Energy suppliers are lobbying against a proposal from the European Commission to remove barriers to demand response schemes, writes Philip Baker, Senior Adviser at the Regulatory Assistance Project, an independent consultancy. According to Baker, the Commission should stick with its proposal. Demand response, he argues, will bring great savings to energy consumers. What is more, the Federal Energy Regulatory Commission (FERC) in the United States has introduced similar measures, indirectly supporting the position of the European Commission.
Demand response is a vital source of flexibility in the cost-efficient transition to a decarbonised electricity system. A flexible demand side will ease the integration of intermittent wind and solar generation, while reducing or delaying the need for network investment to electrify the heat and transport sectors.
Downward demand response simply reduces the amount of energy that needs to be generated; the saved energy is neither generated nor consumed by anyone
Explicit demand response, where third-party “aggregators” pay domestic and smaller commercial customers to flex their demand, will play an important role in the development of a flexible demand side, providing a low risk and automated path to market participation that avoids exposure to variable energy prices.
Demand response will reduce customers’ electricity bills
In addition to smoothing the transition to a low-carbon future, explicit demand response and demand flexibility can deliver an immediate and beneficial impact on customer’s electricity bills. Analysis commissioned by RAP demonstrates that even the modest application of demand response across the German/Austrian, Nordic, and French electricity markets will bring savings exceeding €1.6 billion annually, with proportionately greater savings seen across Europe as a whole.
Suppliers will initially see these savings in the form of reduced energy costs, but, in a competitive market, they can pass the savings through to customers in the form of lower electricity bills.
Proposed Electricity Directive eliminates barriers to demand response
Despite the obvious need to encourage customer participation in the electricity market in the interests of decarbonisation and lower energy bills, significant barriers to the successful development of explicit demand response persist.
In many Member States, aggregators must obtain permission from the customer’s supplier to operate on the customer’s load or compensate the supplier for lost income. These requirements threaten the development of a flexible demand side. The European Commission, in Article 17 of the proposed revision of the Electricity Directive – part of the Clean Energy Package introduced on 30 November last year – removes these barriers.
On 13 June, MEP Krišjānis Karinš of the Committee on Industry, Research and Energy (ITRE) of the European Parliament will publish the committee’s findings on the Clean Energy Package. At RAP we encourage widespread support for this particular proposal.
Energy is not transferred
Not unexpectedly, incumbent generators and suppliers strongly oppose these proposed changes. The savings in customer’s electricity bills come at the expense of wholesale market revenues seen by generators, and suppliers cannot bill for the energy not consumed by customers providing “downward” demand response. In making the case for compensation, suppliers contend that energy bought by them is transferred via aggregation to others for profit.
Suppliers are asking the Commission to require the aggregator to continue compensating the supplier for energy costs that cannot be recovered from customers who have chosen not to consume that energy
In reality, however, energy is not transferred. Downward demand response simply reduces the amount of energy that needs to be generated; the saved energy is neither generated nor consumed by anyone. These self-interested objections should therefore be resisted by the Commission, who should persist with their sensible objective of removing unjustified and damaging barriers to the growth in demand side flexibility.
US compensates demand response at the full wholesale market price
A very similar debate in the United States supports the Commission’s position. It centered around the Federal Energy Regulatory Commission’s (FERC) Order 745, which requires market operators to pay the same wholesale price to providers of demand response as is paid to generators—essentially the same situation as exists in European markets today. The Order was adopted in preference to an alternative compensation scheme proposed by the Electricity Power Supply Association (EPSA) that would have subtracted from the wholesale price the savings made by customers in not consuming energy.
The EPSA remedy was similar to, if not the same as, the incumbent’s supplier compensation proposal in Europe in that a third-party aggregator would retain the wholesale price minus the retail price of the unused energy. In Europe, suppliers are asking the Commission to require the aggregator to continue compensating the supplier for energy costs that cannot be recovered from customers who have chosen not to consume that energy.
The Commission can take comfort that an expert electricity regulator of FERC’s stature has reached a similar conclusion
The Supreme Court of the United States eventually reviewed Order 745 and concluded that deciding the terms on which demand response should be remunerated was a matter for FERC and not for them. As a result, the situation in the United States and Europe (based on the wording of Article 17 of the proposed Directive) is essentially the same—demand response will be rewarded at the wholesale market clearing price with no discount or compensation applied.
Although the Supreme Court did not express an opinion on the technical merits of the remuneration provided in Order 745, it is instructive to note the arguments deployed by FERC to justify its position. Firstly, FERC considered that, as the acceptance of a demand response and the equivalent generation offer have same impact on the wholesale market price, they should both receive the same value from the market. Secondly, although they did not inquire into the costs incurred by a market participant when making an offer to the market, FERC noted that the cost structure of different providers could be very different. While a generator needs to recover the cost of fuel, a demand response provider may need to recover significant up-front hardware costs.
The Commission can take comfort that an expert electricity regulator of FERC’s stature has reached a similar conclusion—the value of demand response is the full wholesale market price and no discount is warranted.
