Catalyst with Shayle Kann - Are utilities ready to fully harness demand flexibility? [partner content]

Episode Date: February 4, 2025

When it comes to decarbonization planning, utilities tend to focus heavily on the supply side. But they may be overlooking one of their most powerful tools for managing a cleaner grid — demand flexibility. Demand response and time-varying rates have been in use for decades. But many utilities still haven't fully embraced demand flexibility in their planning. As utilities push toward higher penetrations of renewable energy, the ability to shift demand becomes increasingly vital for maintaining grid stability.  The challenge? It requires a fundamental shift in mindset: from controlling power plants with knobs and dials to empowering customers through smart rate design. "For years and years and decades and decades, the utilities' incentive has been to sell customers more of their product," says Scott Engstrom, chief customer officer at GridX. "But this idea of much more targeted demand flexibility as a requirement to manage a grid dominated by intermittent renewable resources is quite new." In this episode, produced in partnership with GridX, Scott Engstrom talks with Stephen Lacey about why demand flexibility deserves more attention — and how utilities can better harness it as they transition to cleaner energy. Learn more about how GridX delivers detailed analytics for time-of-use rates, helping utilities harness grid flexibility as part of their decarbonization efforts.

This is a branded podcast from Latitude Studios. So how often at a cocktail party are you bringing up rate design with people? Well, that's a really good question. Not very often. There's been a couple of times where this has happened for those of us who are old enough to remember what Enron was back 25 years ago. And certainly so we're seeing that more and more, I think, as awareness of data centers and AI is growing.

And people are starting to hear that that requires a lot of electricity. They become more interested in utilities. I don't know if the general public is aware of the concept of rate design, but maybe implicitly they are. That's Scott Ingstrom, the chief commercial officer at GridEx, talking with Stephen Lacey. Scott has been working on rate design for almost 30 years. It's not a subject he leads with in social situations, but he's very passionate about the impact of good rate design. In the last few years, Scott is seeing a lot more utilities embracing time-varying rates. And those rates are bringing value to stressed grids,

like in his home state of California in September of 2022. The entire state and a big part of the western U.S. is dealing with a sweltering heat wave. And California remains under a state of emergency because of the extreme conditions. We had a long string of 100-plus days that was really creating some challenges for the grid operators, for the utilities,

for government officials who were trying to figure out how do we take care of the people who need access to electricity while not also creating rolling blackouts. California increasingly uses emergency alerts in periods of extreme weather. In this case, the heat wave was so bad, state coordinators sent out a message that's usually reserved for child abductions. This actually accumulated, which is now famous, and I say famous with air quotes around it, Amber Alert type notification that went out here in California requesting consumers to reduce

their energy consumption. One utility, Southern California Edison, measured how a combination of alerts and rates impacted demand. SCE has a time of use rate. After the heat wave, the utility examined how customers changed behavior as prices increased during on-peak time periods. And they were actually able to measure that they got 75 megawatts of load reduction just as a result of customers who either actively or passively reacted to the fact that those on-peak prices, are higher than off-peak prices. And this is really pretty stunning in a world where we've done demand response programs

and things like that for a long time to see this sort of very low-cost, easy way to get load shift or reaction to benefit the grid and also obviously benefit those customers who save money by lowering their usage during that on-peak pricing period. Many utilities like SCE are seeing strong results

from their demand-side programs. But Scott thinks the industry you can do a lot more to fully embrace demand flexibility. What does this tell you about the value of demand flexibility and how utilities now see that value? For the most part, for years and years and decades and decades, the utility's incentive has been to sell customers more of their product. Certainly energy efficiency has been around and been successful as a concept with an economic model to go with that. But this idea of much more targeted demand flexibility as a requirement to manage a grid which may become more dominated by

intermittent renewable resources and things like that is quite new. So I think we're still very early on the demand flexibility stage of learning for utilities and for customers. In this episode, produced in partnership with GridX, Scott Ingstrom talks with Stephen Lacey about why we're at a pivotal moment for grid flexibility. They explore how utilities are finding value in time-varying rates and how utilities can better use them as part of their decarbonization plans. So when we consider utility decarbonization goals, they very often heavily focus on the supply side. Why isn't demand flexibility getting equal attention in these conversations? A couple of things stick out to me. One, I think, as a set of people who work in utilities,

there are a lot of engineers, electrical engineers, the generation plants, the big, uh, power plants are the things that they know best and certainly get a lot of attention. They're the biggest assets that most utilities have. So the idea of changing the carbon content of the generation assets is pretty, I think, much more easy to measure, easier to understand. And so if you are, you know, looking at what utilities have announced or what regulators have asked for, usually that's a, we are going to change the carbon components of the generation of the electricity, the electrons that we provide to our customers.

