Strategy Insight

Published 4Q 2021

Load Flexibility Valuation Is Critical to

Grid Reliability

Dan Power Roberto Rodriguez Labastida

Research Analyst Senior Research Analyst

Spark
The electric grid is shifting from a centralized generation model powered by fossil fuels to one reliant on
distributed energy resources (DER) powered by variable, renewable sources. As renewable energy
resource capacity on the grid increases, so does the volatility of grid supply. Jurisdictions around the
world have begun implementing aggressive clean energy targets, emissions reductions goals, and new
regulations allowing DER to participate in markets and serve the grid. The transportation and buildings
sectors have started electrifying end uses that have historically relied on fossil fuels, and the growth of
digitalization is being used in the energy sector to improve operations. These factors have exposed load
flexibility as a critical resource in the path to zero emissions.

Context
This report covers the following:

• With more renewable sources coming online, supply-side volatility is increasing.

• Electrification and digitalization are adding more flexible loads to the grid.

• New market regulations allow flexibility to be used as a resource.

• The role of load flexibility in balancing the grid is growing.
• Accurately valuing load flexibility in energy markets is important.

Recommendations
Guidehouse Insights recommends the following:

• Grid operators and utilities must develop metrics to capture load flexibility’s operational impacts.
• Regulators must identify new methods for determining utility revenue that reward load flexibility.
• Grid operators and utilities must adjust expected demand profiles.
• Building equipment and DER manufacturers must ensure their products enable load flexibility.

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 Load Flexibility Valuation Is Critical to Grid Reliability

Supply Volatility Increases with More Renewable Sources

Traditionally, grid operators have had great control over supply-side resources, such as coal and natural
gas power plants, because these resources are dispatchable (i.e., because coal and natural gas power
plants run on a controllable fuel, they can be powered on and off as needed). The demand profile can be
predicted, to an extent, but has ultimately been out of the operator’s control. The result is a
follow-the-load model that requires grid operators to request more supply as demand increases.

The negative effects from climate change, resulting from increased and prolonged greenhouse gas
(GHG) emissions, have prompted providers to start shifting the electric grid from a centralized, fossil
fuel-powered generation model to one reliant on distributed energy resources (DER) powered by
renewable energy sources. Renewable energy resources, such as solar PV arrays and wind turbines,
while essential in transitioning the power sector to zero emissions, are variable in nature. As the shift to
renewables progresses and they make up a larger share of the grid resource mix, supply-side stability is
becoming an issue at the forefront.

With the shifting energy landscape, flexibility in the power system is becoming more important than ever.
Flexibility in the power system refers to the grid’s ability to react to the changing needs of the system
while maintaining reliable operation. One aspect contributing to the overall flexibility capability of the
power grid is the focus of this report: load flexibility. Load flexibility, also referred to as demand flexibility,
makes use of renewable energy sources, flexible loads, and controls to serve the grid. Guidehouse
Insights defines load flexibility as the capability of electricity demand to respond continuously to changing
supply and grid conditions based on price signals or other metrics in a way that maintains grid stability
without sacrificing consumers’ quality of service. It is important to note that while demand response (DR)
is a well-known tool for reducing peak demand in emergency situations, load flexibility is a continuous
process implemented by the grid operator that does not require any energy usage changes by the
consumer nor does it affect their comfort level.

Fossil Fuel Power Plants Have Historically Provided Grid Stability

Sudden or large-magnitude changes in demand usually have been managed using fossil fuel power
plants. Fossil fuel plants offer the advantage of running on a controllable fuel (e.g., coal or natural gas),
meaning they can quickly be brought online or taken offline to balance supply with demand. Because
renewable energy sources are dependent on uncontrollable weather conditions, those sources cannot be
dispatched on command. If an area’s demand profile begins to increase at a rate greater than a
renewable source can provide supply, fossil fuel plants must be called on to fill that demand.

In the US, California has encountered this issue when solar supply begins to decrease in the later hours
of the afternoon and demand begins to rise as people return to their homes from work. Solar is used
during the middle of the day to fill a portion of demand, but as that supply begins to decrease, the net load
curve (demand curve minus available renewables) begins to sharply increase. This curve, aptly named
the duck curve, has come to represent one of the biggest challenges in transitioning to a zero emissions
electricity sector, as seen in Figure 1.

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 Load Flexibility Valuation Is Critical to Grid Reliability

Figure 1 shows the net demand curve for a 2013 spring day in California. The black curve shows that as
more solar generation was expected to come online in California, the net demand ramp gets more
severe.

Figure 1 California Independent System Operator Net Load Chart (Duck Curve)

(Source: California Independent System Operator)

In addition to creating steep ramps in the demand curve when renewable supply begins to drop off,
renewable generation can also lead to the opposite problem, oversupply, during a different period in the
day. Oversupply occurs when generation exceeds real-time demand, and it can be an issue for the
energy market if it persists over time. Wholesale prices during oversupply times can become negative and
may require manual intervention to maintain reliability in the market. In the UK, electricity prices went
negative in 15 half-hour periods in January and February 2020 alone, according to Current News, in part
because of excess solar and wind energy supply. In Germany, negative pricing due to excess renewables
supply has been a common occurrence as far back as 2017, with prices becoming negative over
100 times that year, according to the New York Times.

