Energy execs: ‘The market for demand-response is only going to grow’

• Some electricity markets in Europe are still closed to demand-response services, including whole segments like local networks managed by Distribution System Operators (DSOs). [Jeff Wallace / Flickr]

Demand-response services are still fairly new in the electricity market, but their importance is only expected to grow as power grids come under increasing strain from intermittent renewable energy sources. Andreas Flamm and Frauke Thies explain the “fundamental shift” that needs to happen in the policy landscape.

Andreas Flamm is Director, Regulatory Affairs Europe at Entelios, one of Europe’s leading energy management solution companies.

Frauke Thies is executive director of Smart Energy Europe (SmartEn), a business association focussing on the digitally enabled interaction of decentralised and decarbonised energy solutions.

They spoke to EURACTIV’s energy and environment editor, Frédéric Simon.

INTERVIEW HIGHLIGHTS:

  • Many electricity markets in Europe are still closed to demand-response services, including whole segments like local networks managed by Distribution System Operators (DSOs).
  • Current market size is about 20 gigawatts but the potential could reach 160 gigawatts in 2030, which is about twice the entire generation capacity from coal and gas in Germany.
  • One of the main barriers is regulation, with France, the UK and Switzerland currently leading the way in Europe when it comes to adopting favourable policies.
  • Technically, the grid is ready for demand-response to happen today. But locally – at the distribution level – there is a major opportunity for demand-response to keep the costs down in the future, and avoid unnecessary investments in new grid capacity.

***

Entelios provides demand-side management services in the energy sector. In a nutshell, what’s the business model for such types of services?

Andreas Flamm: The business model is that we help industrial companies use the flexibility in their production processes to make money in the energy system – while helping the electricity grid cope with the intermittent influx of renewables.

So it’s a win-win from our perspective: the energy system needs flexibility, and industrial companies make a little bit of money with our services. That’s the business case.

Demand-response is fairly new still. And many regulations have been written over the last 100 years from the perspective of energy generators. So the work we do with SmartEN is to convince policymakers to open up electricity markets for the participation of demand-response in order to create a level playing field.

Frauke Thies: For example, we’ve been working very hard on opening balancing markets, where Transmission System Operators (TSOs) are looking for flexibility to keep the system in check.

We’ve been successful in a number of countries and regulations but others still have some way to go. For example, some countries only allow flexibility providers to enter these markets with minimum bids of 50MW, which de facto excludes demand-response. And there are other markets which are simply closed, such as the network reserves market in Germany.

Other potential segments like Distribution System Operators (DSOs) should also be able to use flexibility to run their system smartly. And today that’s essentially not possible. Because the incentives systems are such that DSOs can invest in copper, build more grid, and recover those costs. But they cannot recover the costs for using other solutions like demand-side flexibility, even if it is cost effective. This creates inefficiencies.

IEA chief economist: '1970s' power grids need urgent rethink

Electric vehicles could revolutionise Europe’s electricity system, but an outmoded network regulation could hamper progress, according to Laszlo Varro, chief economist at the International Energy Agency.

So Entelios doesn’t sell gear or physical stuff?

AF: No, we don’t. What we sell is flexibility services, which means energy on short notice to the electricity system, in particular Transmission System Operators (TSOs) who need to balance the grid on a second-by-second basis. So they pay us for that.

We have a pool of industrial companies that we draw from to serve the needs of the TSO. And that pool of industrial companies will then get the bulk of the income that we generate from that service. So it’s a pure service, it’s not an equipment type of business.

That said, we do have equipment that we need to install in order to connect those industrial companies to our aggregation platforms – there is a piece of hardware that we install on each site free of charge. Our aggregation platform – which is basically software – aggregates those industrial assets into a pool, which in terms of size is able to compete with energy generators on electricity markets.

At the end of the day, the electricity system doesn’t distinguish whether you increase generation or whether you reduce demand. So that’s the reason why this is possible.

This is often called “Negawatts” by opposition to “Megawatts”.

