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The commercial sector offers a significant opportunity for growth in the demand response (DR) market, and the number of commercial facilities participating in DR programs worldwide will rise from fewer than 600,000 in 2012 to more than 1.4 million sites by 2018, finds a new report from Pike Research.

With a huge number of buildings and facilities, the commercial sector accounts for a substantial amount of electricity consumption and is a major - but underserved - market, the report says. Energy usage is particularly significant during the peak times of summer and winter, when heating, ventilation, and air conditioning (HVAC) systems in these buildings put a strain on the grid.

On a global basis, commercial buildings consume approximately 23% of all electricity usage. During peak times, the power consumption of commercial buildings is substantial and can even exceed 50% of peak loads in the U.S., Pike Research explains.

Commercial buildings have become increasingly sophisticated in their operations with the adoption of new automation technologies and building management systems. As building owners and operators look for ways to better utilize new tools and equipment in order to achieve greater efficiencies, the report says their interest in DR is also growing.

According to Pike Research, the majority of the commercial customers engaging in DR programs to date have been large businesses and institutions. However, utilities, grid operators and curtailment service providers (CSPs) are now turning their attention to the underserved small and medium-sized commercial business and institutional customers. The report says small and medium-sized businesses (SMBs) and institutional customers account for a significant number of facilities and sites that can contribute a considerable amount of load curtailment during a peak event.

Market outlook
Until recently, utilities and grid operators have primarily relied on manual communications and controls for DR in the commercial sector. With the increasing use of automation (automated DR, or ADR) and open-standards-based communications capability, utilities, grid operators and CSPs are not only able to offer DR to a much broader end-user market, but also able to offer the most advanced forms of DR programs, such as ancillary services, the report says.

Moreover, the increasing deployment of advanced smart metering and advanced metering infrastructure (AMI) installations, which Pike Research expects to pick up in the SMB market segment, will also serve to accelerate the commercial DR market. The report says this development will make it considerably easier for businesses and institutions to participate in the economic DR market, where they can take advantage of dynamic pricing to obtain reduced rate structures.

Because of its long history of DR and early adoption of ADR, the U.S. has a strong lead over other countries with respect to the adoption of commercial DR. Yet, Pike Research says there are signs that other countries, such as Canada, the U.K., France, South Africa, Israel, China, Japan, Australia and New Zealand, are either increasing the pace of  adoption or conducting pilots to explore the feasibility and value of commercial DR programs.

Although North America currently leads with a market share of about 37% in terms of the number of commercial buildings participating in DR, Asia Pacific is not far behind, at almost 34% market share, the report says. In 2012, the region accounted for more than 190,000 commercial buildings that are enabled for DR.

Asia Pacific’s comparatively fast economic growth, followed by a building boom in both the commercial and industrial sectors, will fuel the growth of DR among commercial customers in this region, Pike Research predicts. South Korea, which embarked on DR over a decade ago, is seeing particularly strong growth in commercial DR.

In addition, the report examines the commercial DR market from a load-curtailment perspective. Load curtailment in North America is the most significant in the world, with an estimated 9,677 MW in 2012, and Pike Research expects this figure to reach more than 19,562 MW by 2018.

Although load curtailment in Europe is considerably less than in the U.S., the report says it will increase in the coming years, resulting in a compound annual growth rate (CAGR) of about 29% to reach over 1,612 MW in 2018. During the early years of the forecast period, Asia Pacific will have less load curtailment than North America and Europe, but it will catch up and will surpass Europe in 2018. In the Middle East and Africa, the report says commercial load curtailment is estimated to be approximately 678 MW in 2012, led by Africa’s largest power provider, Eskom in South Africa.

The Middle East and Africa region is the second largest in terms of commercial load curtailment after North America. Although Pike Research expects the commercial SMB market segment to become a promising growth opportunity for DR in the future, it is currently a small market.

The best prospect is in North America, where approximately 17% of total load curtailment is generated by SMBs. In other regions, the report notes that DR participation of this market segment is non-existent or minimal, and it will take many years for DR to become a serious focal point among the SMBs in the emerging markets.

According to the report, North America is the largest market, with expected revenue of over $244 million in 2012 and more than $491 million in 2018. Revenue growth is anticipated to be robust with double-digit rates in other regions, as well. Although these growth rates can be, in part, attributed to small starting bases, Pike Research says many countries, such as Japan, and the emerging markets, especially China, are expected to accelerate their DR program implementations for both the commercial and industrial sectors.

Drivers and inhibitors
The commercial market offers promising prospects for DR, as the market forces are positive with just a few inhibiting factors. Pike Research says one of the most important drivers is ADR with open communications functionality through OpenADR, which makes it possible for building owners and facility managers to participate in DR more efficiently, reliably, predictably and faster than before.

Although the cost of retrofitting a building for ADR can be significant, it has become more affordable during recent years, the report adds. ADR will become especially critical in enabling commercial customers to participate in more sophisticated DR programs, such as dynamic pricing and ancillary services.

From the perspective of utilities, this type of program participation will help them integrate intermittent renewables, such as wind and power, into the grid. Another major technological development is the growing installation of smart metering and AMI in the commercial sector, which should eventually also benefit the SMB market, says the report.

According to Pike Research, other important driving market forces are incentives for load curtailment, energy cost savings, reduced utility demand charges, continued growth of building stock, and Leadership in Energy and Environmental Design (LEED) credits. For example, the U.S. Green Building Council recently initiated a LEED Demand Response Pilot Credit program to encourage DR participation by allowing building owners to earn additional LEED credits if they implement semi- or fully automated DR, the report notes.

Negative market forces are primarily caused by the potential cost of retrofitting a building for ADR, though the report says such expenditures might be funded by the utility or a government agency. Another serious inhibitor is the lack of understanding of the cost benefits of DR. If net benefits cannot be demonstrated, DR participation will remain modest among commercial customers, Pike Research warns.

Regulations can also pose a major obstacle. This has been the case in many European Union (EU) nations where there are restrictions for developing certain DR programs. For example, Pike Research says it is almost impossible for third parties, such as aggregators, to enter the electricity markets in numerous EU countries. Many businesses and organizations in the commercial sector are unable to reduce energy usage at peak periods without significantly affecting their daily operation. Supermarkets and food or beverage stores, in particular, face this restriction because they rely heavily on refrigeration.

This article was adapted from Pike Research’s “Demand Response for Commercial Buildings” report. For more information on the report, click here.

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