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Planning & Implementation
Definition and Rationale
Demand-Side Management can be defined as the selection, planning, and implementation
of measures intended to have an influence on the demand or customer-side of the
electric meter, either caused directly or stimulated indirectly by the utility.
The most common rationale for Demand Side Management in the Power Sector is that
it is often more cost effective and socially beneficial to reduce or manage electricity
demand through investment in efficiency and other demand side measures than to increase
power supply or transmission capacity. DSM programmes are used to eliminate or reduce
the need for additional peak or base load generating capacity and/or distribution
facilities. DSM also permits existing generation to meet the needs of a larger number
of consumers or defers or reduces the need for new capacity.
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Benefits
DSM programmes benefit customers, the programme sponsor and society. As a customer
strategy, DSM programmes encourage the installation and use of end-use technologies
that will use less energy, thereby reducing and/or shifting the customers’ overall
electric bill. Energy efficient technologies also have higher efficiency operating
characteristics; they tend to last longer, thus reducing the operation and maintenance
cost. This is especially true for programmes that encourage the use of high efficiency
heating, cooling, and ventilation equipment (HVAC), energy efficient lighting, and
process technologies, such as fans and motors. So DSM programmes make sense from
a customer perspective because the energy savings more than offset the higher first
costs of these technologies.
Utilities, however, can benefit from these reductions or shifts in customer energy
use. For some utilities, DSM programmes can help them reduce their peak power purchases
on the wholesale market, thereby lowering their overall cost of operations. In the
short term, DSM programme can reduce energy costs for utilities, and in the long
term, DSM programmes can help limit the need for utilities to build new power plants,
distribution, and transmission lines. In short, a DSM programme can be much cheaper
to implement than building a new generating plant.
Society benefits when DSM is green. Reduced or shifted energy usage can directly
translate into less air pollution, less carbon emissions, and a way to lower the
potential environmental threats associated with global warming. DSM programmes are
a promising alternative strategy to the increased concerns, utilities, and government
agencies now have regarding global warming and carbon emissions. Moreover, a properly
designed DSM programme can actually track the programme impacts and measure the amount
of carbon reduced or saved based on programme activities.
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Barriers Preventing Optimal DSM Use
Compared with electricity supply options, DSM is disadvantaged by several market
barriers – conditions which limit customer uptake of DSM measures or which reduce
the incentive for electrical utilities to invest in DSM programmes.
Barriers affecting customer uptake include lack of information and knowledge about
energy efficiency, and financial considerations such as affordability, competing
investment priorities, or access to financing. Together these barriers lead to real
or perceived “transaction costs” that discourage investment even when it is cost
effective to do so.
Barriers preventing electrical utilities from undertaking DSM programmes include lack
of sufficient financial incentive because of deregulation and restructuring, hidden
subsidies for other options, and lack of expertise and infrastructure to deliver
DSM programmes.
These barriers can be removed through appropriate government policy and regulation,
and by careful design of DSM programmes.
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Activities
The activities undertaken by a Utility in the context of a DSM Programme generally
fall into three main categories:
Load management programmes: Redistribute energy demand
to spread it more evenly throughout the day, e.g., load shifting programmes (reducing
loads during periods of peak demand and shifting these loads to less critical periods),
and time-of-use rates (charging more for electricity during periods of peak demand).
Conservation programmes: Reduce energy use, e.g., programmes to improve the efficiency
of equipment, buildings, and industrial processes.
Strategic load growth programmes: Increase energy use
during some periods, e.g., programmes that encourage cost-effective electrical technologies
that operate primarily during periods of low electricity demand.
One common thread that binds all of these customer-side activities is that these involve
a deliberate intervention by the electricity company in the marketplace so as to
change the configuration or magnitude of the load shape.
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Approach
There are many different programme approaches that can be used to implement DSM Programme
including:
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General information programmes to inform customers about generic energy efficiency
options.
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Site-specific information programmes that provide information about specific DSM measures
appropriate for a particular enterprise or home.
Financing programmes to assist customers with paying for DSM measures, including loan,
rebate, and shared-savings programmes.
Direct installation programmes that provide complete services to design, finance,
and install a package of efficiency measures.