FT: There are two things the electricity system needs to provide. One is the Kilowatt hour and another is to keep the system in check and make sure supply and demand match at any one moment. And what demand-response can do is cater to this second need, which is arguably the bigger challenge, given that more and more intermittent electricity is coming in from renewable sources. And this is a big part of where the value in the energy market will be in the future.

How big is this market today? I understand this is still pretty niche so you must be betting on future growth?

AF: Absolutely. As we pointed out earlier, some European markets are still closed for us. So simply by opening those up – the capacity products, the balancing markets, the wholesale markets in general –, the market for demand-response is only going to grow. That’s the policy aspect of it.

And then of course there is a fundamental driver, which is the change in the electricity mix, with more and more renewables, which increases the need for flexible assets that can offer Megawatts or Negawatts at times when wind and solar are off.

FT: Today, according to the European Commission, there is approximately 20 Gigawatts of demand-response installed. In terms of potential, the Commission estimates it is much bigger, at around 100 Gigawatt, and could reach around 160 Gigawatt in 2030, which is about twice the entire generation capacity from coal and gas in Germany today.

But the size of the market is quite hard to assess because we don’t have a coherent monitoring of flexibility and demand-response in Europe. It’s something we’re hoping to see introduced in the so-called Governance Regulation.

And one of the main barriers is regulation. Today, independent aggregators in many countries can only access the market if they have prior agreement of a customer’s supplier, which may be a competitor offering generation capacity. So here, we need clear regulatory definitions to determine who is responsible for what to make sure an aggregator can enter the market without depending on the agreement of a competitor.

Actually, some generators are now getting in demand-response too, we see Engie in France doing that for example.

AF: As we said, demand-response is still relatively new. Historically, the rules have been designed from an energy generation point of view. So there is a fundamental shift that needs to happen in the policy landscape. We’ve had some successes but there is still a long way to go.

FT: Generally, demand response can be done both by independent aggregators or be integrated suppliers, or even by large consumers directly. We believe that all of this must be possible in order to create a competitive and dynamic market.

European power grid operators cook up ‘App Store’ for smart grids

EXCLUSIVE / Grid operators from all over Europe are currently finalising plans to launch a digital information exchange platform that will serve as a basis for developing new digital applications to manage electricity flows, and take up growing amounts of renewable energy.

Can you cite best-case examples of regulations adopted around the world that have been helpful in developing demand-side management solutions?

AF: In Europe, France is probably the best country when it comes to demand-response policy. France has had a very high-level political agenda to open up the market for demand-response solutions. They systematically looked at each market segment and thought about what they need to do to open up. And then they also looked at how they can get more competition for demand-response services into the market by opening up for independent aggregators. So this is why France today is one of the European countries with the highest number of independent aggregators.

There are other countries in Europe, like the UK and Switzerland, which have made progress as well. And others are on their way. Germany for instance has made first steps but still has work to do.

Outside of Europe, the market with the highest penetration rate for demand-response is the US. They have also pioneered this segment. And demand-response there has been quite successful because they have been very open from the start for independent aggregators to compete directly with energy companies. And of course the US also has a large chunk of capacity markets in the different regions, which has been quite successful for the growth of demand-response. It’s not a necessary condition but it certainly helps.

FT: No market is perfect. Clearly, Switzerland and France have made more progress than many other countries when it comes to the policy framework for independent aggregators. Several have made good progress when it comes to opening markets. But none of them have opened everything yet. Also the economic environment in some countries is still challenging because of the way markets and mechanisms are designed.

Are you referring to Eastern EU countries?

FT: For some countries in Eastern Europe, you’re right. But also in Southern Europe – Italy or Spain for instance – where the balancing markets are reserved for very large units. And demand-response is rarely one single unit that is large enough to bid into such markets. So they’re out by definition.

EU pins hopes on ‘regional forums’ to unlock electricity trade

A seamless pan-European energy market is still a long way off, but decisive steps can be taken now with stronger regional cooperation and the introduction of cross-border bidding zones for electricity, policymakers and industry experts argue.

Legislators in Brussels are currently negotiating the electricity market design and energy efficiency directive as part of the Clean Energy package of EU laws. Are you confident that the issues you mentioned will be addressed there?

