smart demand response: a discussion paper...4 of 44 smart demand response: a discussion paper we...

Smart Demand Response: A Discussion Paper

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EXECUTIVE SUMMARY This document presents the result of joint work between network operators and suppliers assessing how the role of Demand Response in the future of GB’s electricity supply might be realised. It is deliberately positioned as a discussion paper to promote industry debate and doesn’t seek to prescribe solutions for Smart Demand Response in the GB Market. It sets out the drivers, requirements and potential market options for Smart Demand Response and then undertakes a qualitative assessment of those options and sets out a potential way forward to facilitating Smart Demand Response. What is described in this paper is not fixed and will evolve over time as the energy market develops with different forms of generation and different profiles of demand, and as the changes are better understood. We have summarised a definition of Demand Response as follows and we add “Smart” to this to reflect that demand response in the future will be invoked in a smart infrastructure: Demand Response: relates to any program which encourages shift of (demand) of energy by end consumers. The participation of the end customers is a response to factors such as incentive pricing, new tariff schemes, greater awareness and an increased sense of responsibility. The end consumers agree to involvement, but their participation may involve either active behavioural changes or passive responses, through the use of automation. The current energy and balancing services markets work as they allow the industry to recover costs of capacity provision and cost of system stability. Demand Response is being used to reduce these costs, as well as optimising energy purchasing and being part of customer product portfolios. Consumers may be asked to provide differing Demand Response services by multiple parties or may not be considered for Demand Response provision. Multiple and potentially conflicting Demand Response schemes are in use now with industry parties not knowing the consequential impact on them (e.g. network operations for DNOs and wholesale purchasing for Suppliers). There is no coordination of Demand Response schemes. This work recognises that consumers are at the heart of making Demand Response happen, it is consumers that provide the response and ultimately, Demand Response is for the benefit of consumers. Products will need to be offered in ways that are acceptable and trusted. However, this work starts from the industry side, to work out what needs to be done so that Demand Response can be offered in a coherent way. In our evolving energy scenarios within the transition to the low carbon economy, Smart Demand Response has real potential to alleviate system stress, and to help the inclusion of cleaner generation, it should be a key electricity market product that is analysed and considered through future market development.

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In this paper, we have identified the context and challenges that we face in our evolving energy market and the drivers, benefits and requirements for Smart Demand Response in that environment. We have then considered what market options may deliver these requirements for Smart Demand Response. This work has resisted the temptation to design an “ideal” solution but instead has looked at whether there could be a staged, evolutionary approach to achieving a coordinated use of Demand Response and through that, wider realisation of benefits. It appears that there could be an evolutionary path that would allow wider use of Demand Response over time without leaping to solutions too early. Any market change, even if evolutionary, must be subject to positive cost benefit analysis and therefore the entire cost benefit case for Smart Demand Response needs to be built to support any market change and particularly to define timing for any potential changes. There is a tacit assumption behind this work that Smart Demand Response can be part of the answer to future energy challenges. This is not a difficult assumption to make, as it is easy to find potential benefits. However, we avoid assuming that all Smart Demand Response is “equally good” and recognise there may need to be mechanisms to realise the potential; to promote Smart Demand Response through a working supply chain to ensure that it makes an effective contribution. There may be difficult decisions to make as to how the use of Smart Demand Response is prioritised or how the benefits are reflected. Priorities may change over time but it should be possible to place the requirements along a timeline for prioritisation and to identify those that need to be solved early or those that need a coordinated industry effort to solve. The solutions are sufficiently complex that putting them in place will have significant lead time and cost to industry to implement. Decisions to implement such arrangements therefore need a sound basis and a suitable notice period. It would appear sensible to plan analysis to build into Distribution Price Control but to keep the option for wider market reform to support Demand Response at appropriate trigger points. This work may be particularly important in the context of potential regulation or legislation to encourage Demand Response. We support the intention to make greater use of Smart Demand Response but we learn from this joint work that while there are many potential uses of Smart Demand Response and many potential benefits, we need to guard against the risk that being over prescriptive in defining how Smart Demand Response is achieved could actually hinder achieving the best benefits. It must be pointed out that this paper is a view from where we currently stand. It highlights complex areas and indicates the need for more analysis and trials. This work has brought together network operators and suppliers in forward looking and cooperative work, this sort of collaboration could become an example of how these companies can recognise common and national interests, work together and perhaps putting the issues of today to one side. The list of contributing companies can be found in the Appendix of this document.

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We recognise that there is a growing body of research into Smart Demand Response. Key to the work that we have been undertaking is that we are considering how to progress means by which Smart Demand Response can make a greater contribution in our future market. It is hoped that the wider research will be complementary to our own work on Smart Demand Response in GB. This is very much a work in progress and presents a view that will continue to be reassessed and evolve. This is why it is presented as a discussion paper.