Alternative rate programmes including time-of-use rates, and load shifting rates.
These programmes generally do not save energy, but they can be effective ways to shift
loads to off-peak periods.
Bidding programmes in which a utility solicits bids from customers and energy service
companies to promote energy savings in the utility's service area.
Market transformation programmes that seek to change the market for a particular technology
or service so that the efficient technology is in widespread use without continued
utility intervention.
The process to plan and implement DSM programmes generally consists of the steps defined
in Figure 1. These steps are not cast in stone; the actual process is dynamic and
varies according to the specific needs of each utility.
More details on each of
these steps are provided in ‘Tools’ Section.
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DSM programme Planning and Implementation
This sub-section sets out the steps in DSM Programme Planning and Implementation.
The first step in DSM programme design is to decide on its goal:
Should the programme target peak loads or encourage a general reduction in electricity
consumption?
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Is a “market transformation” programme needed or is the objective to reduce demand
in a particular sector or area?
Should the programme target existing stock or new equipment?
Are the targeted participants communities and consumers in low income situations
or those which can more easily afford to participate?
The answer to each of these questions will help decide on the
type of programme to use.
The length of the programme should be long enough to ensure complete market transformation
or to achieve other programme goals. It should also be long enough to ensure that
improvements in efficiency continue after the programme is over.
Develop end-use Demand forecasting
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Undertake Load/ Market Research to identify end-use
patterns and market barriers
Define load-shape objectives
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Identify target sectors, end-uses, and measures
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Identify sources of financing
Review Cost Sharing and Viability Options
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programme Selection and Design
DSM Cost/Benefit Analysis
Identify Local Socio-Economic and Environmental
Impacts
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programme Implementation Plan
1. Develop end-use Demand forecasting
Forecasting by end-use is an essential pre-requisite for effective DSM planning
and implementation. Mid- and long-term forecasts of power demand variations play
a very important role in the development of a DSM programme. However, this exercise
is not generally an integral part of the DSM planning process. In fact, demand forecasting
is an exercise that every electricity-generating company should carry out regularly
in order to assess its future equipment requirements. However, if these forecasts
are not available, they must be prepared at the beginning of the DSM programme planning
activity since load-curve modification objectives must be based on them. It is important
to note that electricity companies often plan and implement DSM programmes after
a demand-forecasting exercise. It is especially important in economies where per
capita consumption is low and growth rates in electricity demand are high, so that
macro-economic and technical parameters can be treated separately.
Estimates of current electricity consumption and peak demand should be disaggregated
by sector and end-use – motive power, lighting, cooking, etc., and load curves derived
for each sector and end-use.
More details on each of
these steps are provided in ‘Tools’ Section.
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2. Undertake Load/ Market Research to identify end-use patterns
and market barriers
To design effective DSM programmes it is important to know how electricity is used
and what barriers are preventing customers from using efficient technologies.
Load research should be undertaken to estimate load curves for each sector or region,
using local sub-metering, customer bill analysis and customer surveys. Major areas
of interest to DSM programmes include the residential, commercial, industrial, and
public utility sectors.
Market research is needed to understand the target market, identify barriers and
evaluate possible solutions. This research can be carried out through customer surveys
which can be used to determine current equipment usage, decision making criteria,
and views on different types of programmes. It is also important to carry out a survey
of local suppliers to assess the availability of efficient products and services.
More details on each of
these steps are provided in ‘Tools’ Section.
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3. Define load-shape objectives
Based on the results of the load research in the utility, load shape objectives
need to be selected for the current situation. Figure 2 illustrates a simplified
form of these load-shape changes.
Valley Filling (increased demand at off peak) involves increasing the load during
off-peak hours. Valley filling consists of building off-peak loads. This may be
particularly desirable where the long-run incremental cost is less than the average
price of electricity.
Load Shifting (demand shifting to non peak) involves shifting peak loads to off
peak hours. Popular applications include use of storage water heating, storage space
heating, and coolness storage. In this case, the load shifting associated with thermal
storage involves load shifting related to conventional electricity applications
e.g. building heating by electric convectors.
