Sustainability Atlas
Clean Energy·16 min read··...

Explainer: Energy efficiency & demand response — what it is, why it matters, and how to evaluate options

A practical primer: key concepts, the decision checklist, and the core economics. Focus on unit economics, adoption blockers, and what decision-makers should watch next.

In 2024, demand response programs in the United States curtailed over 60 gigawatts of peak electricity demand—equivalent to removing approximately 45 million homes from the grid during critical periods—yet less than 5% of eligible commercial and industrial facilities actively participate in these programs. This disconnect between available capacity and actual adoption represents one of the most significant missed opportunities in the American energy transition, with an estimated $15-20 billion in annual savings left unrealized.

Energy efficiency and demand response (EE&DR) represent the "first fuel" of the clean energy transition: reducing energy consumption and shifting load patterns costs less than building new generation capacity. For decision-makers navigating decarbonization mandates, volatile utility rates, and grid reliability concerns, understanding the unit economics, adoption barriers, and emerging trends in EE&DR has become essential for strategic planning.

Why It Matters

The significance of energy efficiency and demand response extends far beyond simple cost savings—it addresses fundamental challenges in grid reliability, emissions reduction, and economic competitiveness that will define America's energy landscape through 2030 and beyond.

From a grid perspective, the stakes have never been higher. The Federal Energy Regulatory Commission (FERC) reported that peak demand in the United States grew by 4.7% between 2023 and 2025, driven largely by electrification of transportation, data center expansion, and increased cooling loads from climate change. The Electric Reliability Council of Texas (ERCOT) alone experienced 12 days in 2024 where demand exceeded 80 GW, compared to just 3 days in 2020. Without demand-side flexibility, meeting this growing peak requires billions in new peaking generation—typically natural gas plants that operate only hundreds of hours per year while contributing disproportionately to emissions.

The economics are compelling: the Lawrence Berkeley National Laboratory estimates that each megawatt of demand response capacity costs $50-150 per kW-year to procure, compared to $200-400 per kW-year for new peaking generation. At scale, this differential translates to tens of billions in avoided infrastructure investment. The American Council for an Energy-Efficient Economy (ACEEE) calculated that energy efficiency investments delivered $1.3 trillion in cumulative savings to U.S. consumers between 2010 and 2024, with industrial participants averaging 15-25% reductions in energy intensity.

For corporate decision-makers, the regulatory landscape has shifted dramatically. The SEC's climate disclosure rules, finalized in 2024, require public companies to report Scope 1 and Scope 2 emissions, creating direct accountability for energy consumption. Simultaneously, utilities across 38 states have implemented time-of-use or demand-based rate structures that can cause commercial electricity costs to vary by 300% depending on when and how energy is consumed.

Key Concepts

Understanding EE&DR requires familiarity with several interconnected concepts that shape program design, economics, and participation decisions.

Energy Efficiency refers to reducing the total amount of energy required to perform a given task or deliver a service. Unlike conservation (which implies doing without), efficiency maintains or improves output while reducing input. Industrial motor upgrades, building envelope improvements, LED lighting retrofits, and high-efficiency HVAC systems exemplify efficiency measures. The key metric is energy intensity: energy consumed per unit of output (BTU per square foot, kWh per widget produced, or MMBTU per dollar of revenue).

Demand Response (DR) involves temporarily reducing or shifting electricity consumption in response to grid conditions, price signals, or reliability events. Unlike efficiency (which provides persistent savings), demand response provides flexibility—the ability to modulate load up or down based on system needs. DR programs typically fall into three categories: emergency/reliability programs (triggered during grid stress), economic programs (responding to wholesale price signals), and ancillary services (providing frequency regulation or reserves).

Transition Plans in the EE&DR context refer to the strategic roadmaps organizations develop to systematically reduce energy consumption and enhance demand flexibility. A robust transition plan identifies baseline consumption, sets reduction targets, prioritizes interventions by payback period, and establishes monitoring protocols. The Science Based Targets initiative (SBTi) requires companies committing to net-zero to demonstrate credible transition plans with interim milestones.

OPEX (Operational Expenditure) considerations dominate EE&DR economics because most efficiency measures and all demand response participation affect ongoing operational costs rather than capital budgets. For facilities managers, converting energy savings into OPEX reductions often proves more straightforward than securing CAPEX for efficiency investments—a dynamic that shapes financing approaches and vendor relationships.

