The numbers don’t lie. Peak demand in Michigan is expected to increase by 2,000 MW in the Lower Peninsula over the next decade. Normally, this type of load growth is met by building new power plants. But these “peaker” plants sit idle most of year, pressed into service only when demand is highest – a few hours per year. A new study commissioned by Advanced Energy Economy Institute finds that Michigan would benefit significantly from using a variety of demand reduction strategies, all of which can relieve stress on the power grid, delay or avoid construction of expensive new power plants, and save money for Michigan electricity customers. Demand reduction strategies include a combination of targeted demand response (DR) programs, time-varying rates, and smart thermostats – options that can save Michigan upwards of $1 billion over the next decade.
Challenges in Michigan’s power sector have been characterized mainly as potential shortfalls in generating capacity to meet electricity demand. But in Michigan, as in most of the country, hot weather is the primary driver of peak demand. Michigan’s electricity system is sized to meet anticipated needs for the days of highest use – the hot summer days when everyone cranks their air conditioners In 2015 and 2016, nearly 2,000 MW of capacity was needed in Michigan to serve needs in just 76 hours of summertime heat – just 0.4% of total hours.
As a result, strategies that manage peak demand can mean big savings for Michigan. Peak demand events are predictable, allowing for demand reduction strategies that provide consumers with options to lower usage during these critical periods. The demand reduction approaches analyzed in the paper include demand response (DR), under which commercial and industrial customers are compensated for reducing their energy use upon request by grid operators; “connected thermostat” programs, under which utilities control certain appliances; and time-varying rates, which send price signals to customers with advanced (“smart”) meters to curtail their power usage at times when the power grid could be strained.
The AEE Institute report – Economic Potential for Peak Demand Reduction in Michigan, produced with research partners Demand Side Analytics LLC and Optimal Energy – examines the costs and benefits associated with demand reduction strategies targeted at constrained areas of Michigan’s electric grid. The report shows these strategies could be implemented at a lower cost than the price of building new power plants. The report evaluated a range of market scenarios, including an analysis of building new capacity at varying levels of costs. The report’s modeling aims to maximize the benefits of deploying various demand reduction strategies, including avoided generation costs. The results indicate that net benefits for electric ratepayers – total savings minus total costs – could exceed $1 billion, with the middle scenario producing $482 million in net savings for consumers and businesses over 10 years.
Traditionally, avoiding new generation costs can be difficult for utilities because utility earnings are often tied to making capital investments such as in power plants. However, recent changes in Michigan’s energy laws (Public Acts 341 and 342 of 2016) allow for utilities to earn a rate of return on their demand reduction investments. Consistent with the findings of the AEE Institute report, a recent study by the Michigan Agency for Energy and the Michigan Public Service Commission, in collaboration with the Midcontinent Independent System Operator (MISO), found that additional demand response programs would be the most cost-effective way to fill any gap between supply and demand under conditions that are challenging for the grid. Commenting on that study, MPSC chairman Sally Talberg noted that demand response resources are likely to be both cost-effective and can be put in place before the summer of 2018.
The AEE Institute report shows that demand reduction strategies deployed through a mix of programs and rates would yield big benefits for Michigan. As Michigan’s regulators and policymakers consider ways to address a potential capacity shortfall and ensure the reliability and affordability of electricity for all customers, demand reduction represents an option that can provide strong benefits at low cost. Policies that capture these benefits will save Michiganders energy and money.