Towards a large-scale adoption of Demand Response
The largest industrial consumers have, for years, been able to profit from their flexibility through interruptible contracts. With the roll-out of smart meters and recent ICT technological developments, Demand Response could become available for everyone. This article focusses on the current situation around Demand Response in North West Europe, the challenges, possible solutions and key success factors.
The transition to a low carbon energy system based on renewable production sources in North West Europe is in full force. Incorporating growing shares of intermittent renewable energy sources requires flexibility elsewhere in the electricity system: either on the supply or on the demand side. Demand Response (DR) is considered as being part of the solution, and is high on the agenda of policy makers and energy players. If demand can adapt to the available supply, the need for conventional back-up capacity during periods of low renewable production on the supply side, as well as the need for investments in extra grid capacity are eliminated.
The benefits of Demand Response
DR consists in shifting consumption to a different point in time, and is defined as a program established in order to trigger changes in the electricity consumption pattern of end-users in response to a price signal varying over time or to incentive payments. With an increasing share of renewable production producing at near zero marginal costs, the runtime for conventional production units is significantly reduced (Fig. 1).
Figure 1 High residual load development in Germany 2012-2015
As a result, the market becomes more volatile and power producers need to recover the fixed costs involved in operating their conventional assets in a shorter time period, leading to moments when the cost of electricity goes through the roof [ 1].
Based on its research, Sia Partners estimates that DR in EU28 could have a potential of 52,35 GW, considering the selected processes. At the level of Belgium, France, Germany and Netherlands, the potential could represent 21,5 GW . The economic value associated to this potential could be substantial. Especially when one takes into account that the exploitation of this potential would avoid large investments in peak CO2-emitting capacities.
By facilitating the possibility to shift consumption, the main benefit of Demand Response is to improve the efficiency of electricity production, which is then translated into:
• Participant financial benefits: bill savings and monetary incentives
• Market-wide financial benefits: lower wholesale market prices
• Reliability benefits: operational security and adequacy savings
• Market performance benefits: by mitigating suppliers’ ability to raise power prices well above production costs
With an increasingly connected energy system, the adoption of smart meters, and the development of smart grids, good technical solutions are on the horizon. The challenge lies in their large-scale adoption.
The missing part of the puzzle
When electricity consumption decreased following the financial crisis of 2008, overcapacity in North West Europe resulted in overall flat and declining wholesale market prices for power. As a result, there has been little incentive to develop extra capacity, either from Demand Response or new conventional generation assets. The foreseen capacity shortage in France during the coming winter could lead to a boost in Demand Response development. RTE (the French transmission system operator for electricity) has launched the new version of its Eco2Mix app on the 12th of December . The goal is clear: raise awareness around the national electricity supply, its threats, and be able to quickly and effectively act when the national electricity supply is at risk. Earlier on targeted to energy intensive professionals, it is now also targeting households and residential consumers.
For now, most contracts in Europe (aside from a handful of interruptible industrial contracts) are fixed, long-term, and do not provide an incentive for consumers to adjust their demand to real-time shortages. However, having the required infrastructure and technologies in place to enable DR is not enough to elicit behavioral changes.
Some pilot projects  have failed to deliver the expected results despite initial enthusiasm, due to a low level of participation. Thus demonstrating that key to achieving DR objectives is the involvement of end-users. So how do we get end-users’ buy-in and ensure they participate in DR?
This question was at the center of the program of a recent smart-grid conference organized by the TKI Urban Energy, where the number one challenge was whether the solutions that were being developed, sufficiently took into account the needs and wishes of the consumers. The primary focus in the ongoing experiments had been on the technical interaction of smart appliances with the grid, and less on the interaction with, and participation of, the consumers.
Pricing designs for Demand Response
Fixed price contracts, currently used for medium and small users, do not provide sufficient incentive to adjust the demand. A solution to this challenge lies in smart pricing contracts. There are different smart pricing designs available that could translate scarcity in the electricity system into customer value (Fig. 2).
Figure 2 Overview of Smart Pricing Variants
Real Time Pricing (RTP) pricing comes closest to having consumers trade real-time on the wholesale market. This means that consumers are exposed to price fluctuations on the wholesale market. Price is unknown in advance with a higher risk of price extremes. While this may be interesting for large consumers, most consumers may prefer ease of use. To make such a contract interesting for the majority of consumers, requires a highly developed smart eco-system of appliances that can plan consumption autonomously.
Under Critical Peak Pricing (CPP) the price of electricity is substantially raised during critical events. A variation on the CPP is the Capacity Subscription. Under a Capacity Subscription consumers choose their preferred reliability level. When system costs are predicted to reach a certain threshold, the maximum demand capacity is physically restricted. Ensuring system reliability. This design avoids the need for hourly metering.
The Peak Time Rebate (PTR) is similar to the CPP, only instead of charging a premium during peak hours, consumers receive a rebate when consuming less than the baseline consumption during peak hours.
For Time of Use (TOU) there is a daily changing peak and off-peak price. The peak price for critical days can be multiple factors higher compared to the off-peak price. Critical days are communicated ahead. This method has been applied in Ontario, Canada and failed at reducing peak demand and consumer costs. The system was too complex for consumers and did not provide the level of comfort that consumers required.
The most commonly envisioned pricing method when it comes to DR experiments in the Netherlands, is that of consumers that are continually exposed to price fluctuations [5,6], similar to the RTP method. The drawback of this model is that consumers need to have smart devices in their household, leading to a chicken and egg problem. No RTP pricing means no incentive to buy smart devices, without smart devices there is no way of comfortably adopting an RTP contract. As for the TOU contracts, if the Time blocks are too long, they fail at converting short periods of sporadic scarcity into customer value. While at the same time reducing consumer comfort for unnecessarily long periods.
Transferring Demand Response value to the end-users
When participating in DR, customers voluntarily deviate from normal consumption behavior to obtain lower electricity prices and support security of supply. Exploiting the DR potential also flattens the load profile and avoids more expensive investments in new power plants or transmission capacity in the grid. Eventually opting for DR measures also reduces CO2 emissions as the need to run more polluting peaking units disappears.
At Sia Partners we believe that besides a financial incentive, two other important aspects should also be considered by utilities when developing and offering their demand response solutions (Fig. 3);
Figure 3 Towards End-User Buy-in
- Financial reward: lower energy bill at the end,
- Environmental benefit: no need to activate heavy polluting peak generation units, reduced need for large investments in additional grid capacity.
European utilities in the process of transforming their business models are already looking at these developments and are faced with several questions;
- What would be the necessary timeframe to be able to seize a significant ratio of the potential?
- How to assess the economic value of a portfolio of flexible consumers?
- How to facilitate the exploitation of DR from a regulatory perspective, while protecting the consumers’ interests?
At Sia Partners we look forward to answering these and other DR-related questions, and helping you develop your Demand Response strategy.
 Crossing Borders: A regional approach to generation adequacy concerns under increasing VRE output in North West Europe, Kuipers 2016, http://repository.tudelft.nl/
 DEMAND RESPONSE: A STUDY OF ITS POTENTIAL IN EUROPE, Sia Partners energy blog, http://energy.sia-partners.com
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