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Contents EXECUTIVE SUMMARY ............................................................................................................. 2 Contents ................................................................................................................................... 5 1. Introduction ...................................................................................................................... 7 1.1. Smart Demand Response Definition ............................................................................ 7 1.2. Summary of Contents ................................................................................................... 7 2. Demand Response Context .............................................................................................. 8 2.1. Introduction: The challenges we are facing ................................................................. 8 2.1.1. 2050 pathways .......................................................................................................... 8 2.1.2. The “2020 Challenge” ............................................................................................... 9 2.2. Broad Meaning of Smart Demand Response ............................................................... 9 2.2.1. Demand Response is not directly an energy efficiency measure ........................... 9 2.2.2. Demand Response is not only about consumption ............................................... 10 2.2.3. Demand Response is not only about peak reduction ............................................ 11 2.2.4. Demand Response is not only about asking for load curtailment or reduction ... 11 2.2.5. Demand Response is not only about “calls” for response .................................... 12 2.2.6. Demand Response is a tool not the goal ................................................................ 12 2.3. Customer Context ....................................................................................................... 13 2.4. Electric Vehicle Developments ................................................................................... 13 3. Drivers, Benefits, Requirements and Barriers ............................................................... 14 3.1. Introduction ................................................................................................................ 14 3.2. The Key Smart Demand Response Driver .................................................................. 14 3.3. Smart Demand Response Benefits ............................................................................. 14 3.5. Smart Demand Response Requirements ................................................................... 16 3.6. Smart Demand Response Pre‐conditions .................................................................. 17 3.7. Potential Barriers – Risks and Issues .......................................................................... 21 4. Definition of Market Options for GB ............................................................................. 22 4.1. Introduction ................................................................................................................ 22 4.2. Assumptions / Prerequisites / Risks / Benefits ......................................................... 25 4.3. Current Market Framework ....................................................................................... 26 4.3.1. DUoS charges / Market forces are unlikely to be enough ..................................... 27 4.4. Enhanced Supplier Hub Model ................................................................................... 27 4.4.1. Intervention with Enhanced Supplier Hub Model ................................................. 28 4.4.2. Suppliers and Network Operators Affected by Other Parties’ use of Demand Response ................................................................................................................................ 29 4.4.3. Variants to the Enhanced Supplier Hub Model ..................................................... 29 4.4.4. Hierarchy for Smart Demand Response Call .......................................................... 29 4.4.5. Multiplicity of Contractual Arrangements ............................................................. 30 4.4.6. Information Requirements ..................................................................................... 30 4.4.7. Differential UoS Charging ....................................................................................... 31 4.4.8. Assumption ............................................................................................................. 31 4.5. Demand Response Market Operator ......................................................................... 31 4.5.1. Features of DRMO Market ...................................................................................... 32 4.5.2. Increased Understanding of Demand Closer to Live Operation............................ 33 4.5.3. Location of Smart Demand Response .................................................................... 33

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4.5.4. Timing ...................................................................................................................... 34 4.5.5. DRMO with Demand Response Capacity Market .................................................. 34 4.5.6. Questions for Assessment ...................................................................................... 35 5. Assessment of Market Options ...................................................................................... 36 5.1. Not all benefits may be achievable at the same time ............................................... 36 5.2. Price Control Submissions .......................................................................................... 37 5.3. Current Market Framework ....................................................................................... 37 5.4. Enhanced Supplier Hub .............................................................................................. 37 5.5. DRMO .......................................................................................................................... 37 5.6. Triggers and options ................................................................................................... 37 5.6.1. From the Current Market to Enhanced Supplier Hub ............................................ 38 5.6.2. The triggers to move to DRMO ............................................................................... 38 5.7. Further Qualitative Assessment ................................................................................. 39 5.7.1. Potential Cost .......................................................................................................... 39 5.7.2. Potential Benefits .................................................................................................... 40 5.7.3. Scale of Regulatory Change .................................................................................... 40 5.7.4. Scale of Operation & Systems/Process Implementation ...................................... 40 6. Analysis and Conclusions ............................................................................................... 41 7. Recommendations and Next Steps ................................................................................ 43 Appendix A ‐ Organisations / Companies contributing to this work ................................... 44

Intellectual Property Rights and Copyright All rights including copyright in this document or the information contained in it are owned by the contributors identified in Appendix. All copyright and other notices contained in the original material must be retained on any copy that you make. All other use is prohibited. All other rights of the contributors identified in Appendix are reserved.