The Regulatory Assistance Project (RAP) is a globally operating independent and nonpartisan team of experts. Philip Baker (firstname.lastname@example.org) is an energy consultant working with RAP and other clients on power system technical and commercial issues, integrating renewable energy sources, and European electricity market integration. This article is based on a blog post on the RAP website.
Mike Parr says
In 1970 the state-owned DNO (and monopoly electricity supplier) MANWEB (Merseyside & North Wales Electricity Board) asked itself the question: what should be the nature of our relationship with customers. Their answer was: to help our customers use electricity more effectively (& by inference – efficiently). In 1989 they implemented a project that was mix of energy saving and demand response to reduce the need for network reinforcement in one part of the network. They won and their customers won.
This was the last such project given in the 1990s all UK DNOs were privatised by the Tories, R&D expenditure fell to zero within one week of privatisation and the idea of relationships for mutual gain with customers were replaced with relationships for company/DNO profit.
Given the above this statement in the article “In many Member States, aggregators must obtain permission from the customer’s supplier to operate on the customer’s load or compensate the supplier for lost income” comes as no surprise.
The ownership structures most DNOs and energy suppliers (private) predicates they play a zero sum game. In turn this leads to the current controversy over demand response, fancy arguments by well paid lawyers as to why DR is some how “unfair” to their clients, and a Council & EC twisting and turning on issues which should not be issues at all – a matter for commonsense. Electricity markets can’t handle DR? – change the markets.
There used to be a joke about the British going to Australia by plane: “how do you know a plane load of poms (British) has landed” answer – when they switch the engines off the whine continues (- whinging British – this should sound familiar in the corridors of Brussels). This could apply to European generators and to some extent network operators. They whine, continuously, about any changes to their monopolistic world. They pretend to be capitalists, pay themselves like capitalists but want government protection from change. & you know what? the politicos are so dumb they actually listen.
Last comment: National Grid the UK TSO – pays for primary/secondary Frequency Response (FR) such that when frequency riese (= less need for generation) the generators who were paid by NG to provide FR – would pay to NG for the fuel they saved, conversely as frequency fell (demand up) the transfer was in the other direction (settlement was on a per month basis and very roughly netting off led to zero transfers). So the argument of reduced fuel use has already been settled in the UK (& by implication Europe).
S. Herb says
Is part of the issue here the marginal cost bidding system, which means that the net incomes of generators are especially dependent on periods with high demand for dispatchable power? Obviously bidding in demand-response will dampen the marginal cost rise and the utilities will not be happy if that is what was keeping their heads above the water.
Mike Parr says
one questions to answer is: what is the balance for generators in terms of PPAs/long term contracts and energy sold “on the market” (day ahead or otherwise). Something tells me the balance favours PPAs with only modest amounts sold “across the counter” on the day ahead etc market.
Paul Giesbertz says
The industry is not lobbying against demand response. On the contrary. My company but also associations like EFET are proposing to strengthen the rights of consumers, for example the right to make use of services of independent aggregators. However the CEP proposals do need improvement. Firstly the CEP in its proposals does not distinguish between implicit and explicit DR. In case of implicit DR the consumer should indeed be free to act, possibly through an aggregator, without any involvement of the supplier. Explicit DR means that the consumer, possibly through an aggregator, is active on the market and responding to market prices while at the same time he is being supplied by a supplier that uses this same market to source this consumer. In this model it is obvious that the supplier needs to be involved and should be allowed to adapt its commercial terms. This is not acknowledged by the CEP. In other words the CEP introduces preferential treatment of a certain business model which results in higher costs for EU citizens.
Karel Beckman says
The introduction to this article has been slightly amended after publication. The original version contained two mistakes. Editor.
Annabelle McSmith says
An element that is forgotten in this discussion is the impact on the balance responsible party, the electricity grid must always be balanced (production = consumption). It is the job of the balance responsible party (often the supplier) to guarantee this for all the grid users in his portfolio, balance is maintained by forecasting, buying and selling electricity, in/decreasing production of own production unit, importing/exporting electricity etc. If the BRP is not in balance, he pays an imbalance tariff (sort of fine) to the TSO, who is responsible for the balance in the control area (mostly a whole country or region).
Therefore if there is unexpected change in consumption of a lot of grid users because of an external signal by a party who is not the BRP (for example explicit DR by an independent aggregator), there is an influence on the imbalance (and on the fine that the BRP must pay) on which he has no influence. A compensation is therefore necessary to maintain fairness in competing.
A very good source on this issue and an overview of several market models on how the problem can be solved, is this paper by ENTSO-E:https://www.entsoe.eu/Documents/Publications/Position%20papers%20and%20reports/entsoe_pp_dsr_web.pdf
The market design in the US is completely different (no separation between DSO/TSO and the suppliers, no unbundling etc.), so solutions and decisions of US regulators cannot be compared. The European context is far more complex and can differ from country to country. The best solution is therefore a market design specifically adapted to circumstances in each country, but that adheres to principles that are the same for everybody (position of CEER & ACER, organization of European regulators): http://www.ceer.eu/portal/page/portal/EER_HOME/EER_PUBLICATIONS/CEER_PAPERS/White%20Papers/Positions/EuropeanEnergyRegulators_WhitePaper-3-Facilitating%20Flexibility_2017-05-22_PUBLIC_.pdf.