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 Load Flexibility Valuation Is Critical to Grid Reliability

To mitigate oversupply conditions, renewable energy generation is sometimes curtailed because it is

more cost-effective than having fossil fuel plants shut down operations for a period before starting up
again. Curtailing excess renewable supply means that the production of renewable energy is intentionally
scaled back to below what otherwise could have been produced, resulting in economic losses and wasted
zero-carbon electricity. In 2016, the California Independent System Operator (CAISO) curtailed more than
308,000 MWh of excess solar and wind energy. In 2018, it was estimated that Chile curtailed
150,000 MWh of solar generation, 6% of potential solar PV output, due to geographic mismatch between
solar supply and load location. 1

Clean Energy and Emissions Goals Drive Renewables Growth

In the US, 18 states, along with the District of Columbia and Puerto Rico, have set goals relating to clean
energy deployment or emissions. Most of these goals have the states producing 100% of their electricity
from renewable sources by 2050 at the latest. To meet these goals, states have started ramping up their
renewable energy targets. New York, for example, is aiming to have 100% zero emissions electricity by
2040. To get there, the state is planning to install 9 GW of offshore wind by 2035 and 6 GW of solar by
2025. Massachusetts passed legislation in March 2021 requiring net zero GHG emissions by 2050. As a
part of the state’s plan to get to net zero, it is planning to deploy at least 15 GW of offshore wind by 2050.

As of 2021, 197 countries have signed or acceded to the Paris Agreement, pledging their commitment to
limiting the global average temperature rise to less than 2° C above pre-industrial levels, with the
preference being less than 1.5°C. To accomplish this goal, each country is responsible for implementing
aggressive climate action plans for increasing renewable energy deployment and reducing GHG
emissions. Every 5 years, each country is expected to submit a national climate action plan detailing the
specific steps they plan to take to help reach the goal of the agreement.

The European Union (EU) has set a binding target for itself of achieving climate neutrality by 2050. An
intermediate goal, the Fit for 55 proposal, presents a goal of reducing GHG emissions by 55% compared
with 1990 levels by 2030. In addition to setting stricter emissions standards for new cars and capping
emissions from different economic sectors each year, the proposal sets a target of producing 40% of the
EU’s energy from renewable sources by 2030. In Asia Pacific, both Japan and South Korea have pledged
to reach climate neutrality by 2050. India has indicated that it has passed 100 GW of installed renewable
energy capacity as of August 2021 and plans to reach 450 GW of total renewable energy capacity by
2030.

According to the World Resources Institute, 31.9% of emissions worldwide were a result of electricity and
heat production in 2018, the largest single source of GHG emissions. Achieving net zero cannot be
accomplished without transitioning entirely away from fossil fuel generation sources and toward clean
energy sources such as solar and wind. With an expected increase in the installed capacity of these
sources on the horizon, it is imperative to have a plan for grid stability.

E. O’Shaughnessy, J. R. Cruse, and K. Xu. “Too much of a good thing? Global trends in the curtailment of solar PV.” Solar energy
1

(Phoenix, Ariz.), 208, 1068–1077. https://doi.org/10.1016/j.solener.2020.08.075.

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 Load Flexibility Valuation Is Critical to Grid Reliability

Electrification and Digitalization Add Flexible Loads to the

Grid
On top of transitioning the power sector to renewables, end uses typically powered by fossil fuels are
beginning to switch to electricity as part of the effort to reduce GHG emissions. This trend is known as
beneficial electrification or sector coupling. Gasoline-powered cars are slowly giving way to EVs, and
electric heat pumps are becoming more prevalent in building and home heating, ventilation, and air
conditioning (HVAC) systems across the US. Aside from reducing GHG emissions, cost savings for the
customer is another major driver for switching from fossil fuels to electricity because of increased
efficiency or a reduction in ancillary costs. Because electric heat pumps move heat from one place to
another instead of generating it, they are typically more efficient than a central air conditioning and
furnace system, meaning the customer ends up spending less on electricity. EVs require less routine
maintenance (e.g., no oil changes, less frequent brake replacements due to regenerative braking) than
gas powered cars in addition to not requiring fuel purchases.

In August 2021, the US announced the goal of having half of all new passenger vehicle sales by 2030 be
EVs. In November 2020, the UK announced that it was moving the ban on sales of new petrol- and
diesel-powered cars and vans forward by 10 years to 2030 as part of its climate action plan. Sales of new
hybrid cars are permitted until 2035, provided they can cover a significant distance on electricity alone,
though the government has yet to specify that exact range. During the summer of 2021, the UK
government announced targets for banning the sale of new internal combustion engine trucks in the
commercial sector. For trucks between 3.5 and 26 metric tons, the ban is set to go into effect in 2035, and
for trucks over 26 tons, it is set for 2040. In France, the government announced a plan in 2017 to ban the
sale of new fossil fuel cars after 2040 and passed a new Mobility Orientation Law on Transport in 2019
that upheld the ban. Electrifying transportation on that scale presents an enormous opportunity for load
flexibility.

