In a previous blog, we had already talked about the mechanisms through which Red Eléctrica de España (REE) managed variations in production and consumption forecasts. We recall that management was limited to the supply side, with conventional electricity generation sources and then wind generation, adapting its programmes to resolve the technical restrictions of the system.

However, with the continuous entry of renewable energy into the electricity generation system, together with the European energy transition plan of the Winter Package, member countries have had to modify their own market structure and evolve towards participation not only in supply, but also in demand for system adjustment services, with the Demand Response program.

Demand Response according to the European Commission

According to the European Commission, Demand Response is defined as “a tariff or a programme established to provide incentives for changes in electricity consumption patterns by final consumers in response to changes in the price of electricity over time, or to provide incentives for payments designed to induce lower electricity use at times of high market prices or when the reliability of the network is at risk”.

In addition, the European Commission also details two groups for Demand Response:

  • Explicit Demand Response: demand competes directly with supply in the wholesale, balancing and ancillary services markets through the services of aggregators or single large consumers. Consumers can earn from their flexibility in electricity consumption when requested.
  • Implicit Demand Response (also known as dynamic prices): consumers choose to be exposed to time-varying electricity prices or time-varying network tariffs that partly reflect the value or cost of electricity and/or transportation in different time periods and react to those price differences depending on their own possibilities (no commitment). At the contrary to the first option, here consumers can not participate in balancing services or in capacity markets.

It is important to note that neither form of Demand Response is a replacement for the other. Indeed, many customers participate in Explicit Demand Response through an aggregator, and at the same time, they also participate in an Implicit Demand Response programme, through more or less dynamic tariffs, such as a day/night tariff. Activation moments and their purposes inside the markets are different, as well as the benefits: while consumers will typically receive a lower bill by participating in a dynamic pricing programme, they will receive a direct payment for participating in an Explicit Demand Response programme.

Source: Flexibility value chain [USEF]

The demand aggregator

But what is a demand aggregator?

The act of aggregation can be defined as the bringing together of different customers within the electricity system, i.e. consumers, producers, prosumers, to act as a single entity when participating in electricity markets or when selling services to system operators. Through aggregation the value of flexibility can be enhanced by bringing together suppliers that would be too small to participate in the markets individually due to the specified load sizes.

In addition, the aggregator provides this service separately from any supply contract.

In order to allow aggregators to participate, a Member State must define roles and responsibilities around aggregation providers. Several Member States have allowed aggregated load to be sold in the market but have not defined the roles and responsibilities of those selling them. This by default means that only retailers are able to provide these services to consumers. To enable independent aggregators to enter the market in a safe and scalable manner, it is critical that the role and responsibilities of these new entrants are clarified.

The Spanish case

As we mentioned, while other countries already include the Demand Response service within their scheme, others, such as Spain and Italy, for example, have not yet developed adequate national regulations for the evolution of the consumer to the figure of the prosumer. Aggregation in Spain is not legal and there is only one scheme that allows Explicit Demand Response: the interruptibility system for the electro-intensive industry, managed by REE, although this does not allow the participation of aggregators.

Source: Balancing market products, including volume and load accessibility in Spain [SEDC 2015, Demand Response Map]

But last June 2019, the European Union has been very clear: with Regulation 2019/943 and Directive 2019/944 on common rules for the internal electricity market, words such as active customer’, energy community’, aggregator’ and demand response’ have been defined.

As we already mentioned, until today, in the Spanish electricity market, only conventional power plants and then wind power plants are able to participate in the balancing services of the electric peninsular market. However, the 23rd of December, the CNMC extended the participation to the demand side, as well as the storage system side. Indeed, with the publication in the BOE of the Disposition 18423, consumers, from the small ones to the big ones, individually or through a demand aggregator, are now able to participate in deviations, primary, secondary and tertiary regulation providing to the system operator all the energy needs in each moment during the day.

What’s the next step now? The provision also indicates that no later than six months after its entry into force, for all scheduling areas, transmission system operators have to prepare a proposal on the terms and conditions for balancing service providers and balancing settlement agents.

Everything seems to be moving in the direction that the European Commission had set out. Once the Government has approved the new resolution with the new operational procedures for developing this new type of service, it is certain that the electricity market scheme will change drastically. Welcome 2020!

Cristina Vitale | Energy Consultant

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