If households and businesses in Europe were able to adapt their electricity consumption to price signals, it would lower their electricity bills considerably and cut peak demand for electricity by 10%, Yet, the European Commission notes in a recent Communication, that demand response is only emerging “slowly” and that Europe is lagging behind the US and other industrial regions. Brussels says national policymakers and regulators should focus less on providing public support for power production and devote more attention to making demand response happen.
Grégoire Poux-Guillaume, President of Alstom Grid, a supplier of demand response systems, summed up the problem of demand response in an anecdote at a conference in Brussels organised by the Florence School of Regulation last week, on 26 November. He said “My children sometimes ask me, what do you do, daddy? And I tell them, I am building a smart grid, we shave off peaks, so you don’t have build power plants – and we have this technology when the train brakes, we recuperate that energy and charge electric cars with it. And they say – that’s really cool, daddy, when does it start?”
No one really disagrees with the European Commission’s most recent analysis which concluded that demand response is a simple, cost-efficient answer to Europe’s high energy bills, overburdened grids and determination to decarbonise. Yet in practice, demand response is not taking off – not in Europe at any rate.
The fundamental problem, says the Smart Energy Demand Coalition (SEDC), a coalition of stakeholders that promotes demand side action in electricity markets, is historical: “Demand response is a form of balancing capacity, but the electricity regulation is written assuming generation resources will be providing that balancing capacity.”
“It seems useless to develop European supply without a corresponding approach to the demand side”
Balancing is one of the main jobs of network operators: it means ensuring that power generation equals demand in real time. In the past, this was done mainly by varying supply. But supply itself has become more variable with the growing share of wind and solar power, and network operators are looking to demand to take over, at least in part. “This penetration [of renewables] requires a more flexible electricity system and demand response is probably one of the most efficient ways – if not the most efficient way – to provide this flexibility,” Alberto Potoschnig, director of the Agency for the Cooperation of Energy Regulators in Europe (ACER), recently said in an interview.
“It seems useless to develop European supply without a corresponding approach to the demand side,” agreed the European Commission in its recent guidance for member states on completing the EU internal energy market. The Commission noted that “Member States have announced significant public support for investments in new generation capacity. If not properly designed, that support risks creating distortions of competition and investment signals.”
In its new guidance on the internal energy market, the Commission asks member states to consider demand response before creating capacity markets that reward fossil fuel back-up capacity. “Demand response and end-use energy efficiency is a first alternative option before considering public intervention on the supply side.” Making more efficient use of the energy that’s available (through demand response) and using less of it (end-use efficiency) is cheaper, more acceptable and better for the environment than building new power plants or high-voltage lines, argues the Commission.
Savings all round
Demand-side flexibility can save on a whole suite of things, starting with new power plants. According to the load curve of the Belgian high-voltage network operator Elia in 2012, the last 400MW of generation capacity in Belgium were only used for 13 hours: does it make more sense to use demand response or a €400m-gas plant to cover this peak? Yet there have been subsidies for all forms of supply – renewables, coal, gas and nuclear – but not for demand response.
Some European governments want the EU to authorise support to keep old fossil fuel-fired power plants up and running or even build new ones – all in the name of balancing out renewables. But demand response could take on at least part of this role. The Commission calculates that it could cut European peak demand for electricity by 10%, or 60GW. This is equal to about one-third of all EU gas-fired power generation. Realising even a part of this would generate tens of billions of Euros in energy savings by 2020.
The Commission estimates that demand response could save households up to 10% on their electricity bills and industrial consumers more than twice that
Poux-Guillaume of Alstom cited the example of utility company PJM in the North-Eastern US, which has 100 GW of generation capacity, as much as that of France, of which 15 GW is subject to demand response. “At one time last year they shaved off a 1.5 GW peak in one order”. Across the country, 29 GW of capacity is in demand response in the US now.
“We’ve seen in the US recently, demand response accounting for about 10% of the adequacy capacity being provided in [capacity] auctions,” says Potoschnig. “So it can provide a sizeable amount of what we need in terms of resources.”
The Commission estimates that demand response could save households up to 10% on their electricity bills and industrial consumers more than twice that. The savings come mainly from “smarter” consumption – at off-peak times, when electricity is cheaper – rather than consuming less (actual energy savings are only 2-4%; bigger savings should come from e.g. more efficient appliances). Consumers should ultimately also benefit from lower system costs, although how much these trickle down to them will depend on network regulators. For the Commission, it’s also about “empowering consumers”.