Additionally, the growth of digitalization in the power sector is leading to significant changes in the
traditional supply and demand relationship. Internet-connected appliances and devices, smart meters,
thermostats, plugs, chargers, and energy management systems have given end users greater insight into
when and how much energy is used. Those same advancements have given grid operators more control
over how and when electric demand can be met. While electrifying more applications is likely to lead to an
increase in electricity demand, digitalization allows the demand for certain loads to be filled at varying
times throughout the day without affecting the end user. For example, if a customer plugs in their EV
when they arrive at work in the morning, it does not matter when the grid operator allocates electricity to
charge the battery throughout the day so long as it is fully charged when the user wants to drive it home.
The result of electrification and digitalization converging is a more controllable demand profile made up of
large- and small-scale flexible loads.

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 Load Flexibility Valuation Is Critical to Grid Reliability

New Market Regulations Lead to Flexibility as a Resource

In September 2020, the US Federal Energy Regulatory Commission (FERC) issued Order Number 2222.
The order allows aggregated DER that provide value to the grid through flexibility to be compensated for
the value they create. In other words, the order allows aggregated DER to compete alongside traditional
resources in organized wholesale markets. Under this order, regional markets in the US are required to
set up new market structures to incorporate DER flexibility. CAISO and the New York Independent
System Operator already have existing programs that require minor adjustments to comply with the order.
The other major regional transmission organizations and ISOs in the US—PJM Interconnection, ISO-New
England, Midcontinent ISO, and Southwest Power Pool—have filed extensions for compliance, citing the
need for additional time to converse with stakeholders on how to best implement DER and to update their
market software programs.

As of June 2021, corollary Order 2222-B extends individual state DR opt-out rules to heterogeneous DER
portfolios that include DR, which means that if a state regulator has blocked DR participation in the
wholesale market, DER portfolios created under FERC Order 2222 that contain DR, regardless of
whether they contain other technology types, may not participate in that state. FERC is investigating this
rule further as it has stated in the past that this provision may inhibit the growth of DER deployment,
thereby undermining the entire goal of Order 2222. Historically, DER have not met the minimum size
requirements to participate in regionally operated electricity markets. By allowing DER to aggregate and
meet those size requirements with the issuance of Order 2222, FERC is aiming to facilitate wider
adoption of these resources to serve the changing needs of the grid.

In the EU and UK, flexibility markets have been adopted to allow technology that enables flexibility to
support the grid through activities such as real-time congestion management, peak demand reduction,
outage management, and long-term capacity planning. 2 These markets developed in response to the
growing presence of DER and other renewable energy sources on the grid. Regulators recognized that
growing electricity demand coupled with an increase in variability from renewable sources requires
innovative solutions from grid operators. The UK’s Revenue = Incentives + Innovation + Outputs (RIIO)
model, developed by the Office of Gas and Electricity Markets (Ofgem), looks to reward utilities for finding
low cost, innovative solutions to serving the evolving needs of their customers. The model includes
setting baseline revenue for long-term rate periods, combining operational and capital expenditures into
one regulatory asset to encourage more cost-effective investments, creating performance incentives, and
generating a fund exclusively for pilots geared toward innovation.
In March 2018, Ofgem began discussing the next iteration of RIIO with stakeholders. In July 2018, RIIO-2
was adopted and took effect in April 2021 for gas distribution and gas and electricity transmission
networks and is set to take effect in April 2023 for electricity distribution network operators. RIIO-2 is set
to have several improvements compared with RIIO-1, including a reduction in the length of baseline rate
plans and increased customer engagement.

2
Guidehouse Insights, Flexibility Markets and Enabling Technologies, 3Q 2020,
https://guidehouseinsights.com/reports/flexibility-markets-and-enabling-technologies.

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 Load Flexibility Valuation Is Critical to Grid Reliability

Load Flexibility Plays a Larger Role in Balancing the Grid

Load flexibility decouples power demand from end uses, allowing grid operators to move from a
follow-the-load model to one where the load is controlled to match supply conditions, resulting in
numerous grid benefits. One of the key grid benefits load flexibility provides is reducing the slope of
multi-hour ramps and minimizing peak demand. With markets changing to allow participation of DER and
more renewable energy sources coming online as additional loads become electrified, load flexibility is
poised to become a critical grid-balancing resource.

Load Shifting Reduces the Slope of Multi-Hour Ramps

In a renewable heavy grid, such as that of California, steep multi-hour ramps occur as the result of two
things: diminishing solar supply and rising demand. Steep multi-hour demand ramps create instability in
the grid because they require large amounts of supply to be brought online very quickly, increasing the
likelihood of demand outpacing the supply at some point, leading to blackouts. Load flexibility paired with
excess renewable supply at other times during the day enables load shifting, a technique that can prove
valuable in eliminating steep demand ramps and maintaining grid reliability.

