Demand side: what’s the potential and how do we access it?

For one of the UK’s largest suppliers of electricity and gas, demand side response is part of a wider energy market picture that must focus on flexibility, fairness and achieving the lowest cost for consumers. Steve Davies, Energy Policy Development Manager at E.ON UK, explains.

To understand the potential of the demand side we must first define it. We can all picture a factory shutting down its production line in response to high energy prices.

But does demand response include embedded generation. Does it include storage? Does it include demand reduction or energy efficiency? Does it include back-up generation? And, the most important question of all, how much demand response does our energy system need?

To answer these questions it’s useful to think first about the economics of the demand side. The primary value of the demand side is flexibility: its ability to reduce the costs of managing our energy system. We need to consider whether this value is rewarded in the markets today or whether it is missing. If so, there may be a case to intervene with targets and incentives.

18GW – the estimated amount of ‘shiftable’ electricity that may be possible across all sectors today at peak (around 30% of total demand).

Fair Access

The energy market encourages customers to reduce demand when prices are high; the new capacity market rewards the additional capacity the demand side provides. System and Network Operators have a number of mechanisms that reward the flexibility needed to manage our energy system. There is no additional market failure requiring subsidies or taxes to change behaviour. The challenge is to ensure demand side resources can access this value fairly. We must recognise that the existing arrangements to reward and encourage flexibility in our energy system have been designed for the system of the past not the future.

We must recognise the shift towards low carbon electricity generation, which means more intermittency and creates significant challenges to manage networks. And we must also recognise that the flexibility to address these challenges can be provided not only by large, centralised power generation but also by smaller decentralised generation, demand response and energy storage. The current arrangements that reward flexibility and the incentives for network operators must adapt to this changing world.

Market Forces

Some sources suggest there may be technical potential for up to 18GW of ‘shiftable’ electricity demand across all sectors today at peak (around 30% of total demand) [1]. Clearly a lot of this is not actively shifting demand today and may require significant changes in economics to do so. Deciding how much of this potential is needed is very challenging. Accessing all of it could be expensive. Rather than attempting to set a target for demand side participation we should ensure flexibility so sources can compete fairly together and let market forces determine what the appropriate mix of flexibility is. There should be no inherent bias towards generation or towards demand side technologies.

Rather than attempting to set a target for demand side participation we should ensure flexibility so sources can compete fairly together and let market forces determine what the appropriate mix of flexibility is.

The lowest cost to customers

Our vision is for all providers of flexibility to compete alongside each other, driving down the cost to customers. This will undoubtedly mean a rise in participation of demand side technologies from today. The challenge then is for industry to develop the infrastructure and dialogue with customers that allows this to happen.

So returning to the questions of a definition and how much do we need, actually it doesn’t matter. Transparent and liquid markets for flexibility, coupled with incentives for operators to manage their networks effectively and existing arrangements to ensure environmental performance and efficiency, will give the lowest cost to customers. Markets can decide how much of this flexibility comes from demand, storage or generation.

[1] GB Electricity Demand – 2010 and 2025, The Brattle Group & Sustainability First