This story was originally published by Canary Media and is republished with permission.
In Arizona, utilities have used a counterintuitive tool to help keep the lights on despite the state’s ongoing wave of historic heat — they’ve asked customers to turn their air conditioners down.
In July and August, Arizona’s three biggest utilities were able to call on more than 100,000 customers to reduce their electricity use by a total of 276 megawatts during afternoon and evening hours when demand for power was at its peak. For most of those same months, the southern Arizona territories served by those utilities were in the midst of a record-setting stretch of consecutive days over 110 degrees Fahrenheit.
These statistics come from EnergyHub, the company that operates smart-thermostat-based demand-response programs for utilities Arizona Public Service, Salt River Project, and Tucson Electric Power. Like many utilities across the country, APS, SRP, and TEP offer incentives and free or discounted smart thermostats for customers who agree to let the utility remotely turn their temperature settings up by several degrees when the grid needs relief from air-conditioning power use — with the option for customers to “opt out” by manually resetting their thermostats.
But not every utility is able to get such consistent results out of customers facing as dreadful and persistent a heat wave as the one Arizona has endured this summer. During those two summer months, customers stayed engaged during eight to 10 separate events across the three utilities, delivering up to 300 megawatts of load reduction at the peak of participation, said Jessie Guest, EnergyHub’s strategic client success manager.
That’s not a huge amount, especially compared to the record high of more than 18,000 megawatts of peak electricity draw experienced by those three utilities over this summer.
But every little margin counts in times of peak demand, which makes these customer-enabled “demand-response” resources a vital tool in the grid-balancing toolbox. More and more U.S. utilities are facing the necessity of cutting power to entire neighborhoods to preserve grid stability as climate change drives increasingly hot summers. Demand-response programs offer one way to avoid that last-resort outcome.
Convincing customers to use less energy at critical times is also quite a bit less expensive and polluting than building and firing up new fossil-gas-powered “peaker” plants to cover short-term grid shortfalls. And because a large portion of utility costs are tied up in the investments and energy costs related to meeting peak demand, demand-response programs are especially cost-effective.
That’s in part the reason why Arizona Public Service (APS), the state’s largest utility with 1.3 million customers, plans to rely heavily on distributed energy and demand response to reach its goals of 65 percent carbon-free energy by 2030 and a 100 percent carbon-free energy by 2050.
APS plans to add more than a gigawatt of new solar, wind and batteries over the next four years. But the utility is already closing in on its 2024 target of enlisting 200 megawatts of demand response, with 170 megawatts as of this summer. More than half of that comes from its Cool Rewards residential smart-thermostat program, which launched in 2018, hit 42 megawatts in 2020, 80 megawatts in 2021 and about 100 megawatts last year.
As of this summer, the program has 78,000 connected thermostats and the capability of shedding more than 110 megawatts of load, said Kerri Carnes, APS’ director of customer-to-grid solutions. “These customer partnership programs are going to be increasingly important for us on our journey to 100 percent clean energy,” she said.
Designing a smart-thermostat demand-response program that works for customers
There’s no single trick to getting so many people to so consistently endure discomfort to keep the grid up and running. But a combination of attractive financial incentives, closely managed customer expectations, and tight integration with utility power grid and energy market operations have certainly helped in Arizona.
Free or steeply discounted smart thermostats are a key starting point, Guest said. A growing number of utilities and demand-response providers nationwide have been offering customers free or low-cost smart thermostats from companies like Google Nest, ecobee, Honeywell Home, and other well-known brands so they can capture the greater flexibility and control these devices offer.
That trend is present in Arizona, too: APS has offered free thermostats to customers who sign up for Cool Rewards for years. Salt River Project and Tucson Electric Power have provided smart-thermostat rebates of up to $100 or more for years, and they both offered free thermostats this summer.
Incentives are available for customers who already have smart thermostats, too, with up to a one-time $50 credit for each device they enroll in demand response. Participants also earn annual credits of between $25 and $40, depending on the utility, Guest said.
Importantly, these programs don’t penalize customers who opt out of participating on certain days, she added. That’s not universally the case for demand-response programs — particularly those involving commercial and industrial customers that utilities rely on for larger-scale power reductions during grid emergencies.
But EnergyHub’s experience running residential programs for more than 60 utilities across the U.S. has shown that “a pay-for-performance model decreases overall participation,” she said. “You’re penalizing customers for choosing comfort over the program.”
Carnes agreed that if a demand-response program “feels overly complicated or overly punitive, customers will walk away.”
“Say the day you’re calling an event, I’m having a birthday party,” she said. “Should I be penalized” for opting out of turning off the air conditioning “because I wanted to make sure the people at my kid’s birthday party are comfortable and treated well?”
“If the industry truly wants to have customer-sited resources as part of the solution, then we have to treat customers like people,” she said.
Treating customers like people also means keeping the lines of communication open, Guest said. EnergyHub uses emails and text messages to inform customers before a request to reduce power use of “what to expect, how long it’s going to be, how much temperatures are going to increase above the setpoint,” she said. “Even sending a midseason message, saying, ‘You’re having an impact on keeping the lights on in Arizona’ — that has been big.”
That communication goes both ways. After the first two years of the Cool Rewards program, “in some surveys, customers said, ‘You should pay us more,’” Carnes said. “So we went back and did the math, and agreed — our customers should be paid more.” So in 2022, they boosted the annual participation credit from $25 to $35. Enrollment numbers have risen since the increase was put in place.