In the middle of the day, when solar supply is high but net load is low, excess solar energy may be
forcibly curtailed due to system constraints (e.g., low electricity demand, storage capacity limits,
transmission system limits). The costs to build utility-owned solar PV arrays or wind farms are recouped
by the utility, plus a rate of return on customer bills. Curtailing production from these renewable sources
means the full value of that investment is not being realized. If the curtailment of renewable sources
continues to grow, the development of additional renewable generation plants to meet climate goals and
policies could mirror that of the fossil fuel peaker plants: Customers are stuck paying high rates to
subsidize resources that are only operational a fraction of the time. Thus, making use of solar energy that
would have otherwise been curtailed can have economic benefits on top of reliability ones.

Many of the new electrified end-use loads being added to the grid are not necessarily time sensitive
because they have a mass associated with them that can act as an energy storage system. The loads
with large flexibility potential are EVs, storage water heaters, and heat pumps for HVAC. In EVs, the
battery in the vehicle stores electricity until the user needs to drive. In grid-connected storage water
heaters, the thermal mass of the water acts as the storage system, and in homes and buildings, the
thermal mass of the building envelope serves that purpose. It is important to note that the capability of a
building to act as a virtual storage system is dependent on the quality of the building envelope; it must be
properly insulated and have the areas around doors and windows properly sealed.

By equipping EV chargers, water heaters, and HVAC heat pumps with technology enabling two-way
communication with the grid, the grid operator can continuously monitor and change when electricity is
allocated to those loads based on current supply conditions. Load flexibility takes advantage of excess
solar energy by meeting these non-time sensitive demands earlier in the day, filling the valleys left by the
duck curve with load that typically exists in the mountain. The result, as Figure 2 shows, is a less severe,
multi-hour demand ramp in the evening hours when solar supply begins to wane and people return home
from work and school. Water can be preheated, homes can be preconditioned, and EVs can be charged
in the middle of the day using solar energy instead of in the evening using fossil fuel power plants.

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 Load Flexibility Valuation Is Critical to Grid Reliability

The arrows show load shifting absorbing the extra solar energy present in the middle of the day after
baseline load is met and utility and distributed battery energy storage systems are at capacity. The valley
in the middle of the day is filled by available solar energy that otherwise would have been curtailed while
the valley at night is filled by solar energy that was previously stored in utility and distributed battery
energy storage systems during the day. Customers are still able to drive their EVs, take a hot shower,
and relax in their homes at their desired temperature in the evening without straining the grid. In essence,
load flexibility shifts demand from one part of the day to another to match renewable supply conditions,
resulting in a flatter net load curve.

Figure 2 Theoretical Net Load Curve in a High Solar Generation Area

Without Load Flexibility With Load Flexibility

(Net Load)

12:00 AM3:00 AM 6:00 AM 9:00 AM12:00 PM3:00 PM 6:00 PM 9:00 PM12:00 AM

Time of Day

(Source: Guidehouse Insights)

Excess solar energy in California is referenced here because it is a well-known and extreme case where
renewable sources have drastically changed the demand curve. However, it is not the only market where
this principle is applicable. Texas and parts of Europe have an abundant supply of available onshore wind
energy, but it is typically most prevalent at night, when demand for electricity is low. Charging EVs or
heating water overnight in anticipation of the morning demand would help reduce the amount of wind
energy curtailed and would flatten the demand ramp that usually occurs in the morning as people wake
up and get ready for the day.

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 Load Flexibility Valuation Is Critical to Grid Reliability

Load Flexibility Reduces Daily and System Peak Demand

Shifting load to periods of high renewable energy supply as shown in Figure 2 effectively flattens the net
load curve, resulting in fewer daily peaks and a more stable demand profile. A flatter demand curve with
less daily peaks means a spike in demand beyond expected baseline loads, known as system peak
demand, would have a lower magnitude and less of a negative impact on the system. Lower system peak
demand means a lower probability of utilizing peaker plants, fossil fuel plants that are used infrequently to
meet spikes in electricity demand. Peaker plants are often the most inefficient, expensive, and polluting
power plants to run due to their infrequent use. In New York State, for example, half of the state’s peaker
plants operate 1% of the time or less, according to PSE Healthy Energy. Despite operating so
infrequently, peakers alone are responsible for around 10% of CO2 emissions from electricity production
in the state each year. 3 To compound the issue, the majority of peakers in the state are in areas with air
pollution levels that are already noncompliant with federal air quality standards. In addition to being large
contributors to GHG emissions, peaker plants in New York City, in particular, are among the most
expensive in the US, having cost rate payers an estimated $4.5 billion in capacity payments over the past
decade, according to Peak Coalition.