Disclaimer We have used reasonable endeavours to ensure the accuracy of the contents of the document but offer no warranties (express or implied) in respect of its accuracy. To the extent permitted by law, the contributors identified in Appendix A do not accept liability for any loss which may arise from reliance upon information contained in this document. This document is presented for information purposes only and none of the information, proposals and options presented herein constitutes an offer.

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1. Introduction This document has been produced to present a joint networks and supplier view of how Demand Response might be realised in the future of G.B. electricity supply. This work has been constructed over a series of workshops and builds on previous outputs from joint development work, including previous Demand Response work from ENA/ERA joint working, reports1 and workshop notes.

1.1. Smart Demand Response Definition We have summarised a definition of Demand Response as follows:

Demand Response: relates to any program which encourages shift of (demand) of energy by end consumers. The participation of the end customers is a response to factors such as incentive pricing, new tariff schemes, greater awareness and an increased sense of responsibility. The end consumers agree to involvement, but their participation may involve either active behavioural changes or passive responses, through the use of automation.

We have used the Smart Energy Alliance report2: as the basis for this definition but amended it to allow that Demand Response does not need activity on the part of the consumer, finally we add “Smart” to make this “Smart Demand Response”. This is added to distinguish that we are looking at the delivery of Demand Response in a smart GB energy industry, post the start of mass roll‐out of smart metering and in an industry using facilities associated with that roll out.

1.2. Summary of Contents The term Demand Response is often used for particular purposes with particular and restricted meanings; we stress the broad meaning of Demand Response, there are many activities that have to work together. The definition above is elaborated in section 2. It is important to understand the context of challenges in the future energy landscape that Demand Response may mitigate, these are also explored in section 2. Section 3 sets out the Drivers, Benefits, Requirements and the Barriers to using Smart Demand Response in GB. In sections 4 and 5 we build on this to look how the market might need to develop to make wide use of Smart Demand Response. Importantly, we see Smart Demand Response as a potential offering for all consumers, but this does not assume that a single solution is appropriate for all types of Smart Demand Response or all types of consumer or over time. We do not conclude on a market structure design to operate Demand Response, indeed, we do not try to design the market solution; rather we look to identify the functional needs of the market that will be required to support a greater future role for Smart Demand Response. 1 www.energynetworks.org/electricity/futures/smart-meters.html 2 www.smart-energy-alliance.com/thought-leadership/demand-response-a-decisive-breakthrough-for-europe/

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2. Demand Response Context

2.1. Introduction: The challenges we are facing In order to give the assessment of Demand Response a realistic context, the group has considered how the future energy landscape may look. This helps to recognise the challenges faced by GB and therefore helps understand how Demand Response may be needed to contribute to the solution to those challenges.

2.1.1. 2050 pathways Firstly, we consider a long term aim have used the DECC 2050 pathways work to provide a sound context. The 2050 pathways report3 sets out a number of possible pathways; it does not attempt to choose a best solution. Like the 2050 pathways report we do not need to choose a “favourite” pathway to 2050. Instead we can consider any successful pathway – these are defined in the report as those where “By 2050 we reduce emissions, Supply meets demand, and there is a Secure energy system”. The 2050 “Pathway Alpha” – is a “safe” pathway to consider as it represents a balanced effort rather than assuming a disproportionate contribution or failure from any particular sector:

“Pathway Alpha “illustrates a pathway with largely balanced effort across all sectors, based on physical and technical ambition. In this pathway, there would be a concerted effort to reduce overall energy demand; an equivalent level of effort from three large scale sources of low carbon electricity (renewables, nuclear, and fossil fuel power stations with carbon capture and storage); and a concerted effort to produce and import sustainable bioenergy.”

However, all successful pathways show a significant contribution from storage, demand shifting and backup. For all successful pathways this contribution is regarded as “applying a level of effort that is likely to be viewed as ambitious but reasonable by most or all experts”. So as not to underestimate the challenge, if we additionally assume that storage solutions do not make an unexpectedly large contribution, then for all successful pathways Demand Response makes at least “a significant and ambitious contribution”. The joint working group view of Demand Response is in keeping with this expectation and challenge. We are looking to Smart Demand Response effectively being available to all consumers and making a major contribution to the successful reduction in emissions, supply meeting demand, and security of supply. 3 /www.decc.gov.uk/assets/decc/What%20we%20do/A%20low%20carbon%20UK/2050/216-2050-pathways-analysis-report.pdf

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2.1.2. The “2020 Challenge” We understand the pathways are just that, pathways. So, to bring the challenge “closer to home” we have also chosen an earlier date to assess against. This can help avoid seeing the massive challenge and looking for a correspondingly elaborate solution. We have chosen a date of 2020. This date fits with a picture of the energy landscape that in most ways is similar to today but also one that has some significant differences:

The vast majority of smart metering will be rolled out so can be considered available for use in Smart Demand Response.