Demand Charges represent the portion of commercial electricity bills based on peak power draw (measured in kW) rather than total consumption (measured in kWh). In many utility territories, demand charges constitute 30-70% of commercial electricity costs, creating powerful incentives for load management. A facility that draws 500 kW for 15 minutes during peak periods may pay $5,000-15,000 monthly in demand charges alone, regardless of total energy consumption.

Grid Reliability encompasses the ability of the electrical system to meet demand continuously while maintaining voltage and frequency within acceptable bounds. As variable renewable generation increases and extreme weather events intensify, grid operators increasingly depend on demand-side resources to maintain reliability without overbuilding supply-side capacity.

Distributed Energy Resources (DERs) include behind-the-meter generation, storage, and controllable loads that can provide grid services. The integration of DERs with demand response enables sophisticated strategies: batteries can store cheap off-peak power and discharge during high-price periods, while smart thermostats can pre-cool buildings before afternoon peaks.

What's Working and What Isn't

What's Working

Automated Demand Response (Auto-DR) in Commercial Buildings: The proliferation of building automation systems and OpenADR communication standards has enabled seamless, automated participation in demand response programs. Pacific Gas & Electric's Auto-DR program enrolled over 2,500 commercial facilities by 2024, achieving 95%+ compliance rates during events—far exceeding the 60-70% compliance typical of manual programs. The automation eliminates human latency and decision fatigue, while allowing operators to set boundaries that protect critical operations.

Industrial Process Optimization Through AI: Machine learning applications in industrial facilities have demonstrated 8-15% energy reductions without capital investment. Companies like Kelvin and Verdigris deploy algorithms that identify inefficiencies invisible to human operators—compressor sequencing, HVAC scheduling, and process timing optimizations that compound into significant savings. Constellation Energy reported that AI-driven optimization across their industrial customer portfolio delivered $47 million in avoided energy costs during 2024.

Performance-Based Efficiency Programs: Utilities and ESCOs have refined performance contracting models that guarantee savings. The Energy Services Coalition tracked $8.2 billion in active performance contracts across the United States in 2024, with public sector entities (schools, hospitals, government buildings) representing 65% of the market. These contracts shift technology and performance risk to service providers while allowing customers to fund improvements through guaranteed savings.

Community Choice Aggregation (CCA) Innovation: CCAs in California, Illinois, and Massachusetts have emerged as laboratories for innovative demand response programs. Marin Clean Energy's demand response portfolio reached 45 MW of enrolled capacity in 2024, with residential participants receiving $50-100 annual credits for allowing smart thermostat adjustments during approximately 15 event hours per year.

What Isn't Working

Split Incentive Problems in Leased Properties: The disconnect between building owners (who pay for efficiency upgrades) and tenants (who pay utility bills) continues to suppress investment in leased commercial and multifamily properties. The Institute for Market Transformation estimates that split incentives affect 85% of commercial office space and result in 20-30% higher energy intensity compared to owner-occupied buildings. Green lease provisions that share savings between parties remain rare despite a decade of advocacy.

Complex Utility Rate Structures and Enrollment Processes: Many demand response programs require 12-18 months of historical data, custom metering installations, and complex enrollment applications. Small and medium businesses—which represent 99% of commercial facilities—lack the staff expertise to navigate these requirements. A 2024 survey by the Smart Electric Power Alliance found that 62% of commercial customers were unaware of available demand response programs, while 78% of those aware cited "complexity" as the primary barrier to participation.

Inadequate Compensation for Flexibility Value: Wholesale market designs in most regions undervalue demand-side flexibility. While FERC Order 2222 (requiring RTOs to allow DER aggregations to participate in wholesale markets) took effect in 2024, implementation has been uneven. PJM's capacity market clearing prices of $28.92 per MW-day in 2024 provide minimal economic incentive for demand response investment, particularly when transaction costs and measurement/verification requirements are considered.

Behavioral Persistence Challenges: Programs relying on behavioral change without automation typically see savings decay within 6-18 months. A meta-analysis of 156 behavioral energy programs published in Nature Energy found that average savings declined from 5.2% in the first year to 1.8% by year three absent ongoing engagement or technological lock-in.

Key Players

Established Leaders

Enel X (formerly EnerNOC): The largest demand response aggregator in North America, managing over 6 GW of enrolled demand response capacity across commercial, industrial, and residential segments. Their platform integrates battery storage, EV charging, and HVAC controls for comprehensive flexibility solutions.

Schneider Electric: A global leader in building automation and energy management, Schneider's EcoStruxure platform serves over 500,000 buildings worldwide. Their advisory services and technology solutions span the full EE&DR value chain from audits through ongoing optimization.

