How Demand Flexibility Gives Energy Consumers Power Over Price

How Demand Flexibility Gives Energy Consumers Power Over Price

As a consumer of electricity, you have enormous power to impact the electricity market and fix a broken system. Do you know how leverage your power?

Market Economics

In efficient markets, price is determined by the intersection of demand and supply. When either of these change, the other reacts accordingly and the market returns to equilibrium, with price once again representing what sellers are willing to accept and what buyers are willing to pay.

Electricity markets do not work this way and are largely inefficient. This is because there must be a constant balance between supply and demand, and demand is currently inflexible. Since we’re reliant on supply to perform the balancing action, you the energy consumer become a price taker, forced to pay whatever price the broken electricity market sets.

You are also forced to accept the energy mix given by that price, irrespective of your sustainability goals and values. When there is a lot of renewable electricity on the grid, supply increases, dropping the price along the inelastic demand curve. When clouds roll in and the wind slows, fossil fuel generation must be fired up, driving up the price and dirtying the energy mix.

Leveraging your Power through Flexibility

It doesn’t have to be this way. You can take back control by being flexible with your energy usage. For residential consumers, this can be as simple as turning on their dishwasher late at night. Industrial consumers can easily shift their production slightly towards lower-price time periods.

Without flexibility, you are powerless to set limits on what you are willing to pay or to choose a cleaner, cheaper electricity supply. Being flexible allows you to move along the supply curve, pay the price you want to pay, and use electricity generated in ways that fit your values.

Flexibility Drives Market Improvement

As more energy consumers like you unlock their flexibility, the overall market demand curve becomes more elastic and the entire market benefits. The market price begins to reflect the preferences and budgets of the people – not prices set by the suppliers.

When you stop being a price taker, you gain power to change the market. Flexibility gives you a role in influencing your energy system with what economists refer to as “dollar votes”. With every good or service you purchase, you increase demand for that good and send a signal, or a “vote”, to the market to make more. By shifting demand to periods when there is a high degree of renewables on the grid, you help incentivise investment in renewables with your dollar votes.

This consumer power is driving change in many industries. In the United States, consumers are using their power and dollar votes to hurt the bottom line of businesses with ties to the NRA. This consumer activism has directly caused businesses to take swift and decisive action to prevent a drop in shareholder earnings.

By being flexible and making their demand elastic, electricity consumers will be able to drive this kind of change in the energy industry.

Example: Moving Along the Supply Curve with Flexibility

This simple example shows how Tempus empowers you to move along the supply curve by tapping into the flexibility of your assets.

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In this simplified example, you use 5MW of electricity over the course of 2 hours. When you are inflexible, you split this total load in half and use 2.5 MW of electricity each hour. In hour 1, when supply S1 sets the price at $100 per MWh ($250 total). You also use 2.5 MW of electricity in hour 2, when an increase in supply to S2 has dropped the price to $30 per MWh ($75 total). You are powerless to do anything but accept and pay both prices, paying a grand total of $325 for 5 MW of energy used over 2 hours.

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When you can be flexible, you do not have to use 2.5 MW each hour and can shift a larger portion of the total demand to the lower-price hour. In hour 1, when you previously would have had to pay $250 for 2.5MW of electricity, you can now use 2 MW of electricity, moving down the supply curve and paying $40 per MWh ($80 total).

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You can then increase demand back up and use more energy in hour 2, when there is more supply and the price is lower. Now, you pay $50 per MWh of electricity and use 3 MW, for a total cost in hour 2 of $150. In total, you have still used 5 MW of energy over 2 hours. By being flexible and shifting just a portion of your load from higher-priced hour 1 to the lower-priced hour 2, you have lowered your total bill from $325 to $230, a savings of 30%.

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In total, the same amount of electricity has been used. What is exciting, however, is that a higher portion of this electricity use has come from renewables, and the total cost is about 30% lower.

The Tempus Business Model

Tempus helps energy consumers gain market power and stop being beholden to the supply curve. Using machine learning and AI, we automate the demand flexibility process. Our technology predicts electricity price in advance and automatically shifts your demand based on these price signals, unlocking the value of your flexible assets. By utilising it, customers help improve the energy system and overhaul the broken economics of the grid. Flexibility yields value for you, and for all other energy consumers both now and in the future.

Written by
Rachel Berryman, Data Scientist
Tempus Energy

 

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