The European Commission has proposed a general framework for independent aggregators in its new draft Electricity Directive to incentivise the development of Demand Response in Europe. According to the Commission, aggregators should not be required to compensate suppliers for the electricity sourced and only exceptionally for the imbalances induced. But a new study carried out by independent experts from consultancy DNV GL for Eurelectric shows that this is neither fair nor efficient, writes Kristian Ruby, Secretary-General of Eurelectric. Â (Editor’s note: This article is part of a two-part debate on supplier compensation. For a different view, see this article, A pragmatic proposal for supplier compensation, by Philip Baker of the Regulatory Assistance Project/RAP.)
Demand Response will be one of the building blocks of future wholesale and retail markets. Demand side flexibility helps to integrate the increasing amounts of intermittent renewable energy into the system and benefits consumers by giving them more control over their electricity consumption. Therefore utilities across the EU are keen to develop demand response on a commercial basis.
But a level playing field and fair rules for supplier compensation will be paramount to bringing this techhnology to scale.
The new Directive proposed by the European Commission on 30 November last year as part of the Clean Energy Package aims to encourage the adoption of demand response. One way in which it does this is by defining a framework for a new player in the electricity value chain: the aggregator, who combines customer loads and generated electricity for trading on the energy market.
The DNV GL study commissioned by EURELECTRIC analyses the Directiveâs proposed model for independent aggregators. Regarding aggregators, the provisions in the Draft Electricity Directive say, among other things, that âAggregators shall not be required to pay compensation to suppliers or generatorsâ (article 17.3.d). An exception is made in some (but not all) cases where the aggregator causes imbalance in the system (article 17.4).
Article 17.3d is linked to the general market principle that energy procured also needs to be purchased. In the study this is termed âthe bulk energy issueâ. The proposal implies that the independent aggregator can re-sell energy â which it derives from load shedding among its customers â on the market without paying for it.
With demand response activation, the independent aggregator takes control of energy that was procured by the supplier for his consumer(s). The aggregator re-sells the electricity sourced by the supplier by re-routing it back to the power market. Without paying for it.
If implemented as suggested, this would correspond to a form of electricity short-selling without the supplierâs consent, providing liquidity and flexibility to the intraday and balancing market. The aggregator generates revenues at the cost of the supplier. According to DNV GL, this conflicts with the general market principle that energy sold needs to be bought or compensated for.
Regardless of the Demand Responseâs benefits to the market, there is no reason why any market participant should not pay for the sourcing of energy and the energy taken from another market participant, in this case the supplier, without the latterâs consent.
Free rider
Under the current proposal, then, the independent aggregator becomes a free rider, causing external costs to the supplier and ultimately to the whole system. The benefits of Demand Response activation accrue exclusively to the aggregator, while the costs are borne by the supplier.
This is likely to distort the market for power supply as it will affect especially smaller suppliers and new entrants. Indeed, if a small supplier has a number of customers who are active with aggregators, this will hit them harder.
Moreover, under the proposed framework, Demand Response activated by an independent aggregator, is likely to lead to economic inefficiency from an overall system perspective. When the actual costs of Demand Response, i.e. the loss in revenues to the supplier due to the bulk energy issue, are higher than the revenues generated by the aggregator, Demand Response activation is inefficient from a system perspective.Â
This is so because the aggregator will sell the associated energy even when the market price (e.g. intraday or balancing) is below the supplierâs procurement cost. See Figure 1.
Figure 1: Illustration of the Economic Efficiency and Inefficiency of DR depending on the price at which DR is activated and energy is procured by supplier (Source: DNV GL) The figure illustrates two situations for DR activations by the aggregator that may turn out to be efficient (left) and inefficient (right) from the power systemâs perspective. DR activation will be inefficient when the price at which DR is activated and energy re-routed to the market, e.g. for balancing energy provision or for energy trades on the intraday wholesale (ID) market, is lower than the supplierâs decline in revenues from bulk energy sales, which roughly corresponds to the price at which the supplier procured the energy[1]. If the aggregator is freed from any compensation for the bulk energy issue, inefficient activation of DR is a considerable risk.
