Flexibility is strategically vital to all players in the power sector, a topic discussed at the CGI/Utility Week working group meeting this month. Ellen Bennett and the Utility Week team were there.

Flexibility is top of the agenda in the power sector, as industry and policymakers grapple with the implications of changing habits of generation, consumption and demand. Utility Week and CGI are now in the second year of a major programme of work examining the drivers of flexibility, and the challenges and opportunities it creates for companies that operate in the industry and consumers.

The first piece of research, produced last year, underlined the importance of increased flexibility, with respondents calling for flexibility in the system to more than double by 2030. There was little doubt about the strategic significance of flexibility by 2030, which respondents rated 9.1 out of a possible 10.

Flexibility takes three main forms – interconnection, storage and demand-side flexibility, which encompasses demand-side response and demand-side storage.

In the next stage of work, Utility Week and CGI are looking in greater depth at demand-side flexibility. The project began with a working group comprising three parties – aggregators, energy suppliers, and power networks – which took place in central London earlier this month. Their findings will form the basis of an in-depth piece of market research, but here we summarise the highlights of their discussions.

NETWORKS

The question with demand-side flexibility (DSF) is not how big the market could become, but what is its optimum size? DSF may be presented as a relatively cheap, carbon-free way to achieve increasing electrification but it is not without risk, and the savings for network operators may not be that significant in the end.

Weighing the risk of DSF against its cost and benefits is an algorithm that has yet to be developed, but that must be done with pressing urgency, according to network operators.

Imperial College London has calculated that the benefits of DSF are worth £3-8 billion, and it will also prevent carbon dioxide emissions. But network operators say most of that financial benefit will be felt by suppliers.

The unavoidable fact is that electricity networks must be replaced based on their condition, so although shifting demand may delay a reinforcement, the replacement of that network is inevitable at some point.

DSF is not without costs either. For network operators there is a significant totex cost because of the manpower that is needed to run such schemes compared with those needed to oversee a reinforcement project.

The real benefit of DSF for network operators is that it buys them time and gives them options. The rise of the electric vehicle will place significant stress on electricity networks, but it is not known when and where this will hit DNOs particularly. DSF will let DNOs “wait and see”; meeting the predicted constraint with a temporary measure before any reinforcement takes place.

Herein lies the limitation of DSF for network operators. If they could accurately predict when demand will increase in an area, it would always be cheaper to reinforce. But doing so will effectively remove the market for DSF in that area.

There are many questions that remain unanswered about how DSF will work in practice – and that increases the risk. For example, will DNOs or the system operator (SO) have preferential use of DSF measures? A contract with the SO may be more lucrative for aggregators, but DNOs have a smaller pool of resources to manage the locality.

There is also a risk that aggregators will effectively be managing the local flow of energy unseen by the DNO.

The greatest risk, say network operators, will be to reliability of supply. An automated system is far more likely to fail, and the likelihood of a lengthy power cut will increase. What is an acceptable level of reliability is a question for the government, because it may be aiming for one type of system but paying for another.

The other important question is just how important a constant, reliable supply of energy is to consumers? Is this even being asked?

Consider the example of broadband: the smarter a society and system becomes, the “thicker” it must be. An increase in automation and DSF will mean the electricity network will have to be reinforced to a greater extent than if it were dumb, which will wipe out any saving made by deferring network investment. Network operators already believe that the system is reaching the limits of the modest investments which have been made in recent years.

Which brings the discussion full circle – what is the optimum level of DSF?

Aggregators

The “size of the prize” depends on how you define demand-side flexibility, according to aggregators’ representatives. Does it refer simply to reactive demand-side response (DSR) or it does it also include more proactive efforts to shift consumption permanently with time-of-use tariffs?

In terms of DSR, there is a “population pyramid” with a small number of large industrial players at the top and the millions of household consumers in the UK at the base.

For the moment at least, commercial sites are the “main prize” because there are higher profit margins up for grabs – the cost of installation per megawatt of DSR is much lower than it is for households.

