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What next for demand side response?

Felicity Carus

Britain's mild autumn so far has been a pleasant surprise for most of us, but a nasty shock for the UK electric grid operator. Although the weather forecasters may soon get their predicted freezing gales and heavy snowfall, a chill wind has already blown industry expectations off course when unexpected plant shortages sent wholesale prices rocketing an average of £60/MWh to £2,500MWh.

It's a far cry from the confidence of the summer. In June, the UK's grid operator warned that winter 2015 / 2016 might be the most constrained in 10 years, with only 1.2% of spare capacity in the system, down from 4.1% last year.

But just as the weather is set to get colder, those margins are clearly too close for political comfort. David Cameron called an emergency meeting to discuss the concerns about having sufficient energy to keep Britain's lights on this winter. But worse may be yet to come next year, when around 5GW of the 45GW that supplied the peak demand in late October comes offline in March under EU regulations, forcing coal-fired power stations to close.

Cordi O'Hara, National Grid's director of market operations, said: “Electricity margins for that coldest, darkest half hour of winter are currently tighter than they have been, due to power stations closures." However, the National Grid, which operates the high-voltage electricity transmission system, remained confident that it could keep Britain's lights on - but now, it seems, at an unexpectedly high cost.

National Grid's response so far has been to pay utilities companies such as Centrica and SSE to keep reserve capacity available, as well as paying large energy users to reduce their consumption. These schemes will provide an additional 2.6 GW of capacity and could increase the available margin to 5.1%, it estimated.

But this month's events were an early warning for National Grid. Peak demand usually happens in the winter months - at around 55GW - and the UK's incentives for demand reduction, along with the economic crisis triggered in 2008, seem to be working.

From 2007 to 2012, the UK’s peak electricity demand fell from 61.5GW to 57.5GW. Meanwhile, total capacity keeps increasing. At the end of 2014 capacity reached 85GW - 25GW of it from renewables. Although that pace of growth for renewables may change with the dramatic reduction in subsidies for solar and onshore wind, the actual value captured from these intermittent sources is much less than is currently being realised.

Most often, demand side response temporarily brings down power demand at peak times, say in factories, to help balance the system when it's under strain. Fossil fuel generation has followed the fairly predictable pattern of demand - peaks in industry during the day followed by residential peaks in the evening, with higher demand most likely to occur in the winter months. But the increase in renewable generation means that the traditional pattern is no longer appropriate - when the wind picks up at night and no one is using it is often when the wholesale electricity price is lowest.

But steps are being taken in that direction, of flexible load usage. Open Energi helps commercial and industrial users manage their demand - it's a particularly useful service for energy-intensive users who face additional charges if their demand coincides with so-called triad periods on the grid, which can see wholesale prices jump suddenly to £15,000/MW.

Dave Hill, business development director for retail at Open Energi, said: "Our journey began when we were looking to try to balance the system from the demand side using domestic refrigeration - the vision was you can take advantage of small amount of storage that exists in every day appliances without making any impact on the consumer happiness or productivity.

"We did a big trial to create an economic model to give the consumer the incentive. But we found that the ability to integrate into lots and lots of flexibility on a single site was much more economical.

"Domestic demand is 30% of the total demand in the UK, but it contributes to 50% of peak load. But commercial and industrial users make the biggest impact on balancing the grid as well as facilitating renewable integration – there's much more volume and it's easier to build an economic proposition."

In the US, the focus has very much been on the commercial & industrial market, since the 1970s when the energy crisis triggered new approaches to demand reduction.

Amy Mount and Dustin Benson, policy researchers at the Green Alliance, note in a recent paper that: "In the PJM market on the east coast of the United States, a market with three times the electricity demand of the UK, 15 GW, or 9% of total capacity in 2015-16, will be provided by DSR. Demand response kept the lights on during last year’s ‘polar vortex’ in the US, when old coal power stations stopped because their coal stacks had frozen solid."

In the UK, they say, the electricity market would save over £2 billion by 2025 if power stations were made to compete against electricity saving, such as rewarding companies for not using electricity, or so-called megawatts.

Although the value of this market is difficult to predict, FTI Consulting estimates it could be in the region of €50 billion a year by 2030 across the EU.

In addition to the increased market penetration of renewables, there is another gamechanger on the horizon: the smart grid.

Ben Kellison, director of grid research, said that digital communications for the electricity system improvements in communications could unlock potential in the residential market: "If you go back 5 or 10 years there are a lot of utility programmes in the US that just turned off the tap on whatever systems were available -  if it's water heating or air conditioning - four times a year depending on the event. " He also states, "Communications between devices and back office software now provide an opportunity to target more of those reductions daily or weekly."

In the UK, some 53 smart meters are supposed to be installed in homes and businesses by 2020. However, that target looks likely to be missed - and in any case, the real value of excess renewable capacity can only be realised if they are settled half-hourly to correspond with the price movements on the wholesale market.

However, another potential gamechanger may be in the form of policy. The capacity market is a policy intervention under the Electricity Market Reform under the last coalition government.

Every year, an auction is held to establish a market price based on estimates of how much electricity will be needed in four years' time.

For example a 2GW power station bids in capacity at £20/kW - if the auction clears at £30/kW the power station would win a contract to supply electricity, earning it £60m in addition to selling electricity on the wholesale market.

Fossil fuel generators, nuclear power stations, pumped storage, hydro, interconnectors and demand side response are all eligible to compete in the market. The total value of the capacity contracts awarded in the first auction in December 2014 was £1 billion - but 94% was from existing generation, mostly fossil fuel, and only 0.4% of the contracts were awarded to demand side response management companies.

At least part of the reason is that DSR can only bid on 1 year contracts, while generating capacity can bid for 15 year contracts. Even more perversely, the capacity market has triggered an additional 1.5GW of diesel generation - the most polluting form of electricity generation.

Even Lark Energy, a solar-power developer, is bidding for subsidies to build 18MW of diesel generation on its Ellough project in Suffolk.

Mount and Benson note that "Current market biases create a perverse effect: the UK pays to keep polluting coal-fired power stations in operation, via the capacity market, and then pays again for low carbon technology to displace them, via contracts for difference for low carbon power."

Although the current design of the capacity market may well distort, a good capacity mechanism should stimulate investment in new technologies.

But the policy signals have to be strong to reassure investors, said Kellison. "If there is no capacity mechanism, there's no certainty in revenues for these companies," he said. In addition, countries like Germany have such high market penetration of renewables that their wholesale market has become far too volatile. "The cost of energy is all over the place day to day and when there's a lot of renewables online there's not a strong pricing mechanism to ramp up or down."

Electricity supplier and commercial and industrial (C&I) consumers are used to this cycle of forecasting winter demand. But this year was different and marked a distinct change in tone.

But more certainty may be on its way - although perhaps not in time for a winter energy crisis. This summer, the National Grid estimated that demand side measures will play a role in security of electricity supply by 2030 at least half the time, starting with the C&I sector before establishing itself in the domestic sector.

"For me it was like a civil rights moment," said Hill. "I work for a company and we sell a product and to some degree I stand on a soap box and preach. But it felt like a monumental moment when demand side participation became seen as the answer to these trilemma concerns of carbon emission reductions, security of supply and affordability.

"National Grid has given a huge amount of credibility and more certainty that it won't just buy capacity from a coal fired power station instead."

Since the energy crisis in the 1970s in the US led to the creation of a demand response mechanism, perhaps all we need is a cold winter to precipitate change for this emerging market.


Felicity Carus is a communications professional based in San Francisco, California. She previously worked as a journalist at the Guardian and now freelances as a specialist author in the area of European and US energy policy & finance.

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