demand management

Energy demand management

Energy demand management, also known as demand side management (DSM), entails actions that influence the quantity or patterns of use of energy consumed by end users, such as actions targeting reduction of peak demand during periods when energy-supply systems are constrained. Peak demand management does not necessarily decrease total energy consumption but could be expected to reduce the need for investments in networks and/or power plants.

The term DSM was coined in the 1970s when the 1973 energy crisis and 1979 energy crisis suggested that some of the most convenient fossil fuel energy reserves, such as crude oil, were approaching exhaustion (see article on Hubbert peak).

How it works

Ideally, energy use would be optimised by supply and demand interactions in the market. For electricity use in particular, the price paid on the market is often regulated or fixed, and in many cases does not reflect the full cost of production. Electricity use can vary dramatically on short and medium time frames, and the pricing system may not reflect the instantaneous cost as additional higher-cost ("peaking") sources are brought on-line. In addition, the capacity or willingness of electricity consumers to adjust to prices by altering demand (elasticity of demand) may be low, particularly over short time frames. In many markets, consumers (particularly retail customers) do not face real-time pricing at all, but pay rates based on average annual costs or other constructed prices.

Various market failures rule out an ideal result. One is that suppliers' costs do not include all damages and risks of their activities. External costs are incurred by others directly or by damage to the environment, and are known as externalities. Theoretically the best approach would be to add external costs to the direct costs of the supplier as a tax (internalisation of external costs). Another possibility (referred to as the second-best approach in the theory of taxation) is to intervene on the demand side by some kind of rebate.

Energy demand management activities should bring the demand and supply closer to a perceived optimum.

Governments of many countries mandated performance of various programmes for demand management after the 1973 energy crisis. An early example is the National Energy Conservation Policy Act of 1978 in the U.S., preceded by similar actions in California and Wisconsin in 1975.

Logical foundations

Demand for any commodity can be modified by actions of market players and government (regulation and taxation). Energy demand management implies actions that influence demand for energy.

Reducing energy demand is contrary to what both energy suppliers and governments have been doing during most of the modern industrial history. Whereas real prices of various energy forms have been decreasing during most of the industrial era, due to economies of scale and technology, the expectation for the future is the opposite. Previously, it was not unreasonable to promote energy use as more copious and cheaper energy sources could be anticipated in the future or the supplier had installed excess capacity that would be made more profitable by increased consumption.

In centrally planned economies subsidising energy was one of the main economic development tools. Subsidies to the energy supply industry are still common in some countries.

Contrary to the historical situation, energy prices and availability are expected to deteriorate. Governments and other public actors, if not the energy suppliers themselves, are tending to employ energy demand measures that will increase the efficiency of energy consumption.

See also

External links

References

  • Loughran, David S. and Jonathan Kulick: "Demand-Side Management and Energy Efficiency in the United States", The Energy Journal, Vol. 25, No. 1. 2004 .

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