Demand Aggregators, will they be the breakthrough?

The power system faces every day with a puzzle to solve: Instantly balance power generation with consumer demand. To do this, “Red Eléctrica de España” (REE) is provided with mechanisms to act as soon as possible to variations in forecasts, either for example by a failure of a generating plant, for blowing more or less wind than expected or because consumption peaks more than expected for rising temperatures. There are many factors that can cause an alteration between the initially planned and real volume.

This situation becomes magnified even more considering that renewables are taking greater force in the generation mix and gas and coal-fired plants are closing. All this increases the need for services which allow an agile balance of the system.

The most common action by REE to avoid these imbalances is focusing on the supply side, through adjustment services markets. In these markets, producers adapt their programs to address the technical constraints of the system. These are markets that are managed by REE and where producers get an extra remuneration for adapting its production curve to the specific needs of the system.

But, is there the possibility of contributing to system balance by the demand side? Keep in mind that the hourly demand curve is fairly inflexible, traders must ensure supply to its customers and has no room for maneuver. However, REE already have an organized mechanism to influence demand instantly, known as interruptible service. This service is based on request power derating at peak times to large consumers, at a time when there is not enough generation to meet demand. Obviously, large consumers who participate in this service receive a remuneration established in auctions that are held annually. How to proceed is defined in the Order IET/2013/2013, which regulates the competitive allocation mechanism to manage interruptible demand service, which was subsequently amended by the Order IET/346/2014. Packages of power backoff traded are 5MW and 90MW, which means that only large industries can participate in this system.

However, many medium consumers are left out of this service due to lack of volume, although they would be able and willing to manage part of their demand to offer new options to balance the system. In Spain, there is increasing interest in this option, which would entail raising the need to establish a new regulatory framework that would allow the entry of new agents in demand response management, as has already been implemented in the UK and France, or in process in Germany.

Demand response management includes mechanisms and measures focused on increase the participation of final consumers in the electricity markets and system operation, through economic incentives. Where this idea has been most exploded is in UK, with the development of several companies called Demand Aggregators. These companies add their clients’ consumption, so they can operate with grid operator (in UK, National Grid), participating in markets where, thanks to the management of consumption instantly, they can help balance the system and therefore, be compensated for this. Demand aggregators control, for example, lighting systems and climate of its customers, reducing consumption if the grid operator requests it. In this model participate some water treatment plants, which can manage when performing their pumps, or some industries or shops (supermarkets, shopping centers) that can adjust promptly for a few minutes their cooling systems or air conditioners. With this model, therefore, these consumers have changed from being mere observers to be active agents in the electrical system.

Demand response systems began in UK a decade ago. Main demand aggregators now offer their customers the opportunity to participate in two markets:

Frequency Response: In front of sudden generation or demand changes in the nominal frequency of the system, which ensures the proper functioning of the network (for example, in Spain the nominal frequency is 50Hz). Demand aggregators participate responding quickly, correcting the imbalance within seconds interrupting the consumption of their customers in air conditioners, refrigerators temperature, pumping systems, etc. They are based on automation system because the response must be immediate, and usually it will be solved within 30 minutes, as maximum. Therefore, this option requires smart grid technology and smart metering systems that allow a second by second control.
Short Term Operating Reserve (STOR) or the Capacity Market, which will start delivering from 2018. The STOR is an adjustment market, which involved both generation and demand. Participation in the STOR is performed through tenders, so the price is variable. Currently the price is in the range ₤ 20,000-30,000/MW.

It is expected that the entry of demand aggregators as new market players will finally impact on the market in the medium or long term. For the grid operator, the increase in this long-term mechanism assumes a possible flattening in the demand curve system, which improves efficiency and manageability of the network and reduce price volatility. National Grid is promoting the increase of such agents, recently launching a promotional campaign. Currently, demand aggregators account for 4% of capacity in STOR, but they seek to reach 30-50%.

Those who are more affected by this model are big producers, who are forced to restructure their pricing mechanisms, earning less in adjustment markets. In the UK, companies like Centrica, SSE or EDF Energy have already expressed their concern at this situation and begin to suffer the consequences. The reduction in their income may end up rethinking if they should maintain certain old and expensive generation plants, as well as interest in the construction of new combined cycles.

This model leads to an evolution from a production-driven energy system to a consumer-driven one. In Spain, in addition to be in a regulatory framework in which the figure of demand aggregator is not yet conceived, the main entry barrier is technological, as the model requires significant infrastructure development in smarts grids. However, we are currently in development of these technologies, the next milestone will be the full implementation of the metering system by 2018. In the coming years, options such as demand management through aggregators may become feasible in Spain, opening a new field to explore for many consumers, a new way to improve our energy costs.

Susana Gómez | Energy Consultant