AF: There are two things. One is changing regulations that allow the participation of demand-response. And yes, the Clean Energy Package goes into the right direction there by requesting a framework for independent aggregators.

So that in theory will resolve the issue in those countries that are still closed to demand-response. But in practice it’s always hard to stipulate every detail at the European level, which means it will still most likely leave a lot of room for interpretation at national level.

FT: Things are still under negotiation between the European Parliament and Council. If you look at the Parliament text, for example, the question of independent aggregators is very clearly addressed. We need to see what the final outcomes that comes out of trialogue talks in the end. If legislators manage to be precise enough – yes, we should have aggregator access across the entire EU.

The legislative proposals also include very important elements on general market opening and non-discriminatory conditions for decentralised resources. We are optimistic that these will be in the final legislation.

What policy ingredients do you think are necessary to boost demand-response?

FT: With respect to aggregation I would say three things: 1) First, opening all markets for demand-response and decentralised electricity resources. Which means principled opening and product definitions. 2) Second, define a framework to allow market access to all actors, including independent aggregators. 3) And three, change the regulatory framework for Distribution System Operators (DSOs) so they can also purchase flexibility from the market, where it is more cost-effective than investing in networks.

Are all these three ingredients present in the EU texts currently being discussed?

FT: Yes, they were all present in the Commission proposal, to different degrees. The market opening and the market access are quite present. The DSO aspect is present as well in its basic shape but more work is still needed there in order to streamline this and make it work in practice.

And of course there are other dimensions for demand-side flexibility, for example allowing consumers to react directly to price signals based on information provided by smart meters.

People power? EU gets low marks on ‘energy communities’

When the European Commission tabled its Winter Package of clean energy laws in November 2016, there was a smell of revolution in the air, with Brussels pitching a future where citizens would be empowered to generate their own electricity, consume it locally and sell it back to the grid.

Most European countries are still far from having real-time price signals, however. Many member states are dragging their feet on this…

FT: That’s right. Today, this is a reality only in Estonia and Finland, where even household customers can choose a dynamic price model that shows what’s happening on the market. And in fact many people in these countries have actually gone for it because it’s cheaper for them.

Real-time price signals is controversial for countries like France where people are used to having cheap electricity at regulated prices and are generally sceptical of price fluctuations that markets forces bring. So maybe Estonians enjoy this but it will be difficult to get this accepted in countries like France.

FT: Different consumers have different needs. And they should be able to choose. Some may prefer to have a stable price and let the supplier take the risk for price fluctuations, even though that means paying a bit for the hedging.

But they may also choose to work with an aggregator who sells the flexibility on their behalf. Entelios does it for industrial consumers but there are other companies in Europe doing it for residential consumers.

And a third group of consumers will opt for full automation and a real-time price offering because they find they don’t need someone to do the hedging for them. These are people for example who own an automated heat pump or an electric vehicle, which can react to real-time price signals.

And – importantly –, if a consumer chooses to participate in the market and provides flexibility, it doesn’t mean he is competing with his neighbour who doesn’t. He would be competing with suppliers rather than with other consumers.

AF: This point about customer choice is fundamental. Nobody should be forced to participate in the flexibility market. And conversely, no-one should be shut out from entering. This is true for prices as well – people should be able to choose freely whether they prefer opting for a variable electricity price or a fixed one.

And if the customer wants to use their electricity supplier for flexibility services, they should be able to do so. But they should also be able to choose an independent provider. This is the fundamental starting point – providing customer choice. And for that, you need to open the market for the different providers and allow competition. Once you have achieved that, the way is open for the demand-response sector to grow.

What is also important to understand is that the electricity system is complicated. And in the nitty-gritty of the electricity market – how auctions are defined, for instance –, we often see small changes can make a huge difference. And that can hurt demand-side management businesses because it’s still an emerging market. For regulators, this is an ongoing day-to-day task, involving the Transmission System Operators and the national regulatory authorities.

I suppose the case must be easier to make for industrial consumers with large electricity bills than with small residential customers.