Imbalance issue
The report by DNV GL also discusses Article 17.4 of the Draft Directive. If enacted, this would give rise to an additional inefficiency which the authors call the âimbalance issueâ. This is the difference between the scheduled and the actual consumption in the supplierâs supply portfolio due to Demand Response activation by an independent aggregator. This imbalance is subject to central imbalance settlement (usually with the TSO).
The EU proposal does not allow for not compensating such imbalances induced by Demand Response activation, except in exceptional cases. While the supplier has no influence on the activation of Demand Response by the aggregator, he would have to take the financial responsibility for the imbalance.
Improvements
Overall, the DNV GLâs study shows that the current EU proposal is likely to lead to market inefficiencies. Sound market design including Demand Response aggregation requires solutions that address the bulk energy and the imbalance issue.
In line with DNV GLâs recommendations, the power sector is calling on European decision-makers to to resolve the bulk energy issue by allowing full compensation of the supplier. Member States should be allowed to set the appropriate rules at national level.
When it comes to imbalances induced on other market participants, such as the supplier or a Balancing Responsible Party (BRP), mechanisms should be introduced to neutralize this effect. This is already the case in some Member States. Alternatively, the aggregator should be made financially responsible for the imbalance it induces on other market participants.
Supplier compensation could be implemented in various ways, building upon models already available in Member State regulation, to accommodate different market set ups and ensure regulatory continuity where a functioning framework is already in place.
The power industry supports the EU in encouraging the establishment of independent aggregators to enable more people to benefit from demand response. But the framework must ensure that demand response is deployed in a cost-efficient way in order to avoid spillover effects on other consumersâ bills and reduces the overall attractiveness of these services.
Setting up a temporary framework that gives specific advantages to specific market players, a solution proposed by the Regulatory Assistance Project (RAP), may not be the right way to proceed. It would indeed create regulatory uncertainty for aggregators and   business models will then be established on this basis which will be difficult to adjust later on.
Editorâs Note
Kristian Ruby is Secretary-General of Eurelectric.
Note that the first two paragraphs of the article were edited slightly some hours after the original publication.
[1] In terms of economics: whenever the external cost of DR activation caused by the aggregator exceeds the actual value of his sales, a free-rider inefficiency is caused.
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Rok Pernus says
Well, well, the problems with demand-response have begun before it could even properly start. What a surprise!
Demand response in combination with intermittent energy sources is a horribly bad idea and will ALWAYS create market inefficiencies with negative impact on economy and society. It is economically and politically unsustainable. Production or generation problems cannot be solved with redistribution. It’s a bit like perpetuum mobile. Two probabilistic systems cannot be synchronized without a cost to one of them and there’s no way to substitute buffer. Since we cannot control weather, it will be society, which will pay the price. It will soon become clear, that it can only work to a very limited extend with some cooling/heating applications. I won’t be surprised, if on the end the cost of adjusting the whole system will be greater than benefits…
User says
Regarding the balancing issue: In the report it is explained that the independent aggregator imposes an additional risk on the supplier’s balancing responsibility.
To me, being a non-expert , it does not appear how exactly this issue arises.
Assuming that DR is activated when the system runs short, then, the deviation of the supplierâs scheduled consumption from actual consumption is into the direction that helps to restore system imbalance. So, in the imbalance Settlement the supplier should be payed the reBAP-price for deviating in the “right” direction and he should not have to pay. If that would be the case, however, the actions of the aggregator would not impose a risk on the supplier really.
On the other hand, if the supplier is payed for deviating from his schedule in the ârightâ direction, the energy activated as DR would actually be payed twice â once directly as activated balancing energy to the aggregator and once indirectly via the balancing settlement to the supplier- which does not seem to make sense.
Can anyone clearify?
User says
*(…) the deviation of the supplierâs scheduled consumption from actual consumption is into the direction that helps to restore system BALANCE.