In the long term, when total anticipated electricity demand rises in an area, the electricity provider in that
region is expected to plan to invest in new capital projects, such as additional baseload fossil fuel power
plants, new substations, and additional transmission and distribution lines, to keep up with the expected
demand growth. These capital investment costs and a rate of return are then incorporated into customers’
electricity rates. Large growth in overall demand over time and the presence of peaks beyond those
levels strains the electric grid’s ability to reliably supply power to customers, significantly increases GHG
emissions, and costs ratepayers and utilities more money in the long term. Load flexibility’s ability to
reduce the magnitude and frequency of short-term peaks in demand along with long-term demand growth
has the potential to eliminate the need for new baseload fossil fuel plants and peaker power plants
altogether.

3
Calculated by Guidehouse Insights using PSE Healthy Energy data collected on New York State peaker plants as a part of its Energy
Storage Peaker Plant Replacement Project. Peakers in the state produce roughly 3.3 million tons of CO2 each year. New York State
Energy Research and Development Authority (NYSERDA) estimated that in 2016, electricity production in the state resulted in
31.5 million metric tons of CO2 equivalent emissions. See Table 2 in: NYSERDA. New York State Greenhouse Gas Inventory:
1990-2016. https://www.nyserda.ny.gov/About/Publications/EA-Reports-and-Studies/Energy-Statistics

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 Load Flexibility Valuation Is Critical to Grid Reliability

Load Flexibility Must Be Accurately Valued in Energy Markets

Load flexibility can effectively reduce multi-hour demand ramps by aggregating many smaller loads (e.g.,
using loads at tens, hundreds, or thousands of residential or commercial locations). This method is in
stark contrast to how traditional supply-side resources serve the grid due to their immense capacity. The
market structures were designed for a centralized generation power grid, one that favors having a single
power-generating source located far from the end users it is serving. As the grid continues to transition,
market structures need to be updated so that non-traditional resources, such as load flexibility, are
accurately valued. Accurately valuing load flexibility affords it the opportunity to fairly compete alongside
traditional resources in regional electricity markets. Fair competition leads to innovation, allowing
non-traditional technologies that enable load flexibility, such as grid-interactive water heaters, to serve the
grid in new and significant ways.

Although DR is a valuable resource in reducing peak demand to relieve grid stress, load flexibility
technology that shifts load instead of just shedding it is key. With FERC Order 2222-B subjecting DER
portfolios that include DR to DR opt-outs in individual states, other DER that enable load flexibility may
have the opportunity to serve the grid in ways they otherwise may not have had.

Traditional Utility Business Models Need to Be Reformed

Utilities have typically earned money based on the number of kilowatt-hours sold in each period, meaning
they are incentivized to sell more electricity, something known as the throughput incentive. Additionally,
utilities are usually permitted to recover the cost of capital investments (e.g., new power plants) plus a
rate of return in customer rates, whereas they can only recover operating costs in customer rates (no rate
of return). This regulatory model creates a feedback system whereby utilities are encouraged to sell more
electricity to customers, increasing demand each year, which enables utilities to build more power plants
and transmission lines to keep up, thereby increasing customer rates. Higher customer rates mean that
the utility is incentivized to sell as much electricity as possible to maximize profits. High volumetric
electricity sales necessitate more capital investments to keep up with demand growth, which leads to
higher customer rates, incentivizing higher sales.

The UK’s RIIO framework begins to diverge from the traditional, volumetric utility model of incentivizing
higher kilowatt-hour sales and capital expenditures. RIIO combines operational and capital expenditures
into a single metric and adds performance incentives, which gives utilities the opportunity to pursue the
most cost-effective solution without sacrificing revenue potential. RIIO also creates a separate account to
fund pilot projects, meaning utilities can investigate emerging technologies and applications without
placing their financial wellness on the success of the program. Emerging technology programs often
involve more risk than traditional infrastructure upgrades and in the traditional utility business model
means that cost recovery is less certain, leading utilities to be more hesitant to pursue these upgrades.

To facilitate the growth of DER to reduce GHG emissions worldwide, the markets in which these
resources participate must be reformed so that they support innovative, cost-effective, and reliable
solutions. With proper market reforms in place, technological innovation is expected to continue to
prosper, and customers are likely to receive the same reliable service under the renewable DER model
that they have become accustomed to under the centralized fossil fuel generation plant model.

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 Load Flexibility Valuation Is Critical to Grid Reliability

Load Flexibility Technology Must Be Correctly Classified and Regulated

Historically, energy technology served a defined purpose (e.g., generation, transmission, or distribution),
making classification for regulation purposes relatively straightforward. As energy technology continues to
evolve, it is likely to become increasingly difficult to sort into mutually exclusive categories. Regulations
can play a significant role in determining how much or how quickly a technology evolves and in turn, how
large of an impact on the grid that technology can have. Therefore, correctly classifying emerging energy
technology that enables load flexibility is critical to its success in energy markets.

Technology that enables load flexibility typically cannot be classified as a single type of energy
technology. Grid-enabled water heaters, for example, enable load flexibility by shifting load from times of
peak demand to that of peak renewable supply. The water heaters function as quasi-batteries by
absorbing excess solar or wind energy on the grid and saving it for future use (i.e., storing hot water until
the consumer needs it). Batteries have already been a point of contention in many regional electricity
markets because of their ability to act as a generation source by injecting stored electricity back into the
grid during critical times. Of course, for batteries to serve their intended purposes on the grid, they must
also use electricity from the grid to charge, leading to uncertainty in how that electricity should be treated.