We might expect to see loads such as heat pumps and Electric Vehicles (EVs) becoming significant challenges, particularly in local clusters.

Similarly, we may expect to see distributed generation becoming a significant factor in parts of networks.

We may expect to see intermittent generation starting to become a significant part of the generation mix.

We can see this as a point where challenges will be emerging at different points of networks and we can see that the same Demand Response could start to become a resource wanted by different parties for different reasons.

2.2. Broad Meaning of Smart Demand Response We stress a wide definition of Smart Demand Response in what is done to change demand and in how that change is encouraged. Demand Response is often described using terms suggesting a particular way Demand Response works or suggesting it is done for a particular reason. These terms may often be used for convenience but we must not lose sight of Smart Demand Response being a tool that may be and is used in a variety of ways e.g. for transmission, distribution and supply. There are a wide variety of Demand Response measures currently in place including Triads, Short Term Operating Reserve (STOR), Connection Agreement measures, Radio Teleswitch and retail products. These sorts of measures will need to work together, so it is important to keep being aware of the wider meaning.

2.2.1. Demand Response is not directly an energy efficiency measure Although Demand Response may often be complementary to Energy Efficiency, Demand Response is about shifting demand rather than reducing it. It is about changing the shape of a demand curve rather than reducing the area under the curve. It may often have an energy efficiency effect but Demand Response and energy efficiency need to be distinguished.

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Demand Response is about shifting load to a better time. An energy efficiency measure reduces the area under the curve, Demand Response moves the time of demand rather than directly reducing the load. Some uses of electricity can be shifted to a different time; other uses, if avoided at a particular time, will not transfer to a different time. ‐ For example if someone chooses not to use their washing machine in response to a period of high demand, they are only delaying that use and they will still wash their clothes later – the energy is used at a different time rather than being reduced. However, if someone uses less air conditioning in response to high demand, they don’t make up for that demand later when it isn’t hot, in this case the energy use is reduced. The effect of Demand Response may often be complementary to energy efficiency aims, but this is not always the case.

2.2.2. Demand Response is not only about consumption Demand Response may involve reducing consumption, but the same balancing effect may be achieved by generating more, or returning energy from storage. At a simplistic level, the effect that might be wanted is to avoid excessive load at particular point in the network. There may be a number of devices attached to that point in the network, and these might be a number of devices consuming energy and a number of devices generating energy. The main concern for that part of the network is the net load. Congestion might be avoided by asking for less consumption from a number of devices, or more generation from a number of devices, or by some combination of these. At a detailed level, different devices at different locations do have a different effect on the network but there are a variety of actions involving changing consumption and generation that may work to the same end.

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Demand Response is about net load – this could be achieved by changing consumption or generation.

2.2.3. Demand Response is not only about peak reduction Demand Response may be intended to reduce a peak demand or flatten a load, but it might be intended to match a load to the generation that is available. Increased electrification of heat and transport may help the national objectives but may also mean that the load and peaks will be considerably higher than now. Low carbon generation may mean it will be better value to match demand to generation than to try to reduce peaks.

Demand response might be used to match use to available generation. As an example, there is a peak in consumption but additional generation from wind is available, therefore there may be a desire to increase the consumption during the peak.

2.2.4. Demand Response is not only about asking for load curtailment or reduction

Demand Response may be intended to reduce load at some point or to increase a load at some point. Smart Demand response should be more about optimising use against a number of parameters, rather than a simple “don’t use during these hours” instruction.

Less Consumption

More M

icrogeneration

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For some arrangements there may be hard instructions to change load in a specific period For example a factory is given a firm command to reduce its consumption by a specific amount.

Other arrangements will give incentives to move load into other periods rather than “hard calls”

2.2.5. Demand Response is not only about “calls” for response Demand may be shifted by any number of mechanisms from gentle indications to consumers through price signals to direct control of devices. There is a raft of measures, a wide variety of mechanisms that may have their place in gaining Demand Response from a variety of consumers.

2.2.6. Demand Response is a tool not the goal Demand response is a tool that may be used to help manage a shortage of capacity, it may also be about increasing demand to absorb high levels of generation at particular times. Demand response is also a tool that can be used by the networks in response to a fault, for

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example loss of generation or to manage network congestion. But Demand Response is the tool; the goal should be making the best use of resources. Demand Response is about all of the measures above, combining to make better use of generation and infrastructure.

