Demand side response: a revolution in British energy policy

It's highly significant that demand side response is to be included in auctions for the future British electricity capacity market, as announced by DECC last Thursday, because it marks once and for all a move away from the principle that has dominated energy policy since the national grid began: of satisfying peak demand at any price.

Capacity market auctions will commence in 2014, subject to European state aide approval, and will embrace new and existing generation capacity including combined heat and power (CHP), embedded generation, energy storage, and permanent reductions in electricity demand.

Demand side response (DSR) means that small, decentralised generators and owners of stand-by generators experiencing reduced demand, or a combination of both, will be able to gain an income by selling the energy they don't need.

The UK‟s electricity system is currently sized to meet peak demands that only occur infrequently, which leads to generating plant and transmission and distribution networks being under-utilised for much of the time.

This is expensive and wasteful.

DSR will open up a huge new market, which will grow even more as the 'smart grid' spreads, by letting energy consumers become active participants in a more local and efficient energy system.

It will embrace many different kinds of energy consumers, such as businesses, farms, hospitals, hotels, universities, local authorities and commercial buildings.

As a result of this policy such enterprises will have greater confidence to invest in their own generation plant, and will have the ability to create income for themselves on a sustainable, predictable basis.

Any facility that collects real-time consumption data and is sometimes on standby to reduce energy use, or that runs standby generation that can start up upon a signal from the electricity system, will be able to participate.

Participants will be able to bid both one and four years ahead in the auctions, giving them flexibility and confidence to invest in the future.

It's also good news for combined heat and power, since much small-scale generation is CHP, producing heat and power for local networks.

The other benefits of demand side response include:

• addressing the threat to electricity supply caused by the imminent closure of coal-fired power stations;


• reducing the need to build new power stations and transmission lines;


• reducing greenhouse gas emissions by allowing power stations to operate closer to the maximum efficiency;


• avoiding transmission losses by using electricity locally;


• and reducing the need to keep power stations warm as a spinning contingency reserve.

If we compare the consumption pattern of electricity from the commercial and public sector to the demand profile for all sectors, we see that the peak demands for non-domestic buildings occur at around 11am on weekdays, whereas the total peak is between 4 and 6pm.

This is where the potential for spreading out supply and demand lies.

The potential for DSR to reduce peak demands depends on the flexibility of electricity capacity and the uses to which it is put.

The greatest flexibility is related to load with storage or inbuilt inertia, such as hot water, heating and air conditioning. Some loads, such as computing, exhibit limited flexibility, unless they are in data centres operating unused standby.

Assessments by Element Energy and the Montford University for Ofgem a year ago of the technical potential suggest that DSR measures could reduce winter peak demands in Britain due to non-domestic buildings from 1–4.5GW, but the eventual potential is likely to be much more.

There is work to be done to develop detailed policy implementation that will work well for smaller operators and ensure that the cost effectiveness of DSR is harnessed for the benefit of consumers and the wider UK economy.

A consultation by Ofgem on the subject finished on 28 June. It's probable that the results of the consultation will feed into the practical arrangements under which the capacity mechanism will operate.

Sensibly, there will be a transition period for demand side reduction and small-scale storage within the capacity market.

To this end, Ofgem and the National Grid have just launched a new consultation on transitional products aimed at paving the way for DSR.

The first potential product, Demand Side Balancing Reserve, offers a new opportunity for the demand side to participate in the provision of demand and supply balancing services.

The second, Supplemental Balancing Reserve, is aimed at generators and large users.

Of the first, National Grid is suggesting that it could buy a quantity of demand reduction capability at peak times on non-holiday weekdays during the winter for a set-up payment of between £5-10/kW per year, and utilisation payments for delivery ranging from £500/MWh to £15,000/MWh.

It's also consulting on a second product that would be the same but without the setup payment.

The idea is that this will promote significant growth in the provision of demand-side services ahead of DSR participation in the capacity market.

No one should underestimate the significance of this development: it marks the first time that Britain has moved away from an energy policy of having to supply peak demand whatever it is.

This policy has proved inefficient, insecure, expensive and impractical; the more so as energy and plant construction prices rise and we are constrained by the need to reduce carbon emissions.

It's a fabulous opportunity, and the more organisations and businesses wake up to its potential benefits for them, as well as to the effect on reducing prices for all energy consumers, the better it will be for the whole country.

Low carbon electricity suppliers to get guaranteed fixed payments

The Government's proposed reforms to the electricity market include guaranteed fixed payments to suppliers to ensure revenue continuity.

Measures were outlined yesterday by the Government to secure future low carbon electricity supplies.