In addition to classifying certain types of technology, the laws governing which entities can use certain
technology and how they can use it also has an impact on grid development. In 2011, the Texas state
legislature voted to require owners of energy storage assets to register as power generation companies.
Because transmission and distribution utilities (TDUs) are not allowed to participate in the generation side
of the market in Texas, this law effectively prevented TDUs from using storage assets to serve
transmission and distribution needs. Non-wires alternatives projects—projects that make use of
non-traditional energy technologies to avoid or defer the need for traditional grid infrastructure
upgrades—often employ storage technologies to relieve congestion on the grid or address growing
capacity needs. 4 The 2011 law meant that TDUs in Texas could not pursue non-wires alternative projects
in the same way that utilities in other states, such as New York and California, can. In September 2021, a
new law, Texas SB415, went into effect, allowing TDUs to provide their customers with electricity from
energy storage assets to ensure reliable service by contracting with the power generation companies that
own the storage assets.

It is imperative that existing regulations that classify energy technologies account for the fluid nature of
energy technology that enables load flexibility so that those regulations can be appropriately amended.
Load flexibility can serve the grid in various areas (e.g., generation, transmission, and distribution), and if
the classification of technology used to accomplish those services prevents its true value from being
realized, the grid cannot reap the full range of benefits.

4
Guidehouse Insights, Non-Wires Alternatives Tracker 3Q19, 3Q 2019, https://guidehouseinsights.com/reports/non-wires-
alternatives-tracker-3q19.

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 Load Flexibility Valuation Is Critical to Grid Reliability

Grid Operators and Utilities Must Develop Unique Load

Flexibility Impact Metrics
Load flexibility is a relatively new grid service that was brought on by increased electrified end uses
coupled with growing digitalization in the energy sector. With it being less well-established than other grid
services, it is going to require the development of new metrics to capture its full impact on the system.
Before developing economic models to accurately determine the value of load flexibility, metrics
quantifying the change in electric grid characteristics must first be identified to establish the impact of load
flexibility. Utilities, whether they are vertically integrated, transmission and distribution only, or distribution
only, are required to procure enough capacity to serve their customers, meaning they must take the
effects of load flexibility on their network into account. Additionally, many states in the US require utilities
to develop and file integrated resource plans that detail how they plan to meet future annual and peak
demand. Grid operators are responsible for operating regional electricity markets and transmission
systems. Their guiding operating principle is ensuring enough capacity is sent over transmission lines to
reliably serve customers on distribution networks. Both grid operators and utilities would benefit from
working together to develop the metrics described in the following sections.

Each of the metrics presented require comparison to a baseline case without the use of flexibility. The
difficulties associated with and potential considerations when establishing a baseline case are discussed
as well. Although load flexibility can provide several services to the grid, the focus of this report is
flexibility’s impact on reducing the slope of multi-hour ramps and minimizing peak demand in systems with
high renewable generation capacity. Each of the metrics described can be used in the development of an
economic model to determine the value added by load flexibility.

Measure the Slope and Magnitude of Multi-Hour Demand Ramps

In renewable heavy grids, multi-hour ramps form when renewable supply begins to drop off but demand
continues to increase. The California duck curve, where solar supply begins to diminish in the late
afternoon and demand begins to increase in that same period, is an example of this. Steep slopes in
multi-hour demand ramps (i.e., large megawatts per minute or megawatts per hour) strain the grid as they
require a large amount of fossil fuel sources to be brought online quickly. The magnitude of these ramps
(the difference between the highest and lowest demand in a given time period) dictates the total amount
of capacity that needs to be available. Load flexibility can mitigate these ramps by shifting demand to
other periods of the day without affecting end users.

The metric quantifying this impact would have two parts: slope of multi-hour ramps (in megawatts per
minute or megawatts per hour) and magnitude of multi-hour ramps (in megawatts). The development of
this metric requires the grid operator or utility to define a ramp period (i.e., 1 hour, 3 hours, etc.) and then
use historical data to determine the average slope of the net demand curve and the average difference
between the highest demand and lowest demand in that period. The ramp period chosen should be one
that historically has large shifts in demand.

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 Load Flexibility Valuation Is Critical to Grid Reliability

Case Study: CAISO Flexible Ramping Product

In November 2016, after 5 years of development, CAISO implemented two flexible ramping market
products that enable the ISO to procure sufficient ramping capability that can be dispatched to cover
uncertainty in load and supply forecasts: Flexible Ramp Up and Flexible Ramp Down. Prior to this
implementation, market optimization would solve forecast net load by utilizing an exact amount of
ramping capacity required. When system conditions change, whether that is forecast load or available
renewable energy supply, the market would not have sufficient ramping capacity to match real-time
demand. Since its inception in 2016, the CAISO flexible ramping product has undergone continuous
improvements to better account for the changing grid landscape. The development of a unique metric
relating to multi-hour ramps allowed CAISO to better address system constraints and serve its customers
as their grid increasingly relied on renewable sources.