2.3. Customer Context It is important to deliver customer choice for Smart Demand Response. However, there is much uncertainty of how much demand will be available and where. We do not know what customers will want over time or what their exposure will be to Smart Demand Response opportunities. There is a link to customer appetite for products and services and then behavioural change. There may be some inertia in behaviour that needs other mechanisms such as automation or direct control for Demand Response to be effective. Certain developments may encourage more involvement of Demand Response – for example a concentration of Electric Vehicles in an area may fit well with Demand Response measures allowing their use to be economic.

2.4. Electric Vehicle Developments There is considerable work underway to consider the infrastructure for off peak charging of electric vehicles in Government with the Office for Low Emission Vehicles (OLEV4) in place. Both Network Operators and Suppliers have been fully contributing to developments and this work is expected to feed into considerations for Smart Demand Response. The ENA have an initiative in development to require installers to notify installations of domestic chargers for Electric Vehicle to network operators and the same is being considered for heat pumps.

4 www.dft.gov.uk/topics/sustainable/olev/

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3. Drivers, Benefits, Requirements and Barriers

3.1. Introduction This section represents a view of how Demand Response can benefit various stakeholders, the requirements of industry in delivering and operating Demand Response and a view of barriers that will need to be addressed. This work is used later in assessing how additional sophistication may be needed to allow Demand Response to make a greater contribution to GB’s electricity supply. A broad view continues to be needed on the work to lead to successful Smart Demand Response for Great Britain and on the benefits of Smart Demand Response. There have been discussions on the use of storage and other fuels to balance the overall GB energy system, but this work concentrates on Smart Demand Response.

3.2. The Key Smart Demand Response Driver The key drivers of Smart Demand Response are within the key drivers of Government energy policy. In particular, one of DECC’s key priorities is to:

Deliver secure energy on the way to a low carbon energy future. Reform the energy market to ensure that GB has a diverse, safe, secure and affordable energy system and incentivise low carbon investment and deployment.

3.3. Smart Demand Response Benefits

Previous work on high‐level benefits has been further developed to provide more definition, identifying which party or parties benefit from particular use of Demand Response and looking into how benefit quantification could be progressed. During workshops, the benefit categories were considered and updates were agreed to produce this list. Note these are arbitrarily presented in order of the “geography over which the benefit applies” – from personal to national. The order in which these are presented is not intended to imply any priority:

1. Facilitate consumer choice

Facilitating a wide set of products and services will deliver better consumer choice

and the chance to be rewarded for actively participating in the energy market.

Smart Demand Response can be a more palatable solution than service curtailment.

Large energy consumers already have this choice – the proposal here is to bring this

offering to every consumer.

Beneficiary: Consumers and the market as a whole from increased consumer choice

2. Manage Consumer Loading

New load types such as Heat Pumps or Electric Vehicles can increase the total demand within a home and network reinforcement could be required to allow their use. However, introducing the use of this sort of load within a Demand Response

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package could allow the total load to remain within existing household capacity or limit the increase to the extent that network reinforcement is avoided or deferred. Beneficiary: Consumers may be able to adopt these devices and gain the benefits from them earlier and more affordably by avoiding, deferring or minimising the need for network reinforcement to deliver increased capacity. This earlier adoption also helps to realise Government policies in these areas.

3. Deferment / Optimisation of investment

By optimising use of existing network capacity and facilitating Active Network

Management, Smart Demand Response can help optimise investment in networks

and facilitate an optimised investment programme, as described above. Demand

Response can help optimise reinforcement and thus reduce or defer costs to be

passed through to the consumer.

Beneficiary: Networks, they can operate more efficient business. This is a benefit

that feeds through the supply chain to consumers.

4. Avoid regional and national network congestion and provide fault based network

services

Regional and national networks can benefit from the same improved efficiency in

planning. Smart Demand Response is one of a number of tools that can be used to

balance networks. By facilitating Active Network Management, Smart Demand

Response can add to the cost effectiveness of network balancing for both pre and

post fault network management.

Beneficiary: Networks, they can optimise operations and this is a benefit that feeds

through the supply chain to consumers.

5. Balance generation at national level through reserve or response services

Smart Demand Response is one of the tools that help balance the system by

facilitating for example efficient use of renewable generating capacity.

Beneficiary: The UK in contributing to meeting its renewable and carbon emissions

targets.

6. Balance the trading position of energy suppliers

Smart Demand Response can help suppliers keep a balanced position in the market

it can mitigate risk and allow better trading.

Beneficiary: Suppliers, again this is a benefit that feeds through to consumers as it

allows suppliers to operate more efficiently and compete on their customer pricing.