And that's certainly easier, I think, for everybody to get their arms around. Okay, we had a coal plant, and now we've replaced that with solar and wind. That's really easy to see and understand. Of course, once that carbon comes out of the electrons, and we're in a situation where now a lot of these power plants that we had knobs and dials, and we could turn up and down the supply of energy to meet demand as it went up and down over the course of the day, and we've replaced those assets with solar and wind and resources that are on customers' roofs or batteries that are in their car. That requires a whole different mindset for managing the grid and the supply and demand.

And that's where you need the demand flexibility. And I think we're still, as I was just describing with demand flexibility with this new supply stack and how to manage that, we're still early days on that. Most utilities have some sort of net zero or close. to net zero goal, but that goal is in 2030, 2040, 2050, out some time. And so thinking about what that demand flexibility is needed to meet that new supply stack is still being figured out and we're very much in the pilot stage. So what I'm hearing you say is when we look at these utility decarbonization goals, the value of that supply stack is dependent in some way on predictable,

reliable demand flexibility. Certainly, yeah, I think to get there, to get to the really bold goals that most utilities, most states have now around a net zero decarbonization future, that will, I guess we, depending on what happens with large-scale nuclear, potentially batteries,

but for many states, that is going to be a lot of intermittent, renewable energy that can't be controlled with knobs and dials, that is controlled by how much sunlight we have, how much wind we have at any given time. And as that variable can't be controlled by grid operators, the thing they will need is exactly what you just said, kind of predictable, firm levels of demand flexibility. And certainly our industry is grappling with that.

We're seeing, you know, in capacity markets, can we use demand response resources as a source of capacity, as a source of resource adequacy? and we're very much in this learning and evolving status right now. And one of the things we're certainly trying to help our utility partners do is measure how much demand flexibility are they getting things from, are they getting from things like time-varying rates? So the value of that demand flexibility is also dependent on rate design. What's the role of rate design within that demand flexibility toolkit?

Yeah, a few things. I think one things I was certainly alluding to is the amount of demand flexibility we're going to need is going to grow as we approach these net zero targets as we get to the 2030s, 2040s, 2050s, depending on the utility. So to do that, we have a lot of utilities start with time of use rates. I think everyone sort of sees the general trend, that time of use rates, as we talked about earlier, encourages customers to use less energy on peak. Not all customers can respond to that or want to. are willing to pay more for the comfort it creates of running your air conditioning during on-peak. And so as a result, I think over time, though, we will need to dig into more and more customers who might be needed to have different incentives as a way to generate the demand flexibility.

So that may be for some customers who would respond to a on-peak price of a certain level would need it to be much higher before they respond to that. And of course, the offsetting of that is what is your off-peak price? So some customers who maybe don't have flexibility will sign up for a time of use rate that doesn't have a large premium for the on-peak prices. And those that do have flexibility maybe would sign up for one with a very high on-peak price and a low-off-peak price. So we will, even though utilities don't like this because they think it's a lot of complexity

to manage, I think to get to the goals that they want to achieve on the supply side, the decarbonization, they're going to have to offer more rates, more programs to get more customers who would be incentivized by those different rates and programs. So let's talk about that complexity a little bit. We're seeing the emergence of this category, complex rate analytics. What is this category? What drove the creation of this category, and why is it significant for utilities? Well, it's significant for a couple of things. When we first started with GridX, we were very much focused on helping. utilities do billing around new rates and time of use rates. A lot of the legacy systems that

had built before smart meters didn't really have to contemplate the idea of time of use rates because there weren't meters at the customer's houses to measure energy usage by an hour. As we all remember, we had meter readers who came once a month and read our meters. And so knowing what we were doing at any kind of granular level wasn't possible. So those billing systems weren't built to support that. Yet with the emergence of smart meters about 15 years ago, that enabled time of use rates because now the utility could measure that hourly usage.

So there was a mismatch between the infrastructure at utilities and the rates that the commissions were wanting them to charge their customers. So anyways, we had started there, but what we heard right away was as much as there was a need for that sort of billing infrastructure, utilities didn't have great tools to understand what these new rates would do to their revenues and therefore their earnings. And so for investor-owned utilities, this would be a really important understanding.