Honeywell: Through their Building Technologies division and Honeywell Forge platform, Honeywell delivers integrated building management and demand response capabilities. Their 2024 acquisition of Carrier Global's commercial HVAC controls business strengthened their position in smart building optimization.

CPower Energy Management: A pure-play demand response and distributed energy aggregator managing 5.5 GW across all major wholesale markets. CPower specializes in complex industrial loads and has pioneered participation models for data centers and water treatment facilities.

Itron: The leading provider of advanced metering infrastructure (AMI) and grid analytics, Itron's technology underpins most utility demand response programs. Their Distributed Intelligence platform enables real-time load control and measurement at the meter level.

Emerging Startups

Leap: A San Francisco-based platform connecting DERs to wholesale energy markets, Leap raised $22 million in Series B funding in 2024. Their API-first approach enables smart device manufacturers and aggregators to monetize flexibility without building market expertise.

OhmConnect: Pioneering residential demand response in California, OhmConnect has enrolled over 500,000 households and demonstrated that gamification and direct incentives can drive meaningful residential load flexibility. They expanded to Texas in 2024.

Voltus: An enterprise-focused distributed energy platform that aggregates industrial and commercial loads for wholesale market participation. Voltus manages 3 GW of capacity and has raised over $100 million to date.

Arcadia: While primarily known for community solar, Arcadia's Arc platform provides the data infrastructure enabling demand response programs at scale. Their acquisition of Urjanet in 2023 created the largest utility data aggregation platform in North America.

Gridmatic: Using AI to optimize battery storage dispatch and demand response, Gridmatic's technology maximizes revenue from flexibility assets across multiple value streams simultaneously.

Key Investors & Funders

Breakthrough Energy Ventures: The Bill Gates-backed fund has invested over $150 million in demand-side flexibility and efficiency companies, including Series B investments in multiple building technology startups.

Congruent Ventures: A climate-focused VC with deep expertise in grid-edge technologies, Congruent has backed Leap, Copper Labs, and other DR-adjacent companies with combined investments exceeding $80 million.

U.S. Department of Energy (DOE): Through the Office of Electricity and Building Technologies Office, DOE has deployed over $500 million since 2022 in grid flexibility R&D, demonstration projects, and state energy program support.

Energy Impact Partners (EIP): A strategic investor backed by major utilities, EIP's portfolio includes numerous demand response and efficiency technology companies, providing capital alongside utility customer access.

NYSERDA (New York State Energy Research and Development Authority): The nation's most active state energy agency, NYSERDA has committed $1.4 billion to demand-side programs through 2030, including substantial support for emerging technology demonstration.

Examples

1. Walmart's Enterprise-Wide Demand Response Program: Walmart enrolled over 4,500 stores and distribution centers in demand response programs across 35 utility territories, creating one of the largest private sector demand response portfolios in the United States. During the August 2024 heat wave that stressed grids from Texas to the Mid-Atlantic, Walmart reduced aggregate consumption by 340 MW during peak hours—equivalent to the output of a small power plant. The company reported $23 million in demand response payments and avoided demand charges during 2024, while reducing peak-coincident emissions by approximately 180,000 metric tons of CO2.

2. California's Flex Alert Success During September 2024 Grid Emergency: When CAISO declared a Stage 2 grid emergency on September 4, 2024, the state's demand response infrastructure delivered 2,100 MW of load reduction within 15 minutes. Automated commercial/industrial programs contributed 1,400 MW, while residential programs (primarily smart thermostats) added 700 MW. The response avoided rolling blackouts that would have affected 500,000+ customers, demonstrating that demand-side resources can provide reliability services previously available only from generation.

3. Duke Energy's PowerPair Residential Program in North Carolina: Duke Energy's combination of rooftop solar, battery storage, and demand response—branded as PowerPair—reached 15,000 residential participants by late 2024. The integrated approach allows Duke to call on 45 MW of dispatchable load reduction during summer peaks while providing participants with backup power and average annual bill savings of $680. The program's cost per kW of flexible capacity ($95/kW-year) significantly undercuts Duke's avoided cost of new peaking generation.