Track Curtailed Potential Renewable Energy Output

Typically, oversupply requires renewable energy sources to be curtailed to maintain grid stability. Load
flexibility can take advantage of excess renewable energy that would have been curtailed by filling
demand at varying points in the day before it would normally be called upon in the grid, effectively shifting
demand to better match renewable supply. As a result, the amount of renewable energy requiring
curtailment during a specific period to maintain grid stability would decrease as load flexibility is
increasingly deployed.

This metric, the percentage of potential renewable energy output curtailed, would require two things to be
defined: the time period of interest (e.g., the month of March, the entire year 2020, etc.) and the total
potential output of renewable energy generated in that period. CAISO and Hawaiian Electric already track
the amount of solar and wind energy curtailed each month to help manage oversupply conditions and
meet renewable energy goals. Quantifying that amount and tracking it over time as load flexibility is
increasingly used would provide insight into load flexibility’s value added.

Measure the Carbon Intensity of Electricity Production

Increasing the amount of renewable energy capacity dispatched would mean the overall mix of resources
used to meet demand in a territory would begin to change. As more renewables are deployed and load
flexibility is integrated into more grids, the share of electricity produced by renewable energy sources in a
territory is likely to grow, resulting in a decrease in systemwide emissions from producing electricity in that
area.

The metric, intensity of electricity generated (in tons of CO2 per kilowatt-hour), would quantify the change
in resource mix on a grid. The development of this metric would require grid operators and utilities to
examine how much demand is typically met by fossil fuel sources versus renewable sources and then
determine the resulting amount of CO2 emissions. For comparison purposes, this metric could be updated
yearly to track the impact of load flexibility.

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 Load Flexibility Valuation Is Critical to Grid Reliability

Identify New Methods to Determine Utility Revenue

Regulators need to start changing the way utilities earn revenue so that they are not penalized for pursing
innovative solutions, including load flexibility, to reduce electricity usage and minimize capital
investments. Decoupling is a regulatory tool used in some areas where a utility’s total revenue in a period
is fixed and the price of electricity per kilowatt-hour is changed based on the level of sales. Decoupling
effectively breaks the link between revenue and volume of kilowatt-hour sales, thereby removing the
throughput incentive. It allows programs that reduce electricity demand, such as energy efficiency
programs, to operate more effectively within the market. That same methodology would allow load
flexibility to be more effective and competitive in the marketplace.

Basing revenue on performance targets tied to flexibility is another method that would expand a utility’s
ability to earn revenue without sacrificing innovation. The UK’s RIIO model makes use of certain
performance incentives where the utility is rewarded regardless of how the performance targets are
achieved. The incentives are grouped into several categories relating to reliability and availability,
environment, connections, customer service, social obligations, and safety. This allows utilities to be
rewarded for a range of impacts instead of those solely relating to electricity sales or savings (e.g.,
reducing systemwide emissions, reducing the duration of service interruptions). In February 2020, the
Sacramento Municipal Utility District became the first in the US to change the metric by which they
measure the progress of energy efficiency improvements from energy savings to avoided carbon
emissions. Using an emissions related metric encourages end-use electrification in addition to energy
savings as more renewable sources come online.

Adopting an incentive structure that utilizes non-traditional performance metrics, such as avoided
emissions, would enable utilities to pursue resource options, such as load flexibility, more freely. Load
flexibility’s ability to shift loads from peak demand to peak renewable supply times results in less severe
multi-hour ramps and lower peak demand and allows for a greater mix of renewable energy resources to
power the grid. In addition to setting electricity sales targets that reduce sales relative to a baseline year
(similar to Energy Efficiency Resource Standards in the US), regulators must set goals and incentives
related to reducing overall system emissions by incremental percentages relative to a baseline year. They
must also create incentives related to retiring a certain percentage of operating fossil fuel plants in a
service territory. Identifying new ways for utilities to earn revenue is expected to serve as a catalyst for
innovation as the energy sector evolves.

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 Load Flexibility Valuation Is Critical to Grid Reliability

Adjust Expected Demand Profiles

Grid operators, vertically integrated utilities, TDUs, and distribution network operators use expected
demand profiles to ensure they are reliably serving their customers. Setting an accurate baseline case is
key to determining the true value added to the grid by load flexibility. To determine anything’s impact, a
scenario in which it does not exist must be established first. The shift from fossil fuel generation sources
to variable renewable energy sources has significantly affected the shape of the demand curve; therefore,
adopting a net load approach is the first step in ensuring the impact of load flexibility is fully realized.
Utilizing this approach, all available renewable energy that can be dispatched at a given time is
subtracted from the total demand curve, leaving the resulting net load curve. California’s duck curve
already makes use of this approach, but other territories that do not should consider adopting it as more
renewable energy sources come online. This approach allows is for a true net peak period to be identified
instead of assuming the peak demand period is the same every day, regardless of weather conditions.
Inaccurately establishing a baseline scenario can dilute the true value of an intervening action, such as
load shifting.