While plenty of other utilities around the country have demand-response programs that are as lucrative — or even more so — as the Arizona utilities’ offerings, many have been far less aggressive in implementing them. And those utilities without programs that pay customers to reduce power use during grid emergencies are forced to ask their customers to voluntarily cut power use for free — a last resort that runs the risk of turning people off of demand response entirely.
Finding a smart-thermostat demand-response program that works for utilities
But while the human touch is important, Carnes also emphasized the need to balance “the art and science” of treating customers “like a resource,” similar to the power plants APS controls or the energy-trading relationships it maintains with neighboring utilities. Paying too much for demand response may erase its relative cost-effectiveness compared to simply buying more power.
But traditionally, the key limitation for residential demand-response programs has been retaining enough customers to ensure that the reductions they can deliver are worth the costs of administering and running a program. Utilities have been criticized in the past for failing to adequately inform or reward customers for their participation in demand-response programs, limiting their growth over the decades they’ve been in place.
At the same time, utilities and their regulators have tended to express skepticism about customers being able to deliver meaningful load reductions when the grid really needs it. That uncertainty has limited utilities’ willingness to rely on demand response in order to forgo more expensive ways of dealing with demand peaks, like investments in new power plants or grid capacity.
As it stands, no utility is tapping the full theoretical demand-response potential that reports from a variety of federal agencies and energy analysis firms have identified across the country. A 2019 report from consultancy Brattle Group found that the U.S. could double its nearly 60 gigawatts of existing demand-response capacity by 2030, yielding $15 billion per year in benefits — and largely avoiding the use and construction of additional power plants — with smart thermostats making up one of the largest new sources of capacity.
But as utilities in Arizona and around the country struggle with increasingly extreme weather and the need to replace fossil-fired power with zero-carbon alternatives, so-called “demand-side” alternatives like Cool Rewards are becoming more and more central to their plans.
APS has made demand response an integral part of its strategy on this front, Carnes said. “My team is integrated with our operations team. We attend the weekly planning meetings — what does the energy market look like, what the weather is going to look like, any changes in the fleet that we need to prepare for.”
APS is using this tight integration between its smart-thermostat-equipped customers and its grid and energy market operations in a number of innovative ways, Carnes said. One example is “precooling” — turning up air conditioning earlier in the day, when grids across the Southwest are awash in low-cost solar power, to store up cold in homes that can then keep their air conditioners off for longer in the late afternoon and evening, when solar power fades away but outdoor temperatures and electricity demand remain high.
That’s not just a way to keep homes cooler through the late afternoons, Carnes said — it’s also a way for APS and its customers to take advantage of the hour-by-hour shifts in electricity costs. APS is among the growing number of utilities with “time-of-use” rates that charge customers less during midday hours and more during late afternoon and evening hours when demand for electricity often spikes. At the same time, widespread precooling allows APS to buy more cheap off-peak solar power from its neighbors, including solar-saturated California, and use less power during expensive peaks.
APS can also “stagger” the times when smart-thermostat-equipped homes are called on to reduce energy use to better balance fluctuations on its grid, Carnes said. That can help ensure that customers aren’t asked to keep their homes too hot for too long, but it’s also a way to react to real-time conditions that don’t correspond exactly to the preset hours of 4 p.m. to 7 p.m. when customers are charged more for electricity. “Just because the residential peak ends at 7:01 doesn’t mean the system peak ends,” she noted.
Flexible dispatch also helps APS avoid “snapback,” she said — the effect of turning lots of air conditioners back on at the same time, which can lead to huge power draws that further unbalance the grid. That’s a common problem with demand response, and one that well-designed programs should try to avoid, she said.
Comparing and contrasting approaches to demand response
The approach Arizona’s biggest utilities are taking stands somewhat in contrast to the way residential demand response is developing in two other states suffering from heat-related grid strains: California and Texas.
California has invested billions of dollars in emergency grid resources since it experienced rolling blackouts during an August 2020 heat wave, and hundreds of thousands of customers in the state are enrolled in smart-thermostat programs, including more than 100,000 customers of Pacific Gas & Electric, the state’s largest utility, and more than 200,000 signed up with demand response provider OhmConnect.
But the state’s increasingly complex and cumbersome structures for rewarding participation in these programs have held back their impact, according to demand-response advocates. Recent changes in the state’s approach to demand response could further erode this potential, the industry warns.
And in Texas, where energy market deregulation and policy have limited investment in and incentives for residential energy efficiency and demand response, the state remains well behind many others in tapping the grid-relief potential of homes and apartments, grid experts say. That’s despite the state’s ongoing challenges meeting rising summer power demand — not to mention its catastrophic grid collapse during the winter storms of February 2021.
A May report from the American Council for an Energy-Efficient Economy found that investments in energy efficiency and demand response could reduce Texas’ summer and winter grid emergencies far more cheaply and quickly than the state’s current focus on building more fossil-gas-fired power plants — with the biggest summertime load reductions potential coming from free or low-cost smart thermostats combined with air-conditioner demand response.
Paul Hines, EnergyHub’s vice president of power systems, highlighted preliminary 2022 data from the U.S. Energy Information Administration that shows how different approaches are yielding different results in Arizona compared to Texas. That data shows that Arizona utilities were enabling nearly three times the number of kilowatts of peak load reduction per customer compared to utilities in Texas, while only spending twice as much per customer, he said.
“Both California and Texas have a complicated layer of incentive programs to work within,” Hines said. “What we’ve found is, the simpler we’ve made this, the more success you have.”