Changes in regulatory requirements, market structures, and operational technologies have introduced complexities that traditional ratemaking approaches can’t address. Poorly designed rates lead to...
Gas Demand Response
In general, demand response refers to the ability of consumers to respond to a supply shortage by curtailing demand, thereby improving economic efficiency. Since the California energy crisis, demand response has been widely used in electricity markets throughout the United States and Canada. 1 Recent developments in the natural gas sector suggest that the time may have come to also introduce demand response in that sector.
Natural gas has begun to emerge as a major fuel for power generation for a number of reasons, including environmental restrictions on the burning of coal and the establishment of renewable energy standards in many regions. The increasing role of natural gas in power generation has already begun to raise concerns about power reliability in certain regions. 2 In the past, natural gas demand was relatively stable and seasonal, being largely driven by the demand for gas as a space heating fuel. As more natural gas is used for power generation, more volatility can be expected in gas markets.
Electricity markets have begun incorporating increasing amounts of demand response in an effort to assure reliable power supply at a cost that is lower than the marginal cost of building additional generators. Because of the increasing interdependence of electricity and gas markets, the time is ripe to examine more closely the opportunities to take advantage of the latent demand response potential on the natural gas side. This could enhance reliability in both gas and electricity markets at a lower cost than would be accomplished by focusing on either market in isolation.
A relatively moderate change in thermostat settings can reduce the amount of natural gas used for space heating by 20 percent.
This past winter, and then again surprisingly this summer, daily wholesale gas prices reached prices in excess of $14/MMBtu in certain markets in the Northeast. 3 This is an amount that is between two and three times the $6 to $8/MMBtu paid by typical residential customers. 4 Hence, it is likely that the benefits from gas demand response on a system level could be significant. Especially in the short run gas demand response may be even more beneficial in the electricity sector, where wholesale prices can swing by a factor of 10 or more due in part to the high cost of storing electricity and the need to keep the power system stable within very narrow voltage ranges.
Are natural gas demand response programs technically feasible and will customers accept them? We believe the answer is yes to both questions. Results from a demonstration project in Canada featuring two identical high efficiency homes suggest that a relatively moderate change in thermostat settings can reduce the amount of natural gas used for space heating by 20 percent. 5 Figure 1 shows a range of savings between 6.5 percent and 21 percent.
It is important to note that these results are based on a comparison of two identical new homes built to relatively strict energy efficiency standards. It is easy to imagine that average gas savings across a mix of average houses could exceed the potentials