7. Facilitate cleaner energy / generation mix

Smart Demand Response will not reduce the need for energy generation by making

efficient use of renewable sources Demand Response will help the energy demands

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to be met by a cleaner mix. This benefit is about the energy mix rather than

optimising capacity.

Beneficiary: The UK in contributing to meeting its renewable and carbon emissions

targets.

8. Future flexibility

The option to use Smart Demand Response can offer a degree of flexibility to cater

for unknown future generation or loads in future years. This may be difficult to

quantify but the benefits shouldn’t be underestimated. Although there is good

appreciation of the types of challenges facing the energy industry, the precise make

up of when and how those challenges eventuate is very much an unknown – a level

of Smart Demand Response can help cater for those unknowns.

Beneficiary: this is a benefit to all. It gives policy makers and the industry some

leeway to cater for faster or slower implementation of new loads or new

generation.

The benefits fall into two categories:

Benefits to consumers, either directly or by efficiencies in industry parties passed through to consumers in cost savings or improved service

Contribution to the UK’s renewables or energy efficiency targets. The results and outputs from Low Carbon Network (LCN) Fund projects are likely to help quantification of benefits. It will be essential to weigh up the costs and benefits of options against the costs if the changes are not made.

3.4. Additional System Balancing Mechanisms Smart Demand Response is only one of the tools that should help achieve the benefits set out in this section. Storage has the potential to play an increasingly important role and there is also a role for other fuels, such as gas, to play in the overall balancing of GB’s energy system. However, while we are aware of other tools and that a variety of tools will work alongside Demand Response, this work is focused on Smart Demand Response and the mechanisms to deliver it effectively in GB.

3.5. Smart Demand Response Requirements This section provides a list of the requirements needed to deliver the benefits highlighted above for Smart Demand Response in a smart GB market. Smart Demand Response Requirements specify the outcomes and then at a level below the requirements that need to be supported to achieve those outcomes.

3.5.1. Requirements The section specifies the requirements, assuming that the pre‐conditions defined below have been achieved. The requirements are used by different parties but each is ultimately for the benefit of consumers:

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1. Shape (decrease/increase) demand using financial incentives:

Time of use tariffs for consumers

Critical peak pricing tariffs for consumers

Special rate/award (e.g. credit consumer account, offering discounted rate, paying a one‐off amount) for taking part in a load shedding event

These requirements will be delivered by Suppliers through their contractual relationships with their customers. 2. Shape demand via cost‐reflective UoS charging

This requirement will be delivered by Network Operators to Suppliers.

3. Shape (decrease/increase) demand using notifications:

Transmission System Operator (TSO), Networks, Suppliers/3rd Parties send message to consumers notifying them of an incentive to alter demand

This requirement can potentially be delivered by Networks/Suppliers/TSO/3rd Parties.

4. Shape (decrease/increase) demand via products that incentivise microgeneration:

Networks/Suppliers/TSO/3rd Parties manage consumer microgeneration to modify (increase or decrease) demand

This requirement can potentially be delivered by Networks/Suppliers/TSO/3rd Parties.

5. Shape (decrease/increase) demand using direct device control:

Create incentives to install devices to enable capability to reduce energy consumption

Networks/Suppliers/TSO/3rd Parties disconnect/reconnect supply

Networks/Suppliers/TSO/3rd Parties manage consumer appliances to modify (increase or decrease) demand

Networks/Suppliers/TSO/3rd Parties manage consumer devices EVs/Heat Pumps to modify (increase or decrease) demand

Networks/Suppliers/TSO/3rd Parties manage storage facilities to modify (increase or decrease) demand

All of these requirements can potentially be delivered by Networks/Suppliers/TSO/3rd Parties.

3.6. Smart Demand Response Pre‐conditions

Using the assumptions and the requirements for the various ways of gaining the benefits of Smart Demand Response we can look at what is needed in addition to allow Demand Response to become widely used in a smart world. While we are not yet operating in a smart world, Demand Response already provides some of the benefits above, but is implemented quite differently across a range of different

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customer groups and the use is restricted by the technology in use. This joint work is looking to open the opportunities to a much wider population – to involve more consumers and to open up more capacity to be used in this way. The challenge is to get to the point where the mechanisms above can be successfully operated in the GB market to bring the benefits identified. In order to carry out Smart Demand Response, we assume that there will continue to be a suitable proportion of discretionary load (or some ability to flex generation) and that smart metering will be in place in the expected timescales. To achieve any of the benefits above, a party intending to “call on” Smart Demand Response will generally need the following pre –conditions to have been achieved (these will have different priorities and sequences for different parties so are not presented in a particular order):

1. The party has a population and density of response they can call on appropriate to their need and that can give a response in the timescales they need. The party has a suitable volume of points to act on, in suitable density, with suitable confidence of the response;

2. The party has appropriate systems and processes in place: a) The party can identify conditions where a call on response is appropriate b) The party knows the availability of demand c) The party has the technical ability to take the action d) The party has the ability to check the result of the action

3. The party have the confirmed right to take the action 4. The party have the agreement of consumers–this may mean both buy in of, and

contract with, consumers in appropriate volumes. 5. The party has adequate priority, which means that there is a working market

solution in place and meaning that the effect on other market parties is known / managed.