Strategic Conservation (the reduction of utility load, more or less equally, during
all or most hours of the day) is one of the non traditional approaches to load management
and results from utility-stimulated conservation. Not normally considered load management,
it also involves a decrease in sale as well as modifications in the way electricity
is used.
Strategic Load Growth (the increase of utility loads) is the load-shape change which
refers to overall increase in sales. Load growth may involve increased market share
of loads through the development of new applications (electric cars, microwave technologies,
automation).
Flexible Reliability (interruptible agreements by utility to alter customer energy
consumption on an as-needed basis) is a concept which may be conveniently perceived
as a load-shape change. Reliability is actually a planning constraint. Utilities
must make sure that they can curtail a customer’s load demand if need be (either
for an immediate need or as a constituent for their energy reserves), in exchange
for various incentives.
These six forms are not mutually exclusive and may frequently be employed in combinations.
The purpose of first three traditional forms of load management is to level curve
of general electricity demands.
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4. Identify target sectors, end-uses, and measures
At this stage in the planning process, the collected information is normally useful
in determining a typical load curve for each end-use. Analyzing how electrical power
is used will then lead to identification of the services where activities should
be launched in order to meet load-curve management objectives through DSM programme.
It is important to target DSM programmes where they can make the largest impact.
Choose sectors and end-uses that account for the largest power consumption and peak
loads, or will do so in the future.
Select DSM measures which will have the largest impact on peak demand and electricity
use.
Target localities, sectors, end uses and measures where DSM programmes are most likely
to make a difference or have the highest benefit to utilities – e.g. where losses
are high, or tariffs are below the cost of new supply.
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5. Identify sources of financing
In any DSM programme, financing is needed for individual projects undertaken by participants.
Utilities may also require financing to cover administrative costs and cost sharing
investments.
The types of innovative financing that can be used to encourage participants to
undertake projects under a DSM programme include:
Direct contracting by the utility
Performance contracting by the utility
Performance contracting by Energy Service Companies (ESCOs)
Leasing
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Participant self-financed savings re-investment
Major sources of project financing can include:
Energy Service Companies
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Revolving funds (from a Lines or Public Benefit Charge)
Self financing – recovery of costs through tariffs
Private equity, venture capital funds and project finance debt from nationalized
Banks/Private Banks.
Dedicated lines of credit or Special funds generated from the levy of additional
charges to the end-users.
Multilateral, bilateral and other international institutions/development agencies
dedicated to promoting energy efficiency services.
Regulators can play an active role in arranging the funds for utilities to implement
DSM initiatives. Also the utilities have to adopt sound marketing strategies to
attract private equity and other project finance loans from nationalized banks.
More details on each of
these steps are provided in ‘Tools’ Section.
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6. Review Cost Sharing and Viability Options
Cost sharing in a DSM programme should try to maximize viability for each partner
(participant, utility, and government). If current tariffs are below the marginal
cost of new power supply options, it is financially viable for the utility to share
in the cost of the efficient technology and maximize participation in the programme.
The wider the differences between tariffs, the higher the utility investment can
be, which in turn leads to a higher participation rate. If the full environmental
cost of power supply is higher than the average cost then governments can also share
in the cost of the programme, by contributing to administration costs, requiring favourable
treatment of DSM through the tax system, or providing financial support directly
to users.
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7. programme Selection and Design
In this step, the planner packages the measures identified in Step 4 into logical
groups for programme delivery. The planners target customer and end-use market segment,
avoided cost value, and the sponsoring utility management and customer service approaches
in identifying a list of programmes for each customer class. In order to ensure
consistent programme design, the planner should use a uniform reporting format to
specify each programme.
Once a limited number of DSM measures have been chosen, the planner proceeds with
the overall analysis method, which consists of an in-depth evaluation of the measures
and their cost/benefit ratios.
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8. DSM Cost/Benefit Analysis
The information used to assess the measures and design of the programmes will be
used to evaluate the financial interest in DSM programme. The benefits and costs
of a DSM programme will be different for each partner involved in the programme - the
energy user (participant), the agency or power utility running the programme, and
society at large as represented by a strategic planner or government.
Benefits
The direct benefits of a DSM programme are the energy savings achieved (e.g. kWh/yr)
and the peak demand reduction. The value of these savings to an energy user depends
on the energy tariff (electricity price and demand charges). There are also possible
maintenance or labour saving benefits associated with the efficient technology.