If they impose time-of-use rates, would they earn more or less from their customers? They didn't have a lot of great tools to do that. And even beyond that, not just internally, but then from a customer perspective, customers had no idea because their rates or their meters were only red once a month. they didn't know if you asked a customer, are you someone who uses a lot of energy on peak or off peak? Most customers wouldn't be able to answer that question, and therefore wouldn't even know if a time of use rate was something they'd be interested in

or would participate in. So this idea of complex rate analytics was built around the idea of how do you help utilities understand and design these rates and bring them to their regulators and those interveners and other stakeholders that get involved in rate case who analyze different rate designs and try and determine what's best for different customer classes and how to balance that utility regulator relationship

around their rates and the level of earnings. And so they're very much an internal utility analytics question and then there was a customer question about how even if you design these rates, then how do you get customers to respond, to understand them, to want to participate? And so providing those analytics, even though that may sound too complex for most residential customers, we could even just call those rate comparisons.

That's maybe a simpler way for people to think about it. But providing that kind of analysis, both internally and for customers, or what really drove this field of complex rate analytics. What rate designs have proven most effective in driving meaningful demand flexibility? You touched on it a little bit before, but yeah, what have you seen working the best? Well, we see, certainly what we've seen drive a lot of success is actually multiple time of use rates currently. We are working with some utilities who are doing what they're called dynamic rates. These are rates where prices change every hour, could change every hour, trying to mimic more what's happening in the wholesale markets and or challenges on the distribution grid with congestions and other things that recognize that energy is more expensive at certain.

times of the day. We can talk more about that. But if we start with just time of use rates, I alluded to this before that. You can have multiple time of use rates. Oftentimes, what we hear pushback on time of use rates is, you know, why would I do this? It's only going to save me $5 a month or $10 a month, to which we might say, well, what's wrong with $5 a month or $10 a month? Why wouldn't you take advantage of that? And that's oftentimes because regulators are really nervous about setting on-peak to off-peak prices that are really have a high ratio with us on-peak-to-off-peak ratio. They're nervous because those customers who maybe aren't aware of the changes or maybe the low-income customers, the high-energy burden who they feel may not

have the flexibility to change your usage, they will get bill shock and that will create just a bad experience across the customers and create bad political outcomes for those in the position. And so what we like to say is let's think about a world in which there is a default time of use rate that has a relatively modest on-peak price to off-peak price ratio. It recognizes that serving customers in the on-peak period is more expensive than the off-peak period, but doesn't punish those who are inflexible if you're on some medical equipment that you need to be on in the peak periods. It's really hard, I think, to say you need to be penalized as a result in. pay more in your on-peak period, except for maybe there's some incentives there. The point is that you have some baseline that is not punishing to customers, but does recognize this difference routine, higher cost-to-serve on peak as opposed to off-peak.

And then you couple that with either one or two other rates that do allow those customers who have flexibility to take advantage of their flexibility and really drive bill savings for themselves and benefits for the grid. That's really what we're trying to generate here. That's the win-win of rate design, where customers benefit and the grid benefits. And so those customers, some that you might think of right away are customers with electric vehicles. They often have a lot of flexibility in when they charge. And so many customers who might say they're opposed to time of use rates may have no issues at all with signing up for an EV rate, even though an EV rate typically is a time of use rate. So that's a good.

good example. Other examples could be certain businesses that can change their processes to overnight or other off-peak periods. That would be very willing to shift their usage from on-peak periods to off-peak periods for some savings, us generating benefits for themselves as well as the grid. So this idea of offering several time-of-use rates to meet those needs, I think does result in what we're trying to get to. Can you walk me through some of the other broader social and economic impacts that utilities need to keep in mind through rate design. One in particular is the criticism that time-varying rates can disadvantage low-income customers. I'd like to hear your thoughts on what the impacts are. What does the evidence actually show about equity impacts of time-of-use rates?

Makes me very happy that people really do focus on this topic because it's really important. And we certainly don't want to do rate design to make people's life worse. We want to use use rate design to help customers ultimately and help the grid if we can. And so I think the knee-jerk reaction across different states that we've seen initially is just what you said, the assumption that time of use rates will disproportionately impact those low-income customers. And the great thing about the investment in smart meters that utilities and their state regulators have done is we actually don't need that to be a boogeyman.