And in order for this to be achieved (for some parties at least): 6. The appropriate regulatory environment must be in place 7. Coordinated and integrated Demand Response mechanisms need to have been

developed. All parties need to have had sufficient confidence to have made the investment in systems and processes.

3.6.1. Further Definition of Preconditions

It is worth some consideration of what these preconditions may mean – bearing in mind that different participants will have different needs – and that these needs will change over time. These are preconditions that represent significant considerations for different parties.

1. Population and density of available response This means that there have to be sufficient participants bought into and contracted to take part, the participants have the means to take part – sufficient discretionary

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load and technical solutions that allow the demand to be called on and in sufficient quantities for the location the response is wanted. The package has been successfully marketed to the consumers and in the locations relevant to the challenges.

2. Systems and processes The ability to:

o Plan Smart Demand Response activities – at different levels, this may mean at different levels of granularity in time or network location: Identify peak demands, winter/summer variations, location of where

constraints occur, etc.; Use current and estimated wholesales energy price variations e.g.

during peak energy consumption times (summer/winter), to estimate the monetary benefit of reducing energy consumption during particular times;

Use current and estimated network charges to estimate the benefit of Smart Demand Response for suppliers; and

Use renewable energy generation forecasts e.g. to estimate timing when excess wind generation needs to be absorbed.

Carry out cost and benefit analysis to ensure assurance in developing the ability for Smart Demand Response

o Monitor for “stress” and identify needs for Smart Demand Response activities

o Estimate the response needed and expected responses o Carry out the interaction with the market solution o Carry out the interaction with the consumers / equipment

technical ability to carry out Smart Demand Response ‐ potential solutions need to be identified e.g. for direct device control to support Smart Demand Response and make necessary arrangements to enable Smart Demand Response via direct device control

need for a level of device interoperability and control capabilities for future‐proofing and facilitation of innovative Smart Demand Response

o Monitor the results to feed back to the planning o Carry out appropriate settlement of service provision o Carry out performance monitoring

3. Right to take the action

An appropriate regulatory framework is in place to reflect which parties can undertake Smart Demand Response activities, at what time. (Including, say, incentives to reward use of Smart Demand Response rather than reinforcement).

4. Agreement of consumers This may mean appropriate awareness campaigning to the general population. But also successfully selling the solution to consumers by having offered packages that

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are sufficiently attractive for them to take part and solutions that fit with the lifestyles of the consumers. It means developing and continuing that relationship.

Contract enough Smart Demand Response participants: this may mean both contracts and the buy in of consumers in volume. Sufficient number of participants and density of response needed to ensure benefits are brought as a result of Smart Demand Response. Participants will need to sign contracts/agreements, which detail length of contract, terms of contract – what Smart Demand Response the participants are able to participate in e.g. based on tariffs or direct device control; whether participation is optional, automatic (or even mandatory); setting terms of how and when the participants will be notified of the event; identify contact persons; specify how frequently load shedding events are expected e.g. per week or per month; how the payments/discounts are applied; how the payment is determined; whether the payment is made per each event, per month, etc; whether there are any penalty fees for not shedding the load when it was requested.

Identify relevant participants for each Smart Demand Response service

Estimate how much time is needed to ensure all of the relevant parties are notified of the event in a timely fashion

Provide advanced notification (via pre‐agreed communication channels) of Smart Demand Response to the participants suitably in advance of the Smart Demand Response to ensure for example that businesses have a chance to shed / move load without incurring any unexpected costs e.g. 30 min or 24 hours

Send any updates on the Smart Demand Response incentives

Send advice on how to improve response

5. The right priority This suggests the need for a market solution that can assess and manage different parties’ calls on response. Does this solution need to know of response calls and response available? The market solution needs to cater for actions of one party that would adversely affect other parties.