Nevertheless, the diffusion of smart technology into consumers’ homes means domestic providers are still on course to make as big a contribution to the market as industrial providers by the end of the decade.

The Association for Decentralised Energy has said business customers alone could provide 9.8GW of DSR by 2020, but aggregators said this figure could extend well into the double digits if the UK proceeds with the electrification of both transport and heat.

They said that one of the principal barriers to the growth of demand-side flexibility is the mindset of policy and decision-makers, who understand DSR on a theoretical level but have relatively little knowledge of how it works in practice.

One aggregator called for them to make more site visits. “I want them to all have wellies,” he said. The Department for Business, Energy and Industrial Strategy “will never leave Whitehall”, said another; Ofgem say they are coming “but never do” and National Grid will send people but they are usually just account managers. “They’ve also never pitched to an investor,” added one aggregator.

This often shows up in policy – in the capacity market, for example, demand-side response is essentially assumed to be the same as any other type of capacity. Under the current arrangements, if one of the providers in the portfolio that makes up a capacity market unit decides to drop out, the entire contract is cancelled, even if they could be easily replaced.

Aggregators said this fails to take into account the way a DSR portfolio is usually managed and doesn’t make sense, particularly because providers often drop out when they decide to install energy efficiency measures that are beneficial to the energy system.

Another major barrier to the success of demand-side response is the vertical integration of suppliers that have “no incentive to find an alternative to their generation” and therefore cannot act as a “hero for the consumer”.

Aggregators said DSR only works in markets where suppliers are not acting as the gatekeeper to the consumer. There has been a “whispering campaign” from suppliers about the reliability of DSR, which appears to have influenced the thinking of policymakers.

Vertically integrated suppliers also appear to have difficulty delivering DSR themselves: “If you’ve built a company around larger generation you can’t turn into a demand-side response organisation”. Where aggregators have worked with suppliers, the aggregators have typically ended up doing the bulk of the work outside sales, because suppliers don’t have the right expertise.

SUPPLIERS

All suppliers present were looking to position their businesses to deliver or enable demand-side services in the immediate and mid-term future – both in the B2B and domestic markets.

This intention manifests in a range of activities, many relating to time-of-use tariffs targeted at early EV adopters and, in the business market, the recruitment of firms with generation and/or storage assets to participate in flexibility trials.

It was broadly agreed that the “size of the prize” could be significant – though the nature of the prize was more about system value than commercial gain. It was felt that early movers in the provision of demand-side services will gain commercial advantage, but that the political environment around energy supply makes it unacceptable at present for energy firms to express much interest in the possibility that demand-side services might be lucrative.

The size of the DSR prize also depends on the uptake of key technologies such as electric vehicles, and to a lesser extent electric heat. It will also depend on the development of local energy systems and the “distribution system operator” agenda.

It was generally agreed that a key benefit offered by DSR is that it could make each of the strands of the “trilemma” much easier to tackle, because it can flatten demand, and drive towards an overall reduction in demand. As a result, the need for new capacity of peaking plants is reduced and the use of renewable energy sources is facilitated.

The barriers to realising DSR value were seen as significant. The group saw fundamental contradictions between recent and ongoing government interventions in the supply market on behalf of consumers, and the need to motivate users to engage in DSR.

This observation prompted a discussion about the price signals and differentials between peak and lowest costs of energy. It was – cautiously – agreed that DSR will be enabled only when there is a bigger price differential and some also insisted that the peak price of energy will have to be higher to motivate customers to engage.

Other problems identified were the complexity of the existing ancillary services system and DNO incentives for adopting smart constraints management approaches. It was generally agreed that these incentives are not strong enough and/or are not targeted in a way that motivates DNOs to press on with the connection of storage, an alternative to conventional system reinforcements.

Participants suggested that a simplification of the pool of ancillary services – to a choice of about six – would help enable DSR. They also called on Ofgem to strengthen the incentives in the RIIO regime for DNOs to avoid conventional reinforcement through smarter methods. They suggested that government could play a bigger advocacy role for DSR and support a national education/awareness programme.