We can actually measure this now and find out the answer. And what we've seen across the utilities we work with is it's not a uniform answer there. It depends on certainly the customers themselves, obviously, that make up that utility. But where they are, the summer peaking utility, a winter peaking utility. Is it a moderate climate? It is a more extreme climate. So we've seen differences in some places we've seen actually that on the whole, low-income customers do better without making any changes to their usage through a time of use

rate. And in others, we've seen that not be the case. So we think in general, this is the real opportunity, though, for utilities who are going to go down the path of time of use rates to use this as a real opportunity for customers. I think the other knee-jerk reaction is our low-income and low-to-moderate income customers may not be as informed, may not be, understand the rate structures, the way other customers do, and therefore just won't respond. And we've seen some good evidence. that those utilities that do invest in customer education, customer awareness, and really focus in on the idea that, yes, prices will be higher three to four hours a day,

but the other 20 or 21 hours of the day, the prices are lower. And this gives those customers the opportunity to actually manage their bills in a way that they didn't previously. They just had a, if they had a constant price throughout the time of the day, through all day, they had no incentive to think about their bill. now with a time of use rate, they can actually think about how could I lower my bill? Certainly we want to be very concerned about those things that will make those customers' energy burden go up, but we also want to think of this as an opportunity to help those customers manage their bill,

and we've seen some utilities be pretty successful at this. Let's turn to another important event, and that was Winterstorm Uri in Texas. Tell us about what happened in Texas and what lesson we should take away about the impact of highly dynamic pricing? Good question. And I will point out that a lot of the context of what we've been talking about are states in the U.S. where regulation is across the transmission, the distribution, and generation, and the supply of electricity.

In Texas, of course, they are, at least in ERCOT, quite unregulated. And so while the transmission and distribution system remains regulated rates, the supply, the generation piece, is unregulated, and there's lots of retailers who compete for business there and try and offer unique rate designs or pair it with things like, I don't know, getting miles on your favorite frequent flyers, lots of different ways to incentivize customers to join. And so there were some what I call retailers, sellers in the state that told customers, you know, we have an option for you, which is to use. real-time prices that are based on the price in the wholesale market. And you could save a lot of money

on that because most of the other retailers are putting a markup on these wholesale rates that you wouldn't have to pay for with our plan. And so given that prospect, a lot of customers signed up because what could go wrong, right? Well, of course, as being a good retail, you don't want to tell your customers what's the worst that could happen. Of course, prices can't, don't just go down, they go up as well. And so for those that may recall, winter storm Yuri created this whole confluence of events that shut down generation plants

and natural gas into the state. The pipelines, just a whole bunch of things happen as a result of the weather that drove wholesale power prices at record high levels. And the plan that those customers signed up for passed those prices directly to retail customers to end up with bills

that are thousands of dollars, in a month that nobody would expect and caused a lot of havoc. And so that, I think, has a pricing plan has largely died in Texas. What we have seen in some other places, however, is a different version of this real-time pricing that includes essentially a concept that allows customers to have a little bit of insurance so that not all of their bill is at risk of the – they get to essentially nominate what part of their business. bill would be at risk for these wholesale price swings going up and down. And I think this is

really more effective because those customers then that Ken are more willing to take on risks, can choose to do that, and those that recognize that they are more risk-averse can also essentially buy that insurance that provides a hedge against those prices, but still lets them take advantage when prices are very low to charge up their electric vehicles or whatever it is they might want to do. So I think the industry has learned from that and I think is going to come out with better business models in the end. I think there may be another way to approach us is to have intermediaries or intermediaries, excuse me, who maybe take on that risk for their customers, offer customers on the other side some tamped-down version of this volatility while

they are very good at managing it themselves with hedging and other financial products. So we'll see where that goes, but as a general product allowing customers to go up and down with a wholesale price of electricity, I think that one's probably on the back burner for a little while. How far do you think real-time pricing can go? So we have a lot more potential automation. now, this so-called prices to devices model where you have these automated IOT devices that can respond to pricing. How granular can this get? And where do you think the market will take it? I don't, I guess, first of all, it doesn't seem to me like a rate that's very, a rate design that

is superhuman friendly. I'm sure there'll be some out there who will have enough time or interest on their hands to follow hourly prices on a website or someplace else. and adjust their behavior or usage. But I think where we're really going is with technology, artificial intelligence, connected devices, to really be able for humans to say, this is what's going to make me comfortable in my house is at this time of day to set the thermostat here or there