Just as it can take the edge off peak demand, demand response can also take the edge off peak supply: when excess renewables production drives energy prices into the negative, big industrial consumers could soak up the extra energy. Flexible generators [such as gas plants] cannot provide that [ability to absorb surplus renewables production],” noted Frauke Thies, policy director at the European Photovoltaic Industry Association (EPIA) at a workshop organised by SEDC and the Regulatory Assistance Project (RAP), a not-for-profit group of experts that advises policymakers on energy and environment, on 6 November.
Demand response offers struggling energy-intensive industries a precious direct revenue stream and they know it. The issue came up at a roundtable on the competitiveness of the aluminium sector – a huge electricity consumer – in Brussels in late November, organised by the European Aluminium Association, and it is part of one of eight innovations just unveiled by the European paper industry to cut greenhouse gas emissions by 2050.
Not happening enough
Yet despite all these obvious advantages, Europe is lagging behind not only the US, but Canada, Australia, South Korea and Japan on demand response, according to a recent position paper from the SEDC. The concept has “begun to emerge”, in the Commission’s words, but “slowly”.
“It’s already happening in some but not many member states”, Jan Panek, head of retail markets at the European Commission, told a workshop organised by the Council of European Energy Regulators (CEER) on 18 November. Where it is happening, it is the energy-intensive industries such as metal, paper, and cement production that are doing it. Commercial and industrial demand response “is technically and economically viable now”, explains SEDC, while the residential level often still requires technology rollout and public investment.
The vast majority of Member State regulations block consumer participation in balancing, reserves, system services and energy markets
What is holding demand response back? Panek and his colleagues have identified several problems, starting with the absence of dynamic pricing: “in most member states there are still regulated prices of some sort.” This can obscure the financial incentive for demand response.
A second requirement is opening up markets, or putting demand on equal footing with supply. The regulatory foundations are there: the EU’s 2012 energy efficiency directive requires member states to “ensure that national energy regulatory authorities encourage demand side resources […] to participate alongside supply in wholesale and retail markets”. Demand response providers are supposed to be treated in a “non-discriminatory manner” and technical modalities developed for their participation. “You have to allow it, encourage it and set up the basic market structure required to make it physically possible,” sums up Jessica Stromback, executive director of SEDC.
In practice, this is far from the case. Stories on the ground relate many problems. For example paper producers with heavy on-site electricity generation could switch this off to soak up excess renewables, they say, but are currently not incentivised to do so because they will have to pay more in network charges for deviating from their stable consumption pattern. In other cases, consumers do not own their load profile but the retailer does and it will deny them the right to shift their load (or charge them for the full value anyway). In still other cases, the retailer may deny consumers access to an independent aggregator or service provider that bundles flexible loads.
The SEDC notes that “fewer than 5 out of the EU 27 Member States have created regulatory and contractual structures that support aggregated Demand Response, and these are in the early days of this process…. The vast majority of Member State regulations block consumer participation in balancing, reserves, system services and energy markets. These regulators and TSOs either have done nothing or are only now beginning to review their national regulatory structures.”
Involving the consumer
“Consumer access is coming up as a barrier in 25 out of 28 member states,” says Stromback. Small industrial, commercial and residential consumers often need an aggregator to access the market, but these are equally often far from welcome. “Germany is really, really shut to independent aggregation,” adds Stromback, by way of example. Here, independent service providers are required to obtain permission from their potential competitors – the retailer, the balancing responsible party (often the retailer) and the distribution system operator – prior to signing a demand response contract with a consumer.
German regulatory barriers to demand response are so severe, believes SEDC, that a significant portion of demand side flexibility remains untapped in a country which hopes to have 35% renewables by 2020.
Getting the residential consumer involved also requires the rollout of hardware in the form of smart meters and smart appliances. “We are not talking about washing machines you run or don’t run,” explained Panek. “It’s about appliances that can run without changing the consumer’s comfort: heating and cooling systems, hot water systems etc.” Demand response is in effect a way of storing energy, whether in boilers, freezers or heat pumps in the home, or smelters and grinders in industry.
The Commission will carry out a study over the next three years to identify the “essential features of smart appliances”, said Panek’s colleague Ulrike Nuscheler. One of the key issues is ensuring interoperability across brands and from appliances to a central management hub.
For retailers, demand response is a new way of engaging with consumers, yet they feel the threat of independent aggregators that could reduce their energy sales
The successful rollout of smart meters is also essential. The Commission is currently analysing the cost-benefit analyses and smart meter rollout plans it has received from member states. About two-thirds of the plans envisage a rollout, which means at least three-quarters of European households should have smart metres by 2020 (just short of the EU’s 80% target). Although the industry worries the real figure might be lower and Germany’s decision not to aim for the EU target on cost-effectiveness grounds has attracted negative press, smart meter makers like Landis+Gyr remain positive: Germany still wants nationwide coverage by 2029, for example, they point out.