Adjusting the granularity of the timescale in day-ahead markets is another way to increase the accuracy
of determining the effect of an intervening action from a resource. In 2018, CAISO proposed changing the
granularity of the timescale in its day-ahead market from 1 hour to 15 minutes to encourage systemwide
flexibility. Fifteen-minute ramps can have steeper slopes than that of the hourly ramp periods of which
they are a part, meaning that increased granularity of the timescale can enhance the ability of the grid to
respond to real-time imbalances, especially during already steep multi-hour ramp periods. CAISO
deferred pursuing this option after determining the complexity of implementing it outweighed the benefits.

Case Study: Recurve’s Load Impact Analysis of OhmConnect’s DR Event in August 2020
In August 2020, DR aggregators in California, including OhmConnect, experienced undervaluation due to
the establishment of an inaccurate baseline when they were called to action during the August 14 and 15
blackouts and subsequently alerted their customers to reduce energy usage in peak periods in exchange
for incentives. Because day-ahead locational marginal pricing did not reach the price cap, OhmConnect
did not deliver their full potential nor were they compensated for the relief they did provide. Recurve
carried out a load impact analysis on a portion of OhmConnect’s participants during a DR event that took
place on August 14, 2020. 5 Recurve found that the methods used to determine baseline net load did not
account for the extraordinarily high temperatures California experienced that day nor did it account for
other intervening actions that affected customer energy use. Recurve noted a critical issue in existing
valuation and verification methods for demand side resources: How much energy a customer used in the
past may not be useful for determining their energy usage in extraordinary circumstances (e.g., extreme
heat waves). Additionally, because DR events are usually short in duration, day-to-day comparisons of
energy use may not be valuable when calculating the impact of a demand side intervention.

5
Recurve, Revenue-Grade Analysis of the OhmConnect Virtual Power Plant During the California Blackouts, January 2021,
https://www.recurve.com/blog/revenue-grade-analysis-of-the-ohmconnect-virtual-power-plant-during-the-california-
blackouts.

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 Load Flexibility Valuation Is Critical to Grid Reliability

To conduct its analysis, Recurve used open-source OpenEEmeter and GRIDmeter and Energy
Differential Privacy methods developed by the U.S. Department of Energy, National Renewable Energy
Laboratory, and Marin Clean Energy to maintain customer privacy. It should be noted that this method of
analyzing customer energy usage from smart meter data, sampling another population of customer
energy data for comparison purposes, and filtering out the impact from additional interventions to isolate
the impact on net hourly load from a DR event requires immense computing power.

Although barriers exist to accurately determining the full impact and value of load flexibility on the grid, it
is essential to begin integrating load flexibility into normal grid operations. As new streams of utility
revenue are identified and unique metrics capturing load flexibility’s impact are developed, the true value
of load flexibility is expected to be realized. Load flexibility is essential to maintaining reliable grid
operation in the changing energy landscape and accurately quantifying its value can only strengthen the
grid.

Building Equipment and DER Manufacturers Must Ensure Their Products

Enable Load Flexibility
Building equipment for tasks such as heating water, HVAC, and drying clothes can be used as load
flexibility resources. For this use to happen, the equipment must be grid-connected so that two-way
communication is possible. Enabling two-way grid communication allows grid operators to fill electricity
demand for those end uses at varying times throughout the day without a signal from the consumer that
the end use is being initiated. Some jurisdictions have started taking regulatory steps to help facilitate
load flexibility in this equipment. For example, in 2019, the US state of Washington passed Washington
House Bill 1444, which requires all electric storage water heaters manufactured after January 1, 2021 to
have a communications port capable of making them grid-enabled. It is important to note that consumers
must still opt-in to having their water heater controlled by the grid operator.

In addition to building equipment enabling flexibility, DER must also come flexibility ready. DER, such as
solar PV and energy storage, must have two-way grid communications as well so that they may be
deployed at optimal times to fill varying demand continuously throughout the day. Generac Power
Systems’ home generators, commercial and industrial generators, and solar plus storage solutions, for
example, are manufactured smart grid-ready, meaning they can be enrolled in a virtual power plant to sell
energy back to the grid. The capabilities are offered through Generac Grid Service’s Concerto platform.
Smart EV charging equipment can utilize grid communications to vary vehicle charging speeds based on
grid conditions. Vehicle-to-grid charging takes it one step further by allowing electricity stored in EVs to be
sent back into the grid during times of need. 6 Deploying a wider range of connected equipment and DER
that enables load flexibility is anticipated to increase the flexible capacity of the grid, allowing for a
seamless transition to an electric grid powered by variable renewable sources.

6
Guidehouse Insights, VPP Applications for Managed EV Charging Platforms, 4Q 2020,
https://guidehouseinsights.com/reports/vpp-applications-for-managed-ev-charging-platforms.

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 Load Flexibility Valuation Is Critical to Grid Reliability

Published 4Q 2021

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