AF: This is why we chose to focus on industrial companies. And the reason why it’s easier is because we have a sophisticated piece of hardware that we deliver to each site that controls the asset and pools into our aggregation platform. And the cost of that hardware is easier to recover with large industrial assets.

Now, others have different business models. There are also pre-installed control technologies in things like heat pumps or electric vehicles. In such cases, you don’t need to install anything while making it economically viable to pool those assets. And we are also looking into this segment to provide flexibility solutions more locally, at the DSO level. So we might look at adding smaller things to our pool of assets.

Europe eyes ‘big bang’ in power savings from industry, SMEs

While standards for toasters, fridges and TV sets have so far grabbed most attention, the biggest potential for power savings actually lies in integrating industries and small businesses to the electricity system, a senior EU official has said.

Can any demand-response happen without a massive upgrade of electricity grids?

AF: I think so. The two are to a large extent independent of each other. You can save investment in the low-voltage electricity grid by providing flexibility services more efficiently. So in that sense it’s not at all a prerequisite to enhance the grid, it’s actually a way to defer or avoid grid investment.

The question is different when you’re dealing with massive amounts of renewables – for example bringing wind power from north to southern Germany. There, it is of course necessary to have a stronger grid if you want to transport such large amounts of electricity over long distances.

FT: Technically, the grid is absolutely ready for demand-response to happen today. What is needed is system management. Today, the electricity system is managed via balancing markets at the transmission level where flexible energy services are being traded. But locally – at the distribution level – there is a major opportunity for demand-response to keep the costs down in the future.

Some energy companies like Iberdrola have announced their intention to buy up local distribution grids. Is this a market that demand-side companies would consider getting into as well?

FT: Generally, we are concerned that regulated activities are becoming harder and harder to distinguish from market activities. Europe has gone for a market liberalisation approach that requires an unbundling of regulated transmission and distribution activities from market-based generation and supply activities. And if the lines between those become blurred, it makes it harder for the market to operate effectively.

So you believe unbundling should be a requirement also at the distribution level?

FT: We need to be consistent in the way policies are implemented. A blurry approach is going to make it harder. Take a storage asset: If it is owned by a market party, it can offer that flexibility to whoever needs it most – to the TSO, to an energy supplier or to the DSO.  If that same asset is owned by a DSO, it could use that asset for its own purposes but wouldn’t sell it to anyone else. So that asset would be used sub-optimally. As the DSO as a regulated actor has easier access to capital, it might want to make that investment anyway, which means we’re distorting the market and losing efficiency in the system.

AF: It’s indeed problematic to grow decentralised flexibility markets if there is a monopoly regulated business also active in that segment. That’s why we’re opposed to DSOs owning their flexibility assets because this can easily be done through competition. And I think this should be a general principle: in certain areas like networks, it probably makes sense to have monopolies. But where we can create competition, let’s leave it to the market rather than allow regulated monopolies to also go into that segment.

And this concern is something you believe is being addressed in the Clean Energy Package, or not?

FT: It is generally being addressed. But as always, the devil is in the detail. In any case, demand-response should always be delivered by market actors. I cannot imagine a functioning market in which a DSO goes on the customer’s site and directly activates their flexibility – that would be a complete distortion of the market.

The Clean Energy Package is also for instance trying to define ownership of storage and electric vehicle charging operations. And the Commission proposal is generally clear that this should be a market activity. But there may be cases, especially in the beginning, where it is difficult to determine where the market activity starts and where it ends. So the definitions need to be sufficiently detailed and clear enough in order to avoid abuse.

ENTSO-E chief: Power grids have to remain ‘neutral’ from commercial activity

As private energy companies increasingly get involved in local electricity distribution networks, European regulators will have to do their job and ensure that grid operators are properly isolated from commercial activity, argues Laurent Schmitt.

Supporter

Danfoss

Danfoss top five priorities for a successful DWD revision:

  1. Unlock investments in energy efficiency and digitalization
  2. Increase transparency about energy use and water losses in the European water sector
  3. Enforce reduction of water leaks to de-risk contamination through leaky pipes
  4. Make information easy to understand by the public and comparable between member states
  5. Think circular economy

Danfoss

Subscribe to our newsletters

Subscribe