Industry chief: Energy efficiency bill crucial for demand-response

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Jessica Stromback of the Smart Energy Demand Coalition says the Energy Efficiency Directive could create a demand-response energy market, which decentralises consumption and allows end-users to control their energy use at critical or peak times.

Jessica Stromback is executive director of the Smart Energy Demand Coalition and chairwoman of VaasaETT OY, an energy think tank based in Finland. She specialises in smart meters and is a co-founder of the retailers task force working under the Smart Grids Technology Platform for the European Commission. She spoke to EURACTIV's Ana-Maria Tolbaru.

Why is demand-response important for consumers?

It is important because now they are blocked from the main benefits that the developments in the grid could bring. They are blocked from the energy market. While they provide much revenue for the energy industry, they do not have access to energy markets and can't benefit back from them.

Demand-response promotes the active consumer participation in the energy market. Consumers can lower their energy consumption right when it's most needed, when it's most expensive, but now they are actively, regulatory blocked from that. Even if this can generate money for them, they are not informed and they are not provided access. Article 12 of the Energy Efficiency Directive says they should be provided access.

You claim that the Council’s version of the Energy Efficiency Directive could prevent businesses from generating between €3.5 billin and €5 billion a year in new revenues from their participation in the energy markets. How did you calculate this sum?

The SEDC has looked at the revenues generated through smart meter enabled demand response programmes in the US market, we then significantly lowered these numbers in order to adjust for the current capacity margins and wholesale market prices in Europe. The result of this calculation method is a potential revenue loss in the region of €3.5 and €5.0 billion a year for European businesses.

In fact, the demand response market in the USA is already generating approximately $6 billion in annual direct revenues for American businesses as well as gaining indirect earnings through fewer investments. At approximately 3,500 TWh per year, the overall EU electricity market is nearly the same size as the US market, at about 3,800 TWh per year.

What are the latest developments in the Energy Efficiency Directive on demand response?

Actually, they have recognised the value of demand response and are now beginning to be more positive toward DR.  Article 12, which makes provisions enabling demand response, seems now to be in the process of passing through the Council as well as the Parliament and the Commission. This is excellent news for European consumers.

Having said that, the language surrounding smart metering for residential consumers remains relatively weak within the directive [Article 8 and Annex VI]. Smart meter benefits are perhaps more politically sensitive and some member states have been slow in making the upfront investment in meters with the required level of functionalities – despite their known benefits.

What is behind member states apparent 'apathy'?

Smart-meter-enabled programmes – the whole concept of consumers and households earning from their participation in electricity markets – is still so new that the apparent apathy is really just down to a lack of understanding and information among decision-makers.

Technology is there – but how important is current the regulatory barrier?

Regulation is decisive to the successful deployment of demand response. The regulatory barriers are certainly obstacles given that in some markets demand is not even allowed to participate. This has to change and the EED can go some way towards opening up these markets for consumers. It is essential that demand is treated equally with supply. This is still not the case in Europe – however Article 12 will provide an important step forward.

How would these energy markets work? What would they represent? Who would be the trader, who would be the buyer and who would be the broker?

The buyer would be the electricity supplier or the grid operator (Distribution System Operators or Transmission System Operators) and the seller would be a household, a business or an industrial consumer – even consumers can bid directly into the wholesale markets if they want. The sellers’ loads could be bundled together by an aggregator so that their shifted loads could be sold in ‘chunks’ into the electricity markets. Reducing large amounts of demand creates spare capacity and this capacity can be very valuable at certain times – for example during peak periods when consumption is very high and supply is tight.

Demand response delivers these benefits through providing residential, commercial or industrial consumers – with information, control signals, and financial incentives (often direct payments) to lower or adjust their consumption at strategic times.

How much do member states need to shift the load of energy used? What is the real need here?

It depends on the country but the general trend is only going up. The need is increasing all the time as more renewable sources of energy are integrated into the system. This means the supply side of our energy system is now exposed to more volatility than before because renewable energies are by their nature much more unpredictable than conventional forms of generation.

Moments when the wind doesn’t blow and the sun doesn’t shine could correspond with a time of high demand. So we will need much more flexibility from the demand side. Allowing consumers to shift load is much greener than building more back-up power generators which would be run on fossil fuels and would mainly be used to cover peak demand.

Consumption can go from 20 megawatts per hour to 1000 megawatts per hour for a whole day, when power plants cannot manage the demand, when there is an emergency. You can help here, by helping consumers save energy when they do not need to use it – so that the prices for energy at those peak, urgent times, do not go up so much. But this is one argument, and this phenomenon doesn't happen often, so what is the real need to have this demand-response system implemented all over Europe? Is it cost effective?

Demand response can function in any market and not only as an emergency reserves resource. Therefore the use is not as limited as described above. For example, a load from a freezer can be bid many times a year (as it does not inconvenience the consumer).

The majority of markets become more efficient if demand is also allowed to participate. Also – as the need for creating spare capacity rises – and it inevitably will due to the rising share of renewable energy in our generation mix – the value of capacity will rise. This rising value of capacity has to be factored into the cost-benefit equation.

What analyses are there to prove the demand-response system is cost-effective?

The US, Japanese and Australian experiences are the evidence that demand response programmes are cost effective. This is mainly due to the fact that when DR programmes are allowed to compete in a competitive open market, they often win.

Who pays for the initial capital investments? How does the investor recover the money and how long does it take?

For commercial industrial customers it is usually the aggregator. The payback can take from one day to three years (six months is more normal). It is dependent on the value of the market and the amount of technology that particular consumer needed in order to participate. The aggregator is paid by the percentage he keeps from the DR payments.

In the case of residential consumers all that is required is a smart meter – this is usually paid for by the electricity supplier (known as DSO). The payback length is then less clear as the meters are not installed to provide demand-response services only.

Who owns those power plants saving energy and giving it to consumers at peak, urgent times, when usual power utilities cannot cope with the demand? Do they function as normal power plants? Or do they store energy in order to sell it just at those peak times?

Those power plants are often owned by the utilities’ generation department and are switched on at times of need. Some, such as the so-called ‘spinning reserves’, run continuously in case they are called upon. Needless to say, spinning reserves are not very environmentally friendly as they burn fuel even when not producing power.

Selling energy on markets – this is something that people cannot do, but will have to pay someone to do it for them, as long as they make a profit. This someone could be an aggregator – but how could consumers trust this aggregator?

The aggregators take the risks for the consumer and gradually good service builds trust. You could ask the same question of many business relationships, experience is the only way to build trust.

Consumers take home lower energy bills? Or also money? How do they receive the money they are saving – by handing their energy over to the markets?

It depends on the programme. In general, residential consumers get lower energy bills and commercial/industrial consumers receive direct payments.

Would the creation of such energy markets affect the profits of power utilities?

Some would earn more because they are currently losing by having to buy peak power at expensive prices. On the other hand, other utilities that are currently earning from peaking power would lower their revenue. It depends on the market and the utility. The majority of utilities now acknowledge they will need active demand participation in the very near future.

Would you trade energy into already existing markets? Or do you need to create new markets?

It can be traded into already existing markets or new markets can be created. For example, capacity markets, which don’t exist in many countries, could be sold into as well as the existing markets.

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