Energy Efficiency and Demand Response

Over the past decade, there has been a significant change in electricity usage trends. One key factor causing slower growth in electricity usage is the saturation of energy efficient technologies. This saturation has substantially increased as a result of federal energy policy, state requirements and energy efficiency and demand response programs implemented by utilities. AEP’s load forecasting modeling tracks these trends, which helps us develop resource plans for our companies that account for these changes over time.

Energy efficiency and demand response are important elements of AEP’s resource portfolio; they are tools that encourage reduced energy consumption, either during times of peak demand, or throughout the day or year. AEP currently has energy efficiency as well as demand response programs in place in almost all of its service territories.

The Energy Policy Act of 2005 (EPACT) was the catalyst for establishing energy efficiency as a priority for the nation. EPACT’s success led to more aggressive increases in efficiency standards with the passage of the Energy Independence and Security Act of 2007 (EISA). The EISA set new energy efficiency standards covering vehicles, lighting, motors, building codes and other categories of energy-using equipment. The increased standards have had a pronounced effect on energy consumption, which AEP has seen in its service territory, particularly over the last decade.

Federal codes and standards for residential and commercial lighting – combined with other efficiency gains from other energy-consuming appliances and building systems – are also helping to drive consumption down over time.

These naturally-occurring reductions in future energy usage that are brought about by such emerging federal codes and standards (reflected in the chart) are incorporated into the customer load- and peak-demand forecasts that are relied upon for integrated resource planning purposes. The operating company plans implicitly capture these energy usage reductions over time.

Energy Efficiency Achievements

Today, AEP offers customers more than 100 energy efficiency programs across nearly our entire 11 state service territory. In 2015, AEP’s energy efficiency programs were credited with over 1 million megawatt hours (MWh) of energy reduction and over 250 megawatts (MW) of demand reduction, with associated program costs of $159 million.

Cumulatively, from 2008 through 2015, these programs have been credited with reducing annual consumption by nearly 6 million MWh and peak demand by over 1,500 MW, with program costs of approximately $875 million.

Energy efficiency is viewed as a readily deployable, relatively low-cost and clean energy resource that provides many benefits. Energy efficiency reduces energy consumption by incorporating energy efficiency improvements in their homes and businesses; the trade-off is the up-front investment in a building/appliance/equipment modification, upgrade or new technology.

Energy Efficiency Growth

There have been steady gains achieved through energy efficiency during the last two decades and AEP foresees additional future impacts, which we account for in our integrated resource planning process. Among the drivers of energy efficiency growth:

  • Energy costs - As the cost of energy increases, the value of energy efficiency increases.
  • Technology costs - The cost of energy efficiency technologies is decreasing. For example, the cost of LED bulbs has decreased substantially in the last few years. They are on track to replace CFLs as the next generation lightbulb.
  • Technology improvements – As devices become more interconnected and controllable, the ability to monitor and manage energy consumption rises. Today, this is seen more among commercial and industrial customers (e.g. more efficient building control systems) but is gaining penetration among residential customers through technologies such as smart thermostats.
  • Environmental reasons – Some customers want to reduce energy consumption to support environmental sustainability in addition to achieving economic benefits.
  • Building code efficiency standards – While building code standards can have a large impact over the life of a building, the adoption of these standards occurs gradually over time and the benefits are most often seen in new construction or major restorations or renovations.
  • Public policy – A combination of federal mandates and company-sponsored energy efficiency programs have had a significant impact on the development of more energy efficient technologies and their rapid adoption rate in AEP’s service territory.
  • Appliances – In addition to lighting, there have been significant increases in the saturation of energy efficient technology related to other appliances such as cooling systems, clothes washers and dryers, water heaters, dishwashers, etc.

As a result of these developments, subsequent achievements from utility-sponsored energy efficiency programs that exceed the ‘naturally occurring’ and efficiency codes-driven energy savings will likely be more challenging and expensive to implement in the future.

Every three to four years, AEP conducts a residential appliance saturation survey to monitor the saturation and age of various appliances in residential homes. We compare the findings to projections from the U.S. Energy Information Administration to understand the trends for which we plan accordingly.

Demand Reduction

Demand response supports reliability of the power grid by helping to reduce peak periods of demand. Demand-side management includes energy company-sponsored programs and rate structures that encourage customers to reduce energy consumption during peak demand periods. Within each of AEP’s state integrated resource plans, the potential for more demand-side resources, as well as other smart grid-related projects such as volt VAR optimization, are modeled on the same economic basis as supply-side resources (generating capacity).

Peak demand is reported in megawatts and is the amount of power used at the time of maximum power usage. Peak demand periods vary across AEP’s service territory. For example, Appalachian Power Company’s system peak generally occurs on a winter weekday morning, when electric heating and appliance usage is happening at the same time that commercial equipment and industrial machinery is ramping up electric use. Whereas Public Service Company of Oklahoma’s system peak, for example, typically occurs in the afternoon of a summer weekday, as people get home from work or school and increase their use of air conditioners and fans, while the demand from commercial and industrial customers remains high.

As peak demand grows with the economy and population, new capacity would ultimately be needed. To defer building new power plants, there are several ways to reduce the peak load. For example, a customer with an interruptible contract with AEP agrees to allow the company to “interrupt” or reduce its power consumption in exchange for reduced rates.

For the first time, the North American Electric Reliability Corporation (NERC) is forecasting the lowest peak demand growth rates on record in its annual long-term reliability assessment of the bulk power system. NERC forecasts that winter and summer peak demand growth during the next decade will drop below1 percent for the first time.

NERC also predicts that declining demand growth rates will continue. With the decline in peak demand, less new capacity is needed, allowing energy companies to use more of existing resources to meet future resource needs. It also frees up capital that can be invested on other things such as transmission and distribution infrastructure that improve service to customers.

We’ve been predicting slow growth in peak demand for a number of years due to various factors. Our increasing rates to comply with new environmental regulations, combined with higher saturation of energy efficient appliances, slower population growth and shifting demographics, and the shift in our overall economy away from manufacturing and toward a more service-sector based economy, all point to much slower demand growth than we’ve experienced historically.

Energy efficiency and demand response programs can affect customer bills in differing ways. Customers can be favorably impacted through the delay in investment required for new generation resources, and benefit through avoidance of incremental costs associated with environmental compliance costs. This benefit to the customer, however, comes with a price due to the up-front and ongoing costs of the programs themselves.