Market view: The future is flexibility

Demand-side response is now a proven, commercially viable technology and if supported by energy policy could save the UK billions of pounds, says Chris Kimmett.

In 1882, London’s Holborn Viaduct saw the opening of the world’s first centralised coal-fired power station. Today, we are witnessing the energy system going through a similarly seismic shift.

Evidence of this change was perhaps most marked in early May when, for the first time, the UK’s electricity was supplied without burning any coal. From Monday 9 May to the following Sunday lunchtime, the UK was at “zero coal” almost one-third of the time.

This is not an anomaly, but the foreshadowing of a fundamentally smarter energy system. According to Bloomberg New Energy Finance, within the next decade we will reach peak fossil fuel use for electricity. This is not because we are running out of coal and gas, but because we are finding cheaper alternatives and technological breakthroughs are arriving more quickly than expected, including electric vehicles, demand-side response (DSR) and affordable battery storage.

These technologies are already having an impact on the UK grid. By way of example, DSR is successfully providing response, reserve and capacity in the UK, at ever growing levels, across a range of services.

However, we are only scratching the surface of what is possible with demand response. If we are to capitalise on the cost and carbon savings on the table for the UK, then we need to think in broader terms.

For all of these benefits to be realised we need to see DSR rolled out way beyond the handful of markets that they are able to operate in today. The design of the capacity market should reward all forms of security of supply equally, yet today fast-reacting, real-time balancing cannot participate on an equal footing with generation: generators receive a government subsidy, while demand response can play only a small part.

There are other markets which are unavailable for demand response. A key one important for the long-term development of the DSR industry is access to the balancing mechanism, which is currently open only to large generators. The mechanism is used for a number of different reasons, one of which is constraints, where National Grid cannot deal with the energy that the market has asked to flow through it.

Demand response can address this by managing demand in problem areas, as well as enabling better integration of intermittent renewables, allowing us to actually use the energy generated when the wind blows and the sun shines. California’s grid, which is approximately the same size as the UK and has targets for 50 per cent renewables, is a case in point. Traditionally this level of intermittency has meant the state had to curtail a significant amount of the power generated to manage peaks on the system. The addition of 3GW of flexibility to the system, through DSR and storage, means renewable curtailment will drop by 70 per cent.

Demand response also has a role to play in the wholesale markets where energy is traded between buyers and sellers of power. For instance, rather than bringing an additional expensive power station online at peak, flexibility in an energy user’s cold storage or water pumps could be used as a temporary cushion to smooth the peak. In a world with ever greater penetration of renewables, this will be essential in these markets. This type of product could exist directly in the wholesale markets for purchase or could be offered directly by either a supplier or in partnership. A case study of ERCOT (the grid in Texas) showed that over only five peak days, an extra 1.5GW of DSR (2.5 per cent of total demand) would have reduced wholesale market costs by $200 million (£164 million) – a cost that would be passed directly to consumers.

The financial benefit of grid flexibility in the UK has already been estimated at £8 billion a year by 2030 by the National Infrastructure Commission. This is primarily because a more flexible system enabled by technology would significantly reduce the need for new infrastructure and network investment. For example, instead of building new transformers, a surplus of power could be managed to smooth peaks on the grid. It would also significantly reduce the need for diesel balancing plant with high fuel and carbon costs.

Our modelling shows that there is 6GW of untapped flexibility already available in our energy system, which can be unlocked by smart DSR technology to rapidly provide flexibility to the grid. Indeed, research published last year by Open Energi, National Grid and Cardiff University showed that DSR technology can meet the UK’s crucial grid balancing requirements faster than conventional power stations. This speed is crucial in enabling DSR to provide a direct and practical alternative to new-build gas generation.

Flexibility is being unlocked today, but needs to scale up to deliver the transformational impacts it is capable of delivering. To do this we need to start from a clean sheet, rather than making ad hoc tweaks to existing markets rules.

Demand-side technologies are proven and ready to scale – and businesses will respond to clear market signals. The traditional assumption that large-scale fossil fuel power stations are needed for baseload generation is already changing and, with the right market conditions, we will be able to benefit from a truly smart power revolution.