operators don’t want to work with
retail customers. The best bet for most businesses
is to use a demand-response aggregator or thirdparty provider.
Such companies manage customers’ participation in demand-response programs by handling
the notifications and the transactions between
the customer and the grid operator or utility
company. They track a wide variety of electricmarket data, including hourly locational prices,
grid congestion, capacity prices, and plant maintenance schedules and outages, and they provide
market forecasts of prices. Last year, for instance,
my company sent out an alert on July 10 that the
next day’s electricity prices in the Mid-Atlantic
region would be unusually high due to a heat
alert, making it a good day to schedule maintenance or otherwise shut down and bid to become
an energy resource.
These service providers place bids on their
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customers’ behalf, just as large electricity generators do, into the energy, capacity, and reserve
markets. They install meters at the customer’s
facility and track usage data to establish baselines
and to verify the load reduction in a format and
process that has the approval of the grid operator
or utility company. And they invoice the utility
for payments and process all of these transactions. Demand-response providers perform all of
these services behind the scenes to make participation in the program easy and uncomplicated
for the retail customer.
There are no up-front fees to enroll and participate in demand-response programs through an
aggregator. Instead, the aggregator takes a percentage of the revenue the customer receives from the
utility company or the grid operator. Note that in
some cases, the utility will impose penalties for
nonperformance. The Southern California peak
day capacity program, for example, imposes
penalties for saying no to more than 50 percent of
its requests. Typically, the penalty is that the customer will not receive the regular revenue for that
period. Often the service provider will absorb this
risk, though, making the program totally voluntary and a risk-free way to generate a recurring
revenue stream. Several companies provide
demand-response services, and what each one
offers is slightly different, so it’s important to
know what you’re getting and to what you’re
committing.
Scrapyards are participating in demand
response to save money, increase revenues, and
further their environmental and sustainability
goals. One large scrap company estimates its
multiyard participation in demand response
resulted in greenhouse-gas savings equal to
removing 466 cars from the road for one year—
not to mention all the revenue it received through
program participation. That’s called doing well
by doing good.
Laurie Wiegand-Jackson is president of North America
Power Partners (Mount Laurel, N.J.), which provides
demand-response services to customers throughout New
England, New York, California, the Mid-Atlantic, and
the Midwest. Reach her at 888/476-7764, 856/439-0800,
or lwj@northamericapowerpartners.com.
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