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Since the inception of demand response (DR) in the mid-1970s, electricity consumers in the industrial sector have represented an important target client in the U.S. As DR is increasingly adopted in other parts of the world, industrial facilities will also become a critical customer segment in other countries, finds a new report from Pike Research.

Typically, industrial energy usage is more complex than in commercial sites, the report explains. While the commercial sector presents excellent prospects for DR because of the sheer number of building sites in the world, the industrial sector offers unique opportunities because it is able to contribute unusually large amounts of load reduction - often from just one plant and in one DR event. As a result, the report adds, large or very large industrial or manufacturing sites have been considered the low-hanging fruit by DR providers.

There is a diverse set of industries that are involved in DR programs. They are represented by many discrete and process manufacturers, such as producers of cement, chemicals, steel, paper and pulp, food and beverages, information technology (IT), construction and building materials, and much more.

In addition, oil refineries and agricultural plants potentially have a big role to play in industrial DR. Because irrigation systems require a significant consumption of electricity, an agricultural facility can reduce a great deal of load. For example, one irrigation site may have hundreds of pumps, each able to reduce load by 30 kW to 50 kW during a DR event.

Market opportunity
Pike Research says that although there is no official data about the DR participation rate of industrial customers in the U.S. or elsewhere in the world, it is reasonable to assume that their overall contribution of load curtailment is disproportionately larger than the commercial customer segment.

The Federal Energy Regulatory Commission (FERC) does not examine DR participation or load curtailment for commercial and industrial (C&I) customers separately from residential customers, but the report notes that the commission’s most recent data from the 2012 Assessment of Demand Response and Advanced Metering report indicates that about 78% of potential peak reduction can be attributed to the C&I sector, compared to just 22% of potential load curtailment from residential customers.

Similar patterns in which the C&I sector accounts for a majority of peak reduction - especially from industrial customers - are also expected in Europe and other regions in the world.

To a great extent, DR participation by industrial consumers depends on the flexibility of their production process. One key question these customers ask is: Which parts, and how much of the production line can be interrupted to reduce energy usage? Another key question is: What resources do I have to store power while I am shutting down or reducing power?

In some instances, process manufacturers, such as food and beverage companies, can potentially go without power for many hours, since they usually run a cold storage operation with buried refrigerators that only begin to thaw after many hours without electricity.

However, discrete manufacturers tend to have greater difficulty participating in load curtailment because they usually have less flexibility to modify their processes; typically, they have just two options - on or off - and to stop a process can be costly. Thus, Pike Research says factory plant managers must weigh the economic value from DR program incentives against the potential loss of production and profit margins. With a focus on the bottom line, their aim is to provide the most load curtailment possible with minimum impact on operation for maximum financial gain.

Because of its long history of DR and early adoption of automated DR (ADR), the U.S. has a strong lead over other countries with respect to the use of industrial DR. Yet, 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 industrial DR programs.

Pike Research estimates that, globally, industrial peak load curtailment will amount to 26,849 MW this year and will increase to 62,084 MW in 2019, at a compound annual growth rate of almost 15%. The North American region represents the lion’s share of industrial peak reduction throughout the forecast, though the other regions are contributing an increasing share of load curtailment over time with faster growth rates than North America, mainly because they are starting at a smaller base.

Market forces
Although industrial consumers have many reasons to adopt DR, Pike Research says the financial incentives that are provided by a utility, grid operator or curtailment service provider (CSP) to reduce or shift electricity consumption in response to grid reliability needs are among the most significant drivers.

These financial bonuses often represent a substantial annual revenue stream to industrial customers, especially among those who are able to curtail a large amount of load. In fact, the report says that, in some cases, it is financially more profitable for a plant manager to disrupt the production line on a temporary basis in order to curtail load during a DR event than to continue normal manufacturing operation.

According to the report, utilities, grid operators and CSPs will pay industrial DR participants almost $1.8 billion this year, increasing to about $4.3 billion in 2019.

Another important motivating factor to curtail load is to avoid paying high demand charges on the utility bill and achieve energy cost savings from load reduction, which can amount to 10% to 15% of electricity cost. For many industrial facilities, electricity consumption represents the highest operational cost and is sometimes higher than their payroll.

The report says that technological advancements, such as more effective control and energy management systems, as well as new software and hardware development to enable ADR - including open standards through OpenADR or Smart Energy Profile - have also played a major role in fueling industrial DR growth.

On the other hand, Pike Research notes, the industrial DR market is also facing negative market forces. Perhaps the most serious inhibiting factor has been the increasing supply and subsequent drop in prices of natural gas in the U.S. It has put negative pressure on the DR market by alleviating the demand for electricity, resulting in a drop in electricity prices and DR resources.

Other barriers to industrial DR growth have been the equipment cost of retrofitting a manufacturing plant for DR (especially ADR), the lack of manufacturing process flexibility to participate in load curtailment, and simply a lack of understanding of the risks and benefits of DR, the report adds.

Competitive landscape
Because of its maturity, the industrial DR market in the U.S. consists of many incumbent players that have served this market for a long time. However, as the market has evolved and undergone substantial changes during the last 10 years, due to the development of new DR programs along with the advancement of new technology, it has also begun to attract new entrants and niche vendors with expertise in a particular area that may be able to enable DR in a more efficient and cost-effective way.

According to the report, the newer startups tend to focus on doing less with more as they seek to generate revenue quicker and cheaper. Online software-as-a-service (SaaS), mobile technology, interoperability through open standards, and embedding tools with the technology of other vendors are some of the new strategies adopted by both newcomers and some of the incumbents.

CSPs play a critical role in the industrial marketplace, aggregating and managing load from a large number of industrial customers that have chosen to participate in DR. While EnerNOC and Constellation are large, leading players in this market, Pike Research says smaller and younger companies, such as Canada-based Rodan Energy, U.K.-based KiWi Power and France-based Energy Pool, are strengthening their presence - especially in Europe in the case of KiWi Powers and Energy Pool.

To be competitive in the industrial DR market, Pike Research says vendors must especially hone their capabilities in the following areas:

- Establishing a deep understanding of the customer’s operation and processes in order to find the best opportunities for load curtailment or adjustment. In almost every case, the report says, it is necessary to develop a unique load curtailment strategy that can provide the best financial returns without an adverse effect on the business.

- Continuously engaging industrial customers with new solutions and opportunities that can bring significant financial rewards by participating in load curtailment.

- Preparing to serve the industrial small- and medium-size business market, as this segment is expected to offer an increasing opportunity for DR vendors in the foreseeable future.

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

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