Strengthening the UK's demand response flexibility market

Energy has become front-page news, and the debate about its future has never been so important. Understanding what that future might look like is crucial if we are to meet the long-term challenge of providing safe, reliable, and secure energy in a sustainable and affordable way. Of course, we cannot be certain how the energy future will evolve. Factors such as environmental legislation, energy costs, and economic developments will all have a major impact on the future energy landscape.

Generation of thermal electricity in the United Kingdom is coming to an end. A large amount of coal- and oil-fueled generation has and is retiring because of age and environmental legislation, including the European Union’s Large Combustion Plant Directive. Furthermore, challenging economics for gas-fueled generation has resulted in few new power plants being built and many, including units only two years old, being mothballed until the business case for their operation becomes more favourable.

The resulting decline in capacity and generator availability has led to very tight capacity margins—the difference between electricity supply and demand levels that can make the role of the National Grid in matching generation and demand quite challenging. Indeed, spare electric power production in the electricity system is predicted to fall to less than 2% by 2015, increasing the risks of blackouts should an unforeseen operational issue arise or the United Kingdom experience a cold winter.

Today the situation is very different. Increasing contributions from the renewables sector, notably from wind and solar, are both unpredictable and fragmented, spread out across the country. To maximise carbon savings, National Grid needs to make the most of clean sources like these but must also take compensatory actions when they are not available. Expensive stand-by plant has to be called upon when the wind doesn’t blow or the sun doesn’t shine.

Additional power must be either taken on to the grid or demand reduced. Large users in industry are increasingly being encouraged to “turn down” and delay their demand until such time as available capacity improves.

This increases the requirement for demand side balancing services, known as demand side response (DSR). These services help the system operator, National Grid, to balance supply and demand at times of system stress, vital to maintaining the UK’s power supplies. DSR could provide an important contribution to managing security of supply and cutting energy consumption. It offers a cheaper and greener alternative to building new generating capacity.

Ofgem estimates that non-domestic buildings (excluding industry) contribute approximately 15GW to peak demands on Great Britain’s national grid. This could rise to around 30-40GW when considering large industrial and manufacturing facilities.

The main routes to enter the demand side market are either by providing services directly to National Grid or by working with one of a growing number of demand aggregators or other third parties. Aggregators and third parties can work closely with an energy user and show them how to maximise their assets in terms of the speed of response they could provide, capacity available, the amount of time that delivery could be sustained for – and the various prices available. In effect, the demand-response aggregator will enable property owners and asset managers to access their assets' untapped revenue sources while meeting energy-saving demands, cutting costs, and contributing to the reduction of carbon emissions.

Pearlstone Energy is a National Grid-approved demand aggregator. We use Honeywell’s proven technology to automatically reduce energy consumption in buildings for a short amount of time during periods when electricity demands exceed availability. These automated energy reduction measures are totally carbon neutral and can create additional revenue streams for participating companies while contributing to broader UK carbon reduction goals.

But there are commercial challenges, especially for new entrants, due to lack of investor certainty and reliance on multiple revenue streams. Therefore, some demand side providers would like to see longer-term contracts. Others suggest that more frequent tenders, a move to regular auctions, and standardisation of products would enable wider market entry, and potentially lower minimum size thresholds.

There have also been some concerns by a number of industry observers that DSR has not received sufficient attention and is disadvantaged compared to generation capacity. In particular, DSR providers can only bid for one-year contracts, whereas new generation can receive capacity agreements of up to 15 years. Evidence from markets in other countries, where equal contract lengths are awarded to both generation and demand capacity, suggests that DSR can make significant contributions, without being at the expense of new generation.

For business customers, it can be confusing to navigate the different products and routes to market. There are cultural, informational and behavioural barriers. Confidence is critical, and can be undermined by conflicting sales messages from demand side providers. Industry standards are needed, and are being developed. For customers, senior buy-in and cross-business commitment is often required. Demand side flexibility should link into the significant opportunities for energy efficiency.

The market expectation is that change will occur. However, if change does not happen quickly enough, there is a risk of discouraging new non-traditional market participants. Likewise, as business customer interest grows, we need to ensure they are able to participate, and do not miss the opportunity. For example, some customers wanted to take part in the transitional auctions but couldn’t respond within the required timescales.

There is a clear tension between changing existing markets to ensure that they are fit for future, and not knowing how markets may develop. But a slow watchful approach may also rule things out. So we need to provide a sense of direction for those coming into the markets and wanting to invest, without being able to offer certainty.

A shared vision of an end-point, or at least the principles for a future market is required, as are the incremental steps to get there. This should be an evolutionary pathway – to ensure that we build on lessons learned and maintain investor confidence in the transition from existing to future arrangements.