Energy Hedging: A New Way to Make Demand Response Pay in California?

OhmConnect and East Bay Community Energy take a novel approach to capturing value from home energy flexibility.

JEFF ST. JOHN MARCH 03, 2021

East Bay Community Energy is tapping OhmConnect’s residential virtual power plant as a hedge against energy costs during the state’s summer peaks.

The business of demand response — cutting energy use to reduce peak grid demands — has evolved with the growing capability of technologies to enable it over the decades, from the manual emergency load-shedding of the past to the modern incarnation of virtual power plants, which coordinate digitally connected devices to shift loads across thousands of sites in close to real-time.

But the structures for valuing the “negawatts” that demand response delivers have largely remained the same. One is utility programs that pay customers ahead of time to reduce load under preset conditions and with preset payments, with little flexibility outside the program rules.

The other is bidding resources into wholesale capacity or resource adequacy markets, winning upfront payments in exchange for the promise to show up later when the grid needs them, and then either getting paid more or getting punished for their performance when those moments of need arrive.

This week, East Bay Community Energy and vanguard household flexibility provider OhmConnect announced a partnership that will test a new way to make demand response pay: tapping a portion of OhmConnect’s existing and new customers load-reduction capacity to serve as an energy trading hedge for the California community choice aggregator.

In other words, EBCE will enlist OhmConnect in much the same way it contracts with energy suppliers with physical power plants serving the energy markets operated by California grid operator CAISO, Howard Chang, EBCE’s chief operating officer, said in a Tuesday interview.

The 25 megawatts of load reduction OhmConnect is making available will help EBCE hedge its energy purchases during hot summer afternoon and evening hours, when California’s grid is under the most stress, he said. Those are the conditions that led to rolling blackouts in August as a regionwide heatwave pushed air-conditioning-driven power demand beyond CAISO’s ability to safely supply it.

The partners aren’t disclosing the price of that behind-the-meter load reduction capacity. But Chang said that “what’s great about working with a demand response provider is that you’re able to do this hedge during particularly high-priced peak hours, in a way that a typical energy supplier wouldn’t want to do.” After all, moments of maximum grid stress are also the times that energy market prices spike upward and when traditional energy suppliers can expect to seek outsized returns.

Elta Kolo, content lead for the grid edge team at Wood Mackenzie, noted that it’s likely that some retail energy providers in deregulated energy markets such as Texas may be using demand-side resources in a similar way — although those companies don’t tend to reveal the inner workings of their hedging strategy to their competitors.

But it’s a novel approach in a market like California’s, where utilities don’t face competition from retail energy providers, she said.

A new way to tap demand response in California’s challenging market

It’s also an approach that could unlock growth for California’s demand response industry and the community choice aggregators serving a large and growing share of the state’s electricity customers. Over the past few years, both parties have become frustrated with the limits of traditional approaches to valuing these demand-side resources.

During last August’s rolling blackouts, demand response providers reported going beyond the bounds of their existing resource-adequacy contracts in asking customers to cut even more power use to help mitigate the grid emergency. But the rules for valuing those load reductions ended up leaving providers, including OhmConnect, unable to receive payment for those extra reductions, even as CAISO relied on voluntary — and unpaid — conservation to prevent more grid emergencies in August and September.

“We lost hundreds of thousands of dollars per day on that,” Matt Duesterberg, OhmConnect co-founder and chief risk officer, said in a Tuesday interview. But it still paid its customers for the load they reduced, and “even though it was painful, people were online [saying], ‘I want to do more because I want to earn money, and I want to make sure the grid keeps the lights on.’”

The new program with EBCE avoids the problems of working within the resource-adequacy construct administered by the California Public Utilities Commission. That’s also helpful to EBCE and other community choice aggregators, which have seen the value they can realize from resource-adequacy contracts reduced under a complicated change in how the program is administered put in place by the CPUC last summer.

In December, OhmConnect raised $100 million in infrastructure funding from Sidewalk Infrastructure Partners, a firm backed by Google parent company Alphabet, to form a statewide virtual power plant dubbed Resi-Station. The funding is meant to help OhmConnect expand its existing 100 megawatts of load-reduction capacity in California to 550 megawatts over the next three years, with $80 million dedicated to firming up the load-reduction capacity its customers can provide by offering smart thermostats to shift air-conditioning loads and wirelessly connected “smart plugs” that can turn appliances on and off remotely.

That’s allowed OhmConnect to offer customers payments tied to just how many kilowatt-hours of air conditioner, refrigerator, and other appliance power they’re willing to forgo while avoiding leaving them off for too long, Duesterberg said.

“We’re able to earn a premium because we’re providing during that very precise time period” when prices typically spike, he said. Typical annual payments for customers range from $30 to $100 per year, depending on home size and location, although some exceptionally motivated customers can earn $50 per event if they aggressively turn down everything during a particularly high-priced grid event, he noted.

Importantly, said EBCE’s Chang, while OhmConnect orchestrates its messaging and payments to customers in ways that focus their load-reduction capacity when wholesale energy prices are spiking, it doesn’t expose its customers to any risk of having to pay those prices. That’s in stark contrast to Texas retailers such as the now-shuttered Griddy, which offered customers market-price-tied contracts that spiked massively during the state’s grid crisis last month.

“OhmConnect loves it when there are price spikes,” he said. “Obviously there are performance risks when temperatures get really hot and they have to ask customers to turn down their energy usage. But the higher prices go, the more money they have to pay their customers.”

To be sure, EBCE’s contract includes terms to manage the risk that OhmConnect may fail to deliver the reductions it’s promising. “That’s a risk we have with all our counterparties at the end of the day,” ranging from the generators and solar, wind and energy storage projects it buys power from, to the behind-the-meter battery systems it’s deploying with Sunrun.

It’s also a “short-term contract for us — call it a pilot,” Chang said. “Our intent is to see how it performs” over the critical summer season. “Then we’ll have to assess later this year if it’s met both of our expectations and worked well. Our expectation is that it will and that we’ll have an interest in doing this going forward in future years.”