They set out how new generating capacity (such as renewables, carbon capture and storage (CCS) and nuclear) and non-generation capacity (such as demand-side response and storage), could reduce the impact on customer bills, and create a secure mix of electricity sources to meet projected increased demand.

Energy and Climate Change Secretary Chris Huhne said: “The UK faces a huge energy investment challenge over the coming years, with a fifth of our generating capacity coming to the end of its working life and electricity demand set to double. We want to give certainty to investors to develop the mix of clean energy sources that will power the UK in the years to come.”

Measures outlined include:

• next steps for the Electricity Market Reform programme;
• a Capacity Market, designed to ensure reliable electricity supplies and avoid the higher prices that could result from tight capacity margins;
• a proposal for a System Operator who would work with the National Grid to manage the Feed-in Tariff with Contracts for Difference (FiT CfD) and the capacity mechanism;
• detail on work to enable investment decisions for early projects;
• detail on how Renewable Obligation Certificates will work after 2027.

Reform of the electricity market will begin around May 2013, with the first low carbon projects resulting from it beginning the following year.
The New Year will see more information about how Emissions Performance Standards and FiT CfD will work.

The job of the System Operator, sitting within National Grid, will be to advise the Government on key rules and parameters and administer the FiT CfD and Capacity Market. A settlement agent will manage payments. Ofgem will continue to regulate the new system.

What is a Capacity Market?

The proposed Capacity Market is intended to ensure that sufficient reliable capacity is available by providing incentives to invest not only in generation but also non-generation approaches such as demand side response, or, interestingly, for existing capacity to remain operational beyond its previously estimated life.

Approaches that do not involve generation, such as storage and demand management, are, significantly, acknowledged as potentially being cheaper and helping to cut carbon emissions.

The technological options for electricity storage are increasing, with a number of interesting solutions coming forward such as chemical and flywheel storage as well as pumped storage (pictured above at Dinorwig, North Wales).

The government is also looking at further ways to incentivise efficiency in the use of electricity, including the smart grid.

The detailed design of the Capacity Market, including the payment model, will continue throughout 2012 and into 2013 leading to secondary legislation, with the first delivery plan published in 2013.

It represents a state intervention in the market that begins by estimating the total volume of reliable capacity required a number of years ahead, contracting for the required volume of reliable capacity from providers through a central auction process; and then placing incentives on those providers to ensure they are available when needed.

The additional capacity that results from the Capacity Market is expected to have a dampening effect on electricity market prices.

The 'availability payment'

Responding to criticism that there have been too many changes in government policy on feed-in tariffs and other support measures, which have affected revenue flows in the industry, the Government says that it will establish a “robust legal framework to protect investors against unilateral changes to the FiT CfD" to ensure the predictability of revenue flows.

This will include an 'availability payment', which would compensate providers of capacity for lower electricity market revenues. The level of this guaranteed regular payment is yet to be decided.

Capacity Market have been implemented elsewhere, for example in the United States and Colombia. France and Italy, are in the process of introducing similar mechanisms.

The theory is that a Capacity Market provides an ‘insurance policy’ against a tight future electricity generation market resulting in higher levels of blackouts. Of all the models looked at, it is expected to have the least impact on average electricity bills.

It could lead to new entrants in the market in the form of Energy Service Companies and will also provide further incentives to roll out the smart grid.

More detail on the functions of the System Operator and the role of Devolved Administrations will be set out in the Electricity Market Reform policy document that will be published alongside the introduction of primary legislation next year.

Bridging the investment gap

The government has also outlined measures to ensure there is no gap in investment until the new system is established.

DECC is inviting discussions with developers about significant projects which can benefit from the proposed FiT CfD. Such projects might not be eligible for the Renewables Obligation or able to receive ROCs before the end of March 2017.

In order to supply this “comfort", as the technical note quaintly describes grant aid for any projects selected, legislation will have to be passed by Spring 2013; this is not guaranteed.

Reactions

Renewable Energy Association (REA), chief executive Gaynor Hartnell welcomed the announcements, but said that developers of energy-from-waste plants still lacked clarity on whether the proposed Emissions Performance Standards would affect them. "We're at a loss to know why this can't be settled straightaway," she said. Details are, however, promised early in the New Year.

Richard Lloyd, executive director at Which?, commented that since National Grid "will now have a vital role to play in dictating consumers’ future energy bills, the Government must guarantee it will be held accountable.

“With new analysis from the Committee on Climate Change predicting that investment in low-carbon power will add ￡100 a year to bills by 2020, it’s more important than ever that the Government does everything possible to help people manage their energy use and save money,” he added.

Steve Radley, Director of Policy at EEF, the manufacturers’ organisation, cautioned that the government reforms should "not damage the competitiveness of energy-intensive industries".