Market view: Making the most of DSR

Many European countries are dabbling in demand-side response rather than embracing the flexibility it promises. Kurt Baes and Florence Carlot explain what more they should be doing.

In times of energy transition, when intermittent, decentralised generation is on the rise and large, traditional generation assets are retiring, electricity systems increasingly need flexible solutions to ensure security of supply. Demand-side response (DSR) is one such solution that energy firms should have on the radar. Although it can deliver tremendous value to transmission system operators (TSOs) and drive additional revenue to other market players, DSR is surprisingly underdeveloped in most parts of Europe and beyond.

The technical functionality is straightforward: by adjusting energy demand when external signals are received, aggregators, industrials and even households can provide additional capacity and energy to the market – and be remunerated for it.

Two types of external triggers typically create DSR activity: electricity system supply conditions and electricity market prices. We identify four main mechanisms as the pillars of the DSR market: 

• Wholesale and balancing markets – access to energy markets to sell/buy energy during high price/low price periods.
• Grid and retail tariffs – tariffs can vary depending on the time of day or season. Shifting consumption away from high tariff periods can generate savings for industrials and households.
• System services – primary, secondary and tertiary control services agreed between DSR providers and TSOs are designed to ensure security of supply.
• Capacity markets – sufficient capacity in the market is guaranteed through contracts established before the target delivery period, with remuneration based on the capacity made available.

Even though there is an advantage for participants in DSR to secure additional revenues through contracts, they can be significantly penalised in case of non-delivery, a risk that should be minimised by aggregator interventions.

By contrast, with a price-incentivised response, load is adapted to market or network price signals showing risk of market exposure or imbalance costs. Participants do not receive any payment as such – their reward is in avoided costs, which can be high. However, for industrial players the ability to reschedule production processes in line with grid or energy tariffs is not guaranteed.

DSR is still underdeveloped in Europe

Most markets have developed DSR mechanisms, although at very different paces. The US, supported by state regulators, is undeniably the leader in incentivising DSR providers to participate in the market. Selected European markets have also embraced the importance of facilitating DSR to ensure security of supply.

However, while DSR facilitation has improved, more can be done. Many energy systems are “under stress”, so DSR penetration can and should be further stimulated. It not only helps TSOs manage their networks more effectively (deferring reinforcement capex, limiting network losses, reducing costly temporary isolated generation), but also enables utilities, aggregators and electricity users to capture extra value.

Unlocking this value-add requires various initiatives at different levels. Our experience and interactions with TSOs, aggregators and industrials allow us to recommend four initiatives to increase participation in DSR.

Improve market design

Access to the DSR market must be facilitated via attractive and fair market mechanisms in order to improve the participation of end users and prevent discrimination between actors along the energy value chain. This is one of the key barriers.

Educate and support industrials to engage in management of demand

Although the benefits for industrials are real, much more flexibility can be unlocked. Some examples: United Utilities stated that it expects to make £5 million in revenue from DSR by 2020 by reducing power usage, including turning off pumps at its treatment works. REstore, a European aggregator, stated that primary reserve capacities can earn €180k (£154k) per megawatt per year in Belgium.

Develop real-time price signals

Real-time price signals are required to incentivise and trigger DSR activation, but also need to integrate and reflect those activations. This is in the hands of the market manager, typically driven by TSOs.

Collaboration of aggregators and energy suppliers

Partnerships between aggregators and energy suppliers can bring high added value, although their implementation will be possible only in the absence of conflicts of interest. They ease market access for them and enable optimal leverage of the know-how each party brings to the table.

The challenge will be to define a tailored and non-discriminatory solution for all flexibility owners along the energy value chain, sharing different expectations. Since real cases have proven to be beneficial for a broad range of stakeholders, capturing this value in the energy markets is definitely a prize worth pursuing.