Octopus Energy targets Demand Response in ERCOT to residential sector

Reposted from Power Markets Today

DR has traditionally focused on larger C&I customers, but in ERCOT, the residential sector is the largest, peakiest part of demand and the Texas PUC is working to grow DR there. Octopus Energy worked on that since entering the ERCOT market last year (PMT, Oct-13) and we spoke with its US CEO Michael Lee Friday on the subject.

The "traditional business model" in Texas for residential customers is to draw them in with low introductory rates and then hope they ignore it when those go up after a set time period, Lee told us. "We think this is a very under-loved segment in the market," Lee said. "Modern retailers take residential customers for granted and try to extract a lot of money out of them. We think this extractive relationship is quickly changing in the new world for retail energy."

The best way to do that is to share value creation and Octopus has found that over 30% of its customers are excited to take part in DR, which helps them lower their overall bills. The firm's notifications on DR events produce the most engagement out of any of its communications with customers, he added.

The PUC has worked on growing DR in response to the outages this February and the retailer that captured the most headlines then was Griddy, which passed through $9/KWH prices for a work week to its customers who had electricity and that led to absurd bills and the firm's ultimate dissolution. The legislature passed HB 16 as part of its reforms, which prohibits direct pass through of wholesale prices to small customers.

That legislation did not do Octopus any favors, but Lee said the firm can still help grow DR with the new restrictions. "I think what we had in February was an extreme event and it wasn't just Griddy who had issues," he added.

Some municipal power agencies racked up huge bills and went bankrupt, while many other small retailers went under and even the largest firms in the power sector suffered significant losses. February was really a regulatory failure for having prices at such a high level for so long, Lee said.

"There are ways to do price signals that give customers benefits while also protecting them," he added. "We do that in other markets where we put a cap on the exposure that customers are open to because at the end of the day, there are certain types of hedges and options we can buy to insulate ourselves and our customers."

While opportunity exists to use price signals for residential DR, Octopus uses other strategies to help its customers save. In August, the firm treated some customers to drinks and food at a bar in exchange for them showing a picture of their thermostat at 80 degrees, Lee said.

One way customers can avoid the highest prices in Texas is to precool their house so their air conditioners do not need to run at full output when prices are spiking in the late afternoon. That strategy also would benefit from being coupled with efficiency as precooling is easier and lasts longer the more insulated homes are, Lee said.

While the recent legislation did not help, Texas does have clear benefits for DR including the fact that ERCOT is an energy-only market and electricity is a big bill for customers. Another key factor in Texas is that load is settled against actual meter reads, which means it is easy for Octopus to see and get credited for DR.

In the restructured markets of the Northeast, customers are often settled on an average load profile, so it is impossible to see or benefit from DR in those markets, Lee said.

One area the PUC could change would be to grow the enrollment of programs such as ERCOT's emergency response service, which has historically been capped in MWs and limited to large customers, Lee said. Beyond February's events, another reason to grow residential DR is the fact that in Texas and elsewhere, renewables are becoming a growing presence on the supply side and the resource can effectively be a much cheaper version of storage.

"Over in the UK, we load shift every single day 50% more megawatt-hours than the largest battery simply through demand response and dynamically managing load," Lee said. "And it doesn't cost a dollar of 'CapEx' [capital expenditures] to do that, purely just software. And we give our customers all of that benefit, which creates super-low rates."