Vested interests are frustrating the spread of demand response solutions in several EU countries, most of all in Germany, says a senior expert from a leading demand response service provider. According to this expert, established utilities fear demand response solutions because they compete with their own power plants that have traditionally offered flexibility. However, utilities are also increasingly developing their own demand response skills, he notes. This article is part of the Power Talk blog by Hendrik Steringa hosted on Energy Post.
The energy landscape is changing fundamentally with the rapid increase of renewables. In order to adapt to this new reality the European Commission is consulting stakeholders about a new market design for the electricity sector.
On the supply side the aim is to facilitate the incorporation of large shares of (variable) renewables. At the same time the design needs to facilitate (conventional) power generation that offers flexibility that supports these variable renewables during days without sufficient wind or sunshine.
On the demand side the European Commission sees demand response as an important tool to deliver flexibility. Demand response is “the intentional modification of normal consumption patterns by end-use customers in response to incentives from grid operators.” The aim of demand response measures is to lower electricity use when prices are high or reliability is threatened. This requires consumers to be able to respond to market signals or to participate in automated solutions that have the same result.
Several companies now often aggegrate demand response services. They use automated systems that combine the demand of many users so as to achieve optimum flexibility. The question is what market design best supports the expansion of demand response services. However, a senior expert from one aggregator says that the problem is not so much the design of the market but the way in which access to the market is frustrated by vested interests. Particularly in Germany.
About the influence of market design on demand response the expert explains: “Is the kind of market model that will be adopted in Europe important? From a demand response perspective it does not matter whether you have an energy-only model or a capacity market. Both are workable. The main problem with new demand response initiatives, often developed by new companies, is getting access to the market, more than the fundamental choice of market model itself.”
The regulator thinks that to change the market rules is risky. This is a typical response. Regulators fear that it will have negative effects somewhere else that are bigger than the positive effects
“In the UK for example, which has a capacity market, new demand response initiatives don’t get enough access. There is not a level playing field. Access is tilted towards existing players. New power generation capacity for example gets 15 year contracts. This new capacity is mainly built by existing players. New demand response initiatives only get 1 year contracts. This means no long term security for new demand response initiatives and therefore the volume they can bring to the market is more limited.”
“In the UK the problem is in the detail of the regulations. The government tried to make it right for everybody without making choices. But you can’t. Because it is a market, you have to compete. They thought that everybody would win. But market access remains restricted. That is also the reason why Tempus Energy UK launched a legal claim against the European Commission for allowing the implementation of the UK capacity market in its state aid rules. Their aim is not to get rid of the capacity market. They want to change the rules of the capacity market to get equal access.”
“Why is it relatively easy in Belgium? One of the reasons is that in Belgium there is a crisis situation where they are forced to act. This because they had a security of supply problem, exacerbated last year as half of their nuclear capacity was taken off line because of safety issues. The government was willing to take drastic measures going as far as to forbid Christmas lights being turned on. The federal regulator and TSO [the grid operator Elia – editor] are very willing to work with new demand response initiatives. They allow them to enter the market by creating special products within the ancillary services market that offer flexibility [Grid users help the grid operator to maintain balance on the grid by providing ancillary services like reducing demand in turn for payment – editor]. This way both consumers, who are willing to offer flexibility by curtailing their energy consumption in return for payment, and companies that offer new demand response initiatives can earn money. France is also eager to work with demand response. Demand response brings flexibility in their power sector dominated by relatively inflexible nuclear power plants.”
Demand response initiatives in Belgium are made possible largely because the government is in favour of demand response
“In Germany and the UK the possibilities for new demand response initiatives are more restricted. That is strange because at least Germany, with its high share of renewables, should be up there in the European top of demand response. But they are not. Why is demand response so small in Germany? The main reason: regulatory barriers and a lack of government support to do something about it.”
”When it comes to introducing demand response the important question is: how do you organise the relation between newcomers and incumbents to allow customer choice and introduce change? In several European countries arrangements are made but the German regulator doesn’t take much initiative concerning demand response. The same goes for the German TSO’s. The German regulator takes the position that the stakeholders have to find agreement amongst each other. You decide, the regulator says, it is a market. But in practice it doesn’t work like this. The relation between stakeholders, the traditional players and newcomers, is not equal enough for an agreement.”
These tactics were very defensive. But they have become smarter and changed tactics again
“The main reasons the German regulator doesn’t take initiative? First of all because they have no burning problem. They have enough power plants in place for balancing. It is a ‘If it ain’t broken, don’t fix it’ attitude. The Netherlands has a similar situation that is even more pronounced than Germany because there is lots of traditional, flexible generation capacity. A second problem is that introducing change into the system raises fears. The regulator thinks that to change the market rules is risky. This is a typical response. Regulators fear that it will have negative effects somewhere else that are bigger than the positive effects. There might be unforeseen effects but these issues haven’t even been analyzed yet.”
“Why the TSO’s don’t take the initiative? Mostly for the same reasons as the regulator but in part also because [in Germany] they are not fully unbundled from the big four power companies. The power companies are used to working in a traditional fashion and, moreover, have not developed the demand response skills yet. But also because demand response is in competition with their power plants that traditionally offer flexibility. That internal conflict of interest is one of the key inhibitors of change!”
Demand response skills
“Traditionally power companies are used to balancing the grid with conventional power plants. In Belgium new demand response initiatives are in direct competition for ancillary services with Electrabel, part of GDF-SUEZ [Engie] who traditionally offer flexibility from their power plants. Demand response initiatives in Belgium are made possible largely because the government is in favour of demand response as I explained earlier. Initially there was resistance from the traditional power companies but the nature of the resistance changed over time. Some years ago they said: ‘demand response is a nice concept but it will always stay marginal. It is something for academics. It will never work’. But in the meantime they lost the small aggregator market. Then it changed from attacking demand response to attacking the aggregators [often newcomers that offer demand response services – editor]. They said the aggregators tried to bend the rules.”
“These tactics were very defensive. But they have become smarter and changed tactics again. Now they have embraced demand response, at least in word. In June the president of the Belgian association of utilities, FEBEG, said in a speech that no one is better equipped than the suppliers to manage the flexibility resources their customers have available. But they are not delivering. Some suppliers now for example try to block their customers from signing for demand response with a third party, so they are bound exclusively to their supplier. This makes it more complicated for newcomers to enter the market. The problem is that most costumers unfortunately don’t know what they sign regarding demand response because the demand response products are new and the customer often lacks knowledge in this area.”
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