The status quo of “Demand Response”

The electricity grid must always be in balance, which means that, at each moment, production must equal consumption. This is a well-known premise and is where the complexity of the electricity market lies.

It is well known that the demand for electricity throughout the day and throughout the year is not flat: there are hourly and seasonal variations that require continuous adjustment of supply and demand. For this purpose, there are competitive electricity markets and adjustment services available to the system operator (Red Eléctrica in Spain) to resolve technical restrictions and variations that may arise in supply and demand from the auction to the moment of consumption.

Demand Management, or response to demand, is a tool for balancing this grid. The need for it is growing all the time due to the increase in intermittent renewable energy in the electricity mix (such as wind and solar), which makes the electricity grids more unstable due to climatic uncertainties.

Another strategy for energy efficiency

But before we talk about Demand Management, let’s open a brief parenthesis and comment on energy efficiency, where this system has a great link.

Energy efficiency management, according to the Spanish Law 1715/2014, can be defined as the set of actions or measures, whether technological or changes in consumption habits, aimed at reducing energy consumption by the consumer: individual or company.

The objective of energy efficiency is none other than to optimize as much as possible the relationship between the services obtained and the amount of energy used to generate them.

It is accepted by all, governments, institutions and businesses alike, that energy saving is a basic goal for ensuring the sustainability of natural resources and economic savings for both businesses and households.

To achieve optimal and rational energy consumption, we could say that there are two ways:

– Investments at a technological level.

– Changes in consumption habits.

Within the investments at a technological level, we find the implementation and development of appliances and machinery characterized by lower use of energy or a less polluting type.

On the other hand, the areas of consumer concern both individuals and professionals and consist, in most cases, of implementing good practices.

Demand response can be considered as a tariff or a program where strategically it consists of active demand management.

In other words, the objective of demand response is to get the end consumer to change their electricity consumption habits to adapt them to fluctuations in the price of electricity according to the time zone in which we find ourselves.  In this way, a series of advantages related to savings and rationality in consumption is achieved.

The integration of demand response systems in homes and businesses requires the development and installation of intelligent networks and technologies focused on the adaptation of system operators, where we explain here how demand aggregators are recognized in the market.

Why is it a trending issue?

We can list some advantages of this strategic market as:

1. Savings for the final consumer, since high prices during peak periods, are avoided or reduced.
2. Greater stability of the electrical system, since the risk of voltage drops in the periods that historically have greater consumption, is reduced.
3. Promotion of the participation of renewable energies.
4. The need for generators and standby plants is minimized.

However, the capacity to respond to demand increased by only 4% in 2018, according to the International Energy Agency. While progress has been made in implementing smart meters, this enthusiasm has not extended to the development of the market designs and business models needed to take advantage of the potential flexibility available.

Image 1- Demand management potential in the sustainable development scenario 2016-2040 Source: IEA

At the end-user level, the implementation of demand-side flexibility is Like other forms of traditional flexibility, it is largely centralized and restricted to large industrial or commercial consumers.

According to the IEA in its May 2019 report, around 40 gigawatts (GW) of demand response is currently used through traditional schemes, such as arrangements to interrupt service at critical times, or drastically different rates during the day and night, representing 0.5% of global electricity generation capacity.

The good news is that several jurisdictions around the world are stepping up demand response efforts:

• United States – It has competitive capacity auctions where generators and DR customers participate and offer capacity guarantees in exchange for an economic incentive, in this case, the obligation to meet demand reduction is mandatory. On the other hand, through participation in voluntary programs, end users are notified one day in advance and on Day D, of expected adjustments to peak hours. Consumers who choose to reduce their consumption can reduce transmission capacity costs over the next year, in addition to lowering the cost of electricity by reducing consumption at peak times.
• United Kingdom – Was the first country in Europe to open some of its electricity markets to demand participation. Today, DR is integrated into the balancing and capacity markets.
• France – It has traditionally had a demand response mechanism in which large industrial consumers participated in balancing services, smaller consumers were subsequently included through aggregators and recently DR has been included in the wholesale electricity market.
• Germany – German regulation has opened up the electricity market to DR participation in the balancing markets for large energy-intensive industrial companies with flexible production processes. It also has an interruptible load service.
• Spain – The interruptibility service is a demand management tool that Spain has adopted to provide a rapid and efficient response to the needs of the electricity system following technical criteria (system safety) and economic criteria (reducing system costs). This service has been managed mainly through the intensive industry with the so-called interruptibility auctions. This system is now obsolete and is in the process of disappearing completely.

Image 2 – Selection of Demand Management initiatives Source: IEA

The roadmap

We continue to work so that the figure of the Demand Aggregator can help the demand manager to be able to carry out his role in the system. However, we continue to be involved in the development of regulations and procedures to allow this to become a reality. All of this involves the development of a new market model.

The current market model has been designed so that a large centralized generation supplies passive consumption through a unidirectional transmission and distribution network. The new market must allow for generation and consumption at the distribution level. To this end, there are already two market levels:

1. Global (European) markets such as the ones we have: in which energy can be negotiated with agents located in different points of the Iberian and European networks transparently without taking into account the location of the producer or consumer, as long as they are directly or indirectly connected to the network.
2. Area and flexibility markets: Those markets in which, due to the specific conditions of the distribution network to which the installations are connected, exchanges are restricted or must be carried out by installations located in a specific location or locations and in which trading may be promoted or restricted by the distribution network operator.

In Spain, the IREMEL project (Integration of Energy Resources through Local Electricity Markets) is intended to provide a solution for these zonal and flexible markets. Despite great progress, we are still far from a market capable of providing certain answers to the stakeholders. What challenges are being faced?

• Possible business models to ensure that both customers and service providers need a certain price signal.
• For business models to capture the potential for demand response, they must engage with a large end-user base, accommodate a wide range of technologies, and minimize barriers to participation. Technological maturity is key.
• The great diversity of applications and end-uses means that policies must also be diverse enough to ensure that market designs are appropriate, and markets must be detailed enough to see demand responsiveness meeting certain system needs.
• To encourage new business models, the potential for supporting billing, allocation and reconciliation with more sophisticated solutions, including distributed accounting and blockchain technologies, should be explored.
• Governments and industry should actively disseminate information on the benefits of demand response by promoting socio-economic research to better understand the needs and potential of different types of consumers, end-uses and activities.

Demand Management is characterized by embodying all aspects of the energy of the future: efficiency, digitalization, development of electric mobility and integration of renewable energies, as well as the new role of customers, no longer passive users, but conscious and demanding protagonists. It is an initiative for consumers to make more intelligent decisions about energy consumption, and for the network to do the same.

Priscila Scheel| Energy Consultant