Action Checklist

  • Conduct a comprehensive energy audit identifying baseline consumption, peak demand patterns, and efficiency opportunities with simple payback periods under 3 years
  • Map all utility rate structures affecting facilities, quantifying demand charge exposure and time-of-use differentials that create demand response value
  • Inventory existing building automation, HVAC controls, and metering infrastructure to assess demand response readiness and identify upgrade requirements
  • Evaluate utility and third-party demand response programs available in each operating territory, comparing compensation structures, event frequency, and enrollment requirements
  • Develop load curtailment protocols identifying which loads can be interrupted, for how long, and under what conditions without impacting operations
  • Install interval metering (15-minute or finer resolution) to enable demand response verification and provide data for optimization
  • Integrate efficiency and demand response considerations into capital planning processes, ensuring new equipment purchases include connectivity and controllability features
  • Establish internal carbon pricing or shadow pricing that values peak demand reduction alongside total consumption
  • Create cross-functional governance linking facilities, procurement, sustainability, and finance teams around EE&DR objectives and shared metrics
  • Pilot automated demand response with one facility before enterprise rollout, documenting operational impacts and refining curtailment protocols

FAQ

Q: How do demand response payments compare to the operational disruption costs for typical commercial facilities? A: For most commercial and light industrial facilities, demand response payments of $50-150 per kW-year translate to $5,000-30,000 annually for a facility with 100-200 kW of curtailable load. Operational disruption costs depend heavily on the nature of operations: a retail store might experience minimal impact from HVAC setpoint adjustments during the 10-20 event hours annually, while a data center or healthcare facility might find any interruption unacceptable. The key is identifying "sheddable" loads—typically HVAC, lighting in unoccupied areas, EV charging, and non-critical industrial processes—that can reduce consumption without affecting core operations. Facilities with thermal mass (large buildings, cold storage, water treatment) often provide demand response at near-zero marginal cost by pre-conditioning before events.

Q: What is the typical payback period for energy efficiency investments in commercial buildings? A: Payback periods vary dramatically by measure and building type. LED lighting retrofits typically achieve 1-3 year payback with utility rebates, while HVAC system replacements range from 5-12 years depending on the incumbent system's efficiency and local energy prices. Building envelope improvements (insulation, windows) often require 10-20 years for pure energy payback but may be justified by comfort, acoustics, or maintenance benefits. The ACEEE recommends prioritizing measures with <5 year payback for standard investments, while using performance contracts or green bonds for longer-payback deep retrofits. Importantly, efficiency and demand response investments should be evaluated together: reducing total consumption lowers the baseline from which demand charges are calculated, while demand response directly attacks peak charges.

Q: How is FERC Order 2222 changing demand response participation in wholesale markets? A: FERC Order 2222, which required regional transmission organizations to allow distributed energy resource (DER) aggregations to participate in wholesale markets by 2024, represents a fundamental shift in who can provide grid services. Previously, demand response participation required minimum thresholds (often 100 kW or more) and direct utility relationships. Under Order 2222, aggregators can combine residential smart thermostats, commercial building controls, EV chargers, and behind-the-meter batteries into virtual power plants that bid into capacity, energy, and ancillary services markets. Implementation has been uneven—PJM and NYISO have moved faster than MISO and SPP—but the direction is clear: smaller distributed resources will increasingly compete with central generation for grid service revenues.

Q: What should organizations prioritize: efficiency investments or demand response enrollment? A: The strategic answer is both, but sequencing matters. Efficiency investments should generally precede demand response optimization because they reduce baseline consumption (lowering bills regardless of demand response participation) and often reveal the controllable loads that make demand response valuable. However, demand response enrollment can begin immediately with existing infrastructure—most commercial buildings have enough HVAC flexibility to participate in basic programs without capital investment. Organizations should view efficiency as a capital investment with permanent returns and demand response as an operational optimization that generates ongoing revenue. Mature programs integrate both: efficient buildings with smart controls provide the best combination of low baseline consumption and high-value flexibility.

Q: How do split incentives in leased properties affect EE&DR adoption, and what solutions exist? A: Split incentives—where building owners pay for improvements but tenants receive utility savings—suppress EE&DR investment in the approximately 50% of commercial space that is leased. Solutions include green leases (which explicitly allocate efficiency investment costs and savings), utility on-bill financing (where efficiency investments are repaid through utility bills, following the meter rather than the tenant), and PACE (Property Assessed Clean Energy) financing that attaches to the property. Some jurisdictions have mandated building performance standards that require owners to achieve efficiency benchmarks regardless of tenant status, effectively overriding split incentives through regulation. The most sophisticated property owners now view efficiency as a competitive advantage for tenant attraction and retention, recouping investments through higher rents and lower vacancy rates.

Sources

Topics

efficiencydemandtransition planopexdemand chargesgrid reliabilityDER

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