Even if hardware rollouts take place as planned, is the consumer ready? They must be 1) able to and 2) willing to engage, explains Xian He from the Florence School of Regulation. The first requires understanding the different types of load out there – from storable (e.g. heating, electric cars) to shiftable (e.g. dishwasher) to curtailable (e.g. TV) to base (e.g. alarm) load – and designing contracts to suit these. But to get consumers to actively participate, those who offer demand response must recognise that their engagement depends not only on financial incentives but also social factors, complexity, and fears over privacy/autonomy. For example, without adequate data protection laws, consumers may not want to participate.
Dividing up responsibilities
The requirements of demand response can be summed up as follows: smart meters, smart appliances, a retail contract with dynamic prices, a retail market that allows demand response service contracts, and a responsive wholesale market.
The European Commission hopes that demand response will take off with full implementation of the energy efficiency directive and finalisation of the technical rules (network codes – including a balancing code) under development for transmission system operators (TSOs). TSOs could be the big drivers on this, since for them demand response is a balancing aid.
Distribution System Operators (DSOs) should in theory also support it, but since they are paid for grid investments not operational costs – and demand response raises operational cost but lowers investment – their support will probably depend on getting the right incentives from regulators. Regulators will have to make sure network charges are not a barrier to demand response, enable dynamic tariffs and drive smart meter and grid investments.
For retailers, demand response is a new way of engaging with consumers, yet they feel the threat of independent aggregators that could reduce their energy sales and raise their balancing risk. According to Stromback, aggregators are the only ones in all this really focused on making savings for the consumer – as well as having access to all markets.
Public consultation on demand response
If you want to have your opinion heard on this in Brussels, note that the Council of European Energy Regulators (CEER) running a consultation on demand side flexibility which closes on 20 December. It asks five questions: 1) main benefits and opportunities; 2) main barriers; 3) effect of implementing the energy efficiency directive; 4) awareness of cost-benefit studies on demand response; and 5) other considerations.
Vasishta bhargava says
It is very interesting article related to role of demand response in the smart grid network infrastructure, and its parallel operation with the regional/national grid.
So much to learn and implement the smart grid methods and the demand response of the customers (residential, commercial (retail) & industrial)
Mike Parr says
“the Commission asks member states to consider demand response before creating capacity markets that reward fossil fuel back-up capacity”
That maybe the case but the MS are not listening – the UK’s CM proposals predicate OCGTs and CCGTs – bit of tokenism to DR but that’s about it. But don’t believe me, UK politicos have the same view (House of Commons Environmental Audit Committe report on Energy Subsidies Nov 2013 said much the same thing).
DR is interesting because the main costs are the telecoms network to control systems and enrollment of participants. In this context, the “usual suspect” energy suppliers love “smart meters” since these systems offer potential for more control – at least at the residential level.
The reality is that you do not need SMs to implement DR in any sector, residential or otherwise. This message does not suit promoters of SMs hence one never sees discussions of DR without, frankly, half arsed references to SMs and even more half-arsed “smart appliances” (that would be appliances that you can remote control?).
The comments from Xian He – Florence School of Regulation suggests that maybe they need to – you know – get up to speed a bit on this. PWR did the basics on controllable loads in households (HH) back in 2008. Focus on the next 5 years (= not Evs – not enough of them) heating – yes if you are in France, minimum relevance in many other EU MS. Which leaves, dishwasher, washing machine and possibly a dryer. That is not much load to manage (= maybe 1.5kWhr per day). As heat moves away from gas and towards heat pumps there is more possibilities for DR – indeed, HPs predicate remote control. In the case of France, the housing stock has very low thermal inertia which needs to be addressed – urgently – doing DR in such circumstances is deck-chair arranging.
Finally – consumers. Most consumers are energy wasting dolts. They are so thick & lazy that they are incapable of even addressing something simple like: turn off products on standby (ref: UK, average HH spends £80 per year on standby: source 2012 Intertek study for DECC in which standby energy consumption was measured). Giving them a choice is pointless. Asking their “permission” a waste of time – given they will not know what you are talking & thus incapable of making an informed decision.
Myself and partners are working on a couple of projects – they involve the residential sector and remote control. We will get permission, through the small print of the contract that we will have with HHs. Those that feel this is unfair – well when was the last time you read an EULA? & if you don’t know what that is – well that rather makes my point.