Smart Grid Demand Response: Schneider Electric Reveals Ambitious Plans to Create Virtual Power Plants

I’ve been by before to give you early warning that French giant Schneider Electric has ambitious and innovative plans to participate in the Smart Grid. Now it has a new initiative to create virtual power plants from commercial and industrial buildings. The program could insert the company right in the middle of the burgeoning Smart Grid demand response market.

The Problem? Follow the Money to Understand

First, the problem. Most commercial leases are written to make tenants responsible for their own energy bills. But that means the building owner has no incentive to make energy efficiency improvements. The owner would have to bear all the costs, but the tenants would get all the savings.

Now, the solution. Schneider Electric will use its expertise to wring out significant efficiencies from large buildings. Next, they will offer up that reduced demand to power marketers and aggregators. Then they will pass some of the resulting savings back to the building owners. Equally important, they will finance all this on their own. The building owners don't have to put up any money; they simply sign up and start reaping the benefits.

Multiple Revenue Streams

Those benefits will flow from multiple revenue streams. Schneider Electric is not content with just the load curtailment payments that are part of most Smart Grid demand response (DR) programs. It also wants to tap into payments for permanent capacity (permanent efficiency improvements rather than temporary reductions during peak events); into programs for white certificate trading; and even into markets for carbon reduction should they materialize in the future.

Company executives tell me they were able to save 1 1/2 cents per kilowatt hour when they applied their new program to Rockefeller Center (pictured here). Next up is an ambitious scheme to do the same thing to downtown Chicago's 200 biggest buildings. The firm thinks it can pull 150 MW out of the current demand of 800 MW.

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Why It Will Be Hard for Competitors to Follow

Few companies could pull this off. First, you need deep experience in everything "behind the meter." Second, you need the ability to retrofit and integrate with legacy systems, especially building controls and HVAC systems. Third, you need the sophistication to offer up the energy savings to third-party firms who can bid it into the markets. And forth, you need a big bankroll to finance the upfront costs in return for a share of the recurring revenues.

The Virtual Power Plant

I was intrigued to see that Schneider Electric thinks of the program as a "virtual power plant." Just as the supply side has baseload, load following, and peaking technologies, so too does Schneider Electric's demand-side analog. For instance, on the supply side the baseload is typically supplied by coal and nuclear. On the demand side, Schneider Electric will produce permanent "baseload" efficiency by substituting better lighting, better refrigeration and more efficient transformers.

Combined cycle gas plants typically provide the load following on the supply side. Schneider Electric's virtual power plant will do the same thing with programmable thermostats and other Smart Grid demand response technologies. Likewise, the supply side “peaking plant” functions will be accomplished by direct load curtailment.

So Schneider Electric intends to create virtual power plants out of commercial high-rises. Next question: Will their customer be the utility? The ISO? The power marketer? Or the building owners?

Answer: All of the above. In the slide below that was presented at the 2010 Distributech conference you can see how Schneider Electric expects to sit in the middle, supplying services to all sides and using its powerful balance sheet to finance the capital costs.

I don't know if Schneider Electric will ever be a major player in the single family residential space. When it comes to the C&I market, I think they are a step ahead of anyone else in understanding a) where Smart Grid demand response is going next and b) how to cash in.

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