DSM to the Rescue?

Issue 11 and Volume 109.

By Brian K. Schimmoller, Chief Editor

Americans love to refer to their country in lofty, idealistic terms. When we hear, “land of the free,” “home of the brave,” or “sweet land of liberty,” our chests reflexively puff out and the strains of patriotism involuntarily ripple through our veins. On the other hand, one would be hard-pressed to find an American who experiences the same reaction to the phrase, “conserve energy.”

Conservation is simply not something we do very well. Ours is a consumptive culture, and this consumption hinges on the ready availability of low-cost energy. That consumption, and the accompanying impacts on the economy, is being put to the test as energy prices have skyrocketed in the past year, and particularly since Hurricanes Katrina and Rita, which will push prices higher.

It’s time to resurrect, re-invigorate and re-invent demand-side management programs to reduce demand and minimize cost pressures. DSM – despite its troubled history – deserves another look. While DSM enjoyed some measure of success in places like California, New York and the Northwest through the 1980s and early 1990s, utilities widely came to view DSM programs as unwanted mandates that cost too much to administer and had relatively little impact on demand. Why devote resources to activities that reduce electricity sales and that garner participation from only a small fraction of customers?

As fuel and electricity prices head north, however, DSM programs become much more viable. More importantly, consumer interest grows. A year ago, the hybrid Toyota Prius was a novelty on American streets; today, it’s a relatively common sight. And it’s not just the wealthy environmentalists who are buying all those hybrid vehicles around the country. In our SUV culture, a large and growing percentage of Americans are willing to pay a premium for efficiency.

The challenge will be in getting Americans to act on some of the less-exciting conservation techniques – adding insulation, weatherstripping doors, replacing old appliances with high-efficiency models. For example, despite the millions, maybe billions, of dollars spent on promoting compact fluorescent lightbulbs, penetration is still below 10 percent.

Val Jensen, a DSM expert with ICF Consulting, sums up the DSM challenge this way: “People naturally want to see what they buy, but you can’t see a saved kWh.” Because of the severity of the energy price shock this time around, however, Jensen believes attitudes may be shifting. “For a wider swath of people, energy issues will now impact ‘survival’ issues such as transportation, food prices and quality of life.” In such an environment, DSM can play an important role.

The question for the power industry then becomes how large of a role utilities should play in designing, implementing and conducting DSM programs. Many utilities disbanded DSM programs in the early 1990s, as interest waned and as third-party energy service companies emerged to address this market segment. As Americans (and their checkbooks) wince at the rising cost of energy, particularly this winter, I’m convinced state utility commissions will begin “demanding” a renewed utility role in DSM programs.

Jensen places utilities into one of four categories based on their perception of DSM:

  1. Leading edge utilities. These utilities see DSM programs as part of their business, operate in states that have built up momentum in energy efficiency efforts, and can earn incentives to justify their expenditures.
  2. Utilities that see the big picture. These utilities have a sizable percentage of customers interested in DSM solutions and recognize that regulators want to be seen as proactive in reducing energy consumption. To maintain a positive working relationship with regulators and customers, therefore, these utilities are willing to engage in an unofficial quid pro quo and implement DSM programs.
  3. Utilities who will move, but only if pushed. These utilities don’t see their direct involvement in DSM as part of their core mission, but recognize that DSM may be necessary to get utility commission movement on other issues, such as new power plants and transmission lines.
  4. Just say no utilities. These utilities firmly believe that their involvement in DSM is contrary to their business interest and actively resist mandated program requirements.

Category number three may emerge as the leading driver for DSM in coming years. With a raft of new power plants on the drawing board to satisfy baseload power demand over the next decade, DSM could become the ransom utilities have to pay to cement plant approval. “We’re entering a stage where utilities will need to build a number of new power plants,” said Jensen. “In my opinion, this will drive as much or more activity in DSM than the high fuel prices we’re seeing.”

Debate about supply and demand in the power sector invariably centers on their differences. Supply-side responses, however, are not antithetical to demand-side responses. They are two sides of the same coin. Both can contribute to a reliable, efficient, cost-effective electricity system, albeit in different ways.

The supply side has historically held the advantage in the United States because of the ready availability of low-cost resources. That advantage will likely narrow in coming years as domestic oil and gas reserves are further depleted. I’m not saying that utilities should adopt a DSM-friendly posture simply “for the good of the country.” That contradicts our capitalistic principles and would only poison what should be an open, frank debate.

What I will do, however, is point out that conservation is not really outside a utility’s normal business priorities. The restructuring of the power industry over the past decade gas has forced everyone to do more with less, to squeeze everything out of existing assets. But isn’t that the definition of conservation – or at least a definition?

Admittedly, utilities have much less control over customer participation in DSM programs than they do over equipment and personnel decisions that impact plant profitability, but it will be the utilities that are looked to for action. In the end, of course, conservation is a personal decision. However, as fuel prices rise and as power demand grows, DSM stands to gain traction.