Market view: Businesses can bring balance

By unlocking their energy flexibility through demand response and reserve services, businesses offer a way for us to keep the lights on with cost-effective capacity management, says David Cockshott.

National Grid’s latest winter outlook consultation has declared power margins “manageable” for the year ahead, thanks to 3.5GW of contingency balancing reserve pushing spare capacity from 0.1 per cent to a more comfortable 5.5 per cent ahead of anticipated peak demand levels.

Alongside those power plants, paid to sit in reserve as a safety net, is an ever growing band of businesses willing to turn down consumption temporarily to reduce strain on the system. Bringing forward the capacity mechanism may alleviate concerns from next winter onwards, but part of the responsibility for keeping the lights on this year will fall on these industrial and commercial businesses.

Calling on businesses to reduce consumption during peak demand has evolved from interruptible supply contracts to a whole suite of balancing services for organisations of varying sizes. Business flexibility is now a vital tool as the UK juggles tighter capacity margins and an ever increasing proportion of intermittent renewable generation.

Non-domestic consumption accounts for 60 per cent of the UK’s total energy demand, so demand-side balancing services make sense. In its Future Energy Scenarios, National Grid predicts that industrial and commercial businesses will provide up to 5.7GW of demand response in the next ten years as coal generation comes offline without new nuclear or gas plant to replace it.

While the role of businesses in balancing the system will be critical in the short to medium term, demand-side response is only one element in a smarter energy system. Combined with energy storage and smarter networks, Grid predicts it could reduce the cost of balancing services by £1 billion a year by 2050 and save billions of pounds in overall system costs.

Unlocking business flexibility means shifting load or production outside peak demand periods, turning down or briefly switching off equipment such as refrigeration and heating systems or switching to on-site generation, creating a dynamic solution to balancing the system. Reducing peak usage also avoids red-band distribution network charges, winter triad charges and, from winter 2017, additional peak charges to pay for the capacity market. National Grid forecasts a business demand response of up to 1.8GW in 2016 in triad avoidance alone to minimise transmission network costs.

Businesses are providing demand reserve and frequency balancing services, offering swift response and short-notice load shifting as well as backup generators to support the grid. The requirements to participate in demand-side opportunities are also broadening, enabling more to take part.

One example is the frequency response scheme introduced this year. Firm frequency response (FFR) bridging is open to businesses with a starting capacity of 1MW, compared with the 10MW under the existing FFR scheme. Demand aggregators are also pooling the flexibility of smaller generators and businesses to create virtual power plants to participate in Grid’s demand reserve schemes and bid into the capacity mechanism.

The positive effect of demand response extends beyond immediate balancing needs. Creating new virtual power plants should also reduce the amount of new gas generation required to balance inflexible renewables. When combined with up to 18GW of energy storage by 2040 as the price of batteries and other technologies falls, reducing the number of new plants required to meet peak demand is a far more cost-effective way to meet future energy needs.

As renewable power carves out a greater share of the UK’s generation mix, flexibility is in demand year-round. Businesses will increasingly be incentivised to shift their demand-intensive processes to periods when demand is lowest, taking up the extra electricity produced by inflexible sources. Grid’s new “demand turn up” service pays businesses to increase demand with a response time of as little as ten minutes to maintain frequency. Some suppliers are also creating incentive schemes to balance their own portfolios through business customer flexibility.

With businesses facing rising costs from every direction, the potential rewards available mean that most stand to benefit from unlocking their flexibility. Being paid to turn down during peak periods makes commercial sense, unlocking new revenue streams while avoiding higher network charges. While many businesses would benefit from expert advice to identify where and how to release capacity, the broadening criteria and wealth of options mean most stand to gain from the demand-response drive.

Rather than evidence of a system in chaos, businesses turning down their consumption and shifting production schedules during peak demand is simply the result of an increasingly dynamic energy network. Demand response is establishing itself as one of the most flexible and responsive ways to maintain a balanced energy system. At a time when margins are squeezed ever tighter, identifying ways to alleviate the strain is a welcome move by National Grid.