Tapping the demand response potential, the cost efficient way

News Article

Demand response aggregation is key to enabling a more flexible power system. The European Commission’s draft proposal can be improved to ensure its cost efficient and market based development, a report by DNV GL demonstrates.

With an increasing share of intermittent renewable energy in the market, demand side flexibility provided by demand response (DR) helps meet not only the challenge of the power system’s transition, but also benefits consumers by giving them more control over their electricity consumption (See here).

The efficient provision of DR is a crucial and versatile source of flexibility that can help the system operator to balance the power system by reducing the imbalance between generation and demand of electricity in real-time. This will have a positive impact on the power system and overall on wholesale markets. Moreover, DR can also contribute to the mitigation of network congestion and, in long run, reduce the need for network extension at distribution level.

The draft proposal of the Electricity Directive issued by the European Commission aims at triggering the potential of demand response in the EU, by defining a framework for independent demand response aggregators.

A new study carried out by independent experts from DNV GL on behalf of EURELECTRIC shows that the EC’s proposal as it stands risks reducing the economic efficiency of demand response and impacting the energy retail market. Indeed, independent aggregators could sell energy on the market without having paid for it, which may reduce the overall system welfare (See here). The lack of compensation also poses a higher risk to small suppliers. Indeed, consumers’ DR activations may have a more considerable impact on small supplier’s economic situation due to their limited portfolio, thus hampering retail markets’ competitiveness.

The report reinforces recent recommendations by energy regulators recognizing that ‘payment for resold energy is necessary to serve system efficiency and ultimately to keep consumer bills down’[1].  “To avoid any market distortion” says EURELECTRIC Secretary General Kristian Ruby “DR aggregators should have access to all markets and be able to contract freely with consumers. But the Clean Energy Package should also ensure that the energy sold on the market is paid for, it should acknowledge the aggregator’s financial responsibility for their imbalances, and implement mechanisms to neutralise these impacts on other market parties”.

[1] See their Whitepaper on ‘Facilitating flexibility’ from May 2017