and give that thermostat or some other your EV or your water heater or anything that is able to respond, in which a lot of these will be able to respond to price signals in the future, give those devices the latitude to constantly be pinging some other price signal to find out when a price goes low enough, charge my battery on my electric vehicle. And so you'll be able to, or your thermostat, your smart thermostat, for example, when prices go above a certain level, stop running my air conditioning. And I think this is really exciting the idea that human,

can take advantage of the dynamic pricing without having to monitor all the time and still have the ability to keep comfortable to set levels of how full their EV battery is, what temperature it is in their house. And this can create across thousands and millions of customers real benefits for the grid because price signals will go up and down quite radically, as we've seen here in California with things like the duck curve. For those that know at certain times, of the day at certain months of the year, we are generating more electricity than we are using, and prices go negative. You're actually being paid to take electricity at certain times of the day. So imagine that being paid to fill up your EV battery at certain times of the day,

as opposed to having to go buy gas and put it in your gas tank. That really changes the economics of electric vehicles and other electrification technologies. So I'm really excited about what dynamic pricing can do, and it also can be much more local. We see the grid is also not uniform. There may be different neighborhoods that have embraced electrification, and so at different times of the day, more congestion there. And so being able to create that price signal for others in the neighborhood, not even the humans again, but their devices to understand that really valuable in helping the grid operators operate the grid and avoid local black. as well.

So we started this conversation talking about the value of demand flexibility and meeting these acute needs on the grid, but then also talked about why utilities have been reticent to maybe deploy it more broadly as part of decarbonization plans. And there's still a lot of maturation that needs to happen in the industry. How do you see demand flexibility and rate design evolving to meet these challenges and meeting the urgency? of decarbonization broadly? You know, the interesting thing is smart meters have been around for 15 years. So in my business, I guess we get a little anxious to or eager to see utilities change

quickly. But in truth, a lot of even large utilities today, particularly say in the Northeast, are just now getting their smart meters deployed in that sense. We're still early days. And I think what's encouraging as we look at, you know, maybe a lot of this trend started in the West in California. has made its way across the country. Ten years in now, you know,

if we look at how our 10 to 15 years on, what's happening in California, as an example, I don't want to just focus on California, but, you know, just a willingness to try and it's sort of an all-of-the-above-type strategy toward figuring out demand flexibility and using rate design to do that. And certainly we hear all of the above,

as it relates to generation and supply strategies for how we get to a clean energy transition. I think we should be thinking about that as the same way on the rate design side. And we see a typical pattern, which is a lot, as you mentioned, certainly initially resistance to the idea of changing rate structures.

It sounds complicated. We have to update our systems. There's a lot to do here. Can we actually create benefits? We're seeing more and more that utilities are being able to measure those benefits from the programs. And then the regulators and their staff have to all buy on as well. And we're just seeing this. We certainly GridX participates in events like Nehruc and others where a lot of regulators are at,

as well that the sort of understanding that rate design is part of the clean energy transition, is part of one of the key components of creating demand. flexibility and creating the right price signals to get people to change their behavior in a way that achieves the goals that everyone is wanting to do through the clean energy transition is certainly being accepted more and more. So I'm really excited about how that is changing the acceptance of and willingness to try new and different novel approaches to see how customers actually respond. And certainly one thing we're trying to do at GridX is really how. help utilities if they need to fail fast.

How do we get these new programs out to customers, let them try, see which ones work, which don't? It's all new for our industry. It's very much maybe like going back to the 50s when there was ready kilowatt when the industry was trying to push refrigerators and washing machines and all these other electrification technologies. We're very much back to that again where the utility has to do a lot of marketing and influencing, and except for it's a new generation of people. or maybe two generations on that have never done this before.

And really exciting to see them starting to embrace what that means. Scott Engstrom, co-founder and chief customer officer at GridX. Thanks so much. Thank you, Stephen. I appreciate you having me on. This episode was made in partnership with GridX. Delivering on the clean energy future is complex. GridX exists to simplify the journey.

GridX is the enterprise rate platform of choice for utilities undergoing rate reforms and transitions. The company's analytics deliver the digital. detailed cost of changing to new time of use rates, helping utilities harness grid flexibility as part of their decarbonization efforts. GridX also has a podcast produced in partnership with Latitude Studios. For compelling conversations on the people who are changing the electric grid, find with great power wherever you get podcasts. Learn more at grid.com.