The value of these same savings to the power utility and to society at large depend
on the “avoided” or long run marginal cost of new energy supply (e.g. a power plant
and/or transmission line). This avoided cost is the energy cost for the next kW
of capacity added to the system. The avoided cost depends on whether the savings
are at peak or off peak times (as measured by the coincidence factor), and whether
there is current excess capacity.
All parties benefit if energy costs escalate in real terms over time.
Costs
There are three basic cost components in a DSM programme:
1. Technology Costs - The incremental cost of the efficient technology
2. Transaction Costs - The administrative and other costs of running the programme
3. Financing Costs - The cost of financing the energy efficient technology
Again, different costs are borne by each partner. A power user pays the incremental
cost of the technology, plus the cost of financing, minus any contribution that
the programme agency makes through financial support. This contribution may be in
the form of a soft loan, support to the supplier to lower the price, or direct payment
to the user.
The costs to the utility include the programme administrative costs and the contribution
to the user towards the cost of the technology. Lost revenue must also be taken
into account.
The overall cost to society, however, - the cost to be used in strategic planning
- is simply the technology plus programme administrative costs. This is often called
the Total Resource Cost. The sharing of the technology cost between the user and
the programme agency does not affect the total cost, and financing charges are not
normally considered in strategic planning.
Each DSM programme should be evaluated as to its viability from different perspectives
– society, utility, consumer, and contractor (if used in the programme). Using estimates
of the up front and annual costs and benefits for each partner, internal rates of
return and net present value can be calculated. These measures allow a DSM programme
to be compared both with power supply options and with other investment options.
The cost of saved energy (CSE cost/kWh) and peak demand reduction(CDR cost/kW) ,
are also useful measures to compare DSM to supply options.
Economic Analysis
Economic costs include the incremental cost of the new efficient technology, any
annual increases in operating costs, and the cost of the DSM programme administration.
Cost sharing arrangements do not affect economic costs. Economic benefits include
reductions in maintenance or operating costs, and the value of the savings achieved
through the programme. This is normally the kWh saved times the long run marginal
cost of power, the willingness to pay of customers with the highest tariffs, or
the cost of power from independent power producers – plus any premium added to allow
for environmental or social costs.
Financial Analysis
The costs and benefits used to estimate financial returns vary among partners and
depend on additional programme characteristics such as cost sharing arrangements and
lost revenue. Tax and other measures also affect financial returns. The costs and
benefits for each partner are shown in the table below.
It is important to carry out rigorous sensitivity analysis to determine the “switching
values” of important parameters such as participation rates, savings expected from
each project, technology costs, programme costs and valuation of savings.
More details on each of
these steps are provided in ‘Tools’ Section.
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9. Identify Local Socio-Economic and Environmental Impacts
Most DSM programmes provide indirect economic and environmental benefits as well as
reducing emissions and other impacts from power supply facilities. For example,
employment is created in the energy services industry and consumer savings are reinvested
in other goods or services. These impacts can be estimated using “input/output”
or other economic models. Indirect environmental impacts might include the benefits
of accelerated removal of CFCs from air conditioners, or a plan to establish a disposal
facility for used fluorescent lamps.
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10. programme Implementation Plan
Implementation of any DSM programme requires a core DSM staff or “cell” within a power
utility to develop a plan for the programme and manage its implementation, even if
consultants are hired for both aspects of the programme.
A DSM implementation plan should have the following elements:
Staffing plan and job descriptions for different aspects of the programme – contracting,
marketing, supervision, monitoring and evaluation. Standard contracting procedures for direct installation, marketing, and standing
offers or bidding procedures for energy service companies. A promotion/marketing plan to maximize participation.
A schedule of activities with participation targets for each year of the programme.
A budget and expenditure plan.
A monitoring/evaluation plan including verification protocols, templates for customer
bill analysis, and participant surveys.
Review cost sharing and viability options Select programme type and identify roles and responsibilities Estimate participation rates and savings Estimate costs and benefits Conduct economic and financial evaluation/assessment of programme and typical projects Identify local socio-economic and environmental impacts Prepare programme implementation plan
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