6. The appropriate regulatory environment Policy to facilitate device interoperability and control capabilities for Smart Demand Response. Policy to ensure that networks are robust to future developments. For example will market driven participation be sufficient to ensure EVs charging is accommodated for all levels of network granularity LV / HV / EHV or could automatic (or even mandatory) participation be required? Clearly it is desirable that the combination of market drivers and automation making participation simple are enough, but it remains possible that participation could be required to be mandatory. Relevant regulatory support for Smart Demand Response, for example in microgeneration and energy efficiency policies (UK Energy, Low Carbon Transition Plan, etc.). We must ensure that Smart Demand Response principles are included

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into new initiatives and common systems/infrastructure to provide certainty to network price control.

7. Confidence to invest For the market players to have reached the point where they use demand they need to have invested in the systems and processes, they need to have had confidence that the market will deliver and allow the use of those mechanisms to realise their benefits. For example a network has to balance the return against cost of reinforcement at the relevant granularity (LV, HV or EHV). They can see policy and regulation supporting this and being realised in approriate timescales.

3.7. Potential Barriers – Risks and Issues

This section identifies potential barriers to Smart Demand Response, which will need addressing in any potential solution options:

1. Lack of information about the current purposes for which energy is used at different times of the day makes any modelling difficult; lack of this knowledge and lack of real knowledge of the ability to move load may risk achievement of optimised benefits.

2. Lack of incentives to facilitate Smart Demand Response – no appropriate market regulation in place, thus leading to lack of investment, lack of transparency, disorganisation amongst objectives of the stakeholders (e.g. a supplier requests an increase in demand to absorb excess wind, while a network requests a demand reduction to offset high network load), resulting industry resilience

3. Lack of technical capability – at the moment there is no industry wide solution available in place to enable successful deployment of Smart Demand Response.

4. The pace of roll out of home automation, smart appliances etc will determine how much and when useful volumes of Smart Demand Response are available.

5. Consumer confusion – products and tariffs created may be complex, there might be lack of information on Smart Demand Response, lack of awareness around how the energy consumption could be reduced and the arrangements in general, this could result in lack of consumer interest to participate. A successful Smart Demand Response programme requires a willingness from consumers to make the demand available

6. Unpredictability – this can include load management unpredictability long term / timing constraints on network reinforcement (~10 years difficult to estimate, but in parallel with loads coming on), unpredictability of wind, solar generation, thus potential energy gap, difficulties to estimate costs and benefits of Smart Demand Response.

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4. Definition of Market Options for GB

4.1. Introduction In considering how Smart Demand Response could operate in the GB market, we have looked at how the market might be developed to facilitate the execution of smart Demand Response. We have considered some simple descriptions of the market to learn how well they might deliver (or fail to deliver) Demand Response in GB:

1. Current Market Framework

2. Enhanced Supplier Hub

3. Demand Response Market Operator

These options are described below: Key The following conventions are used to show exchanges of information, services or payment

The Current Market The Current Market Framework option describes an approach without additional coordination.

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Different parties have a variety of arrangements for Demand Response with consumers. For example:

National Grid has Short Term Operational Reserve arrangements with very large consumers.

Distributors can operate Radio Teleswitch meters to alleviate congestion.

Suppliers have Time of Use tariffs.

A party may act as an Aggregator – obtaining Demand Response to provide the service to any other party.

An individual consumer may be approached by a number of parties and could even agree to provide the same demand to more than one party. The industry parties are not aware of each other’s arrangement or use of Demand Response.

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The Enhanced Supplier Hub

Adding sharing of information in this market structure improves the operation of Smart Demand Response through transparency of arrangements between different parties. There may be additional regulatory controls that can be put in place to better control Demand Response or encourage Demand Response in a coordinated way. Demand Response Market Operator model

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This gives a body (or bodies) the ultimate control over Demand Response. Parties would request use of Demand Response and the DRMO would prioritise and respond to calls. The DRMO would facilitate the sharing of information ‐ there remain questions over how much information needs to be passed to that operator and how much control they can exert. This gives us a set of incremental options that build an operational model for Demand Response with increasing levels of change to the existing market model and consequentially different Cost Benefit Cases:

1. Operate Smart Demand Response with no market change

2. Introduce more information exchange to increase effectiveness of Demand

Response in the supplier hub model

3. Introduce a Demand Response Market Operator to manage and control how

Demand Response is used in near real‐time operational timescales

We need to remember the range of actions that Smart Demand Response encompasses. It is not just events and calls on demand, it includes ToU tariffs, critical peak pricing, dynamic pricing etc., these may all be used and need to work together. We must remember that networks are a physical asset with a certain capacity that demand can be managed against and that the location can be absolutely critical. The need for sophistication in the solution increases with the complexity and take‐up of Demand Response measures.

4.2. Assumptions / Prerequisites / Risks / Benefits The following are assumptions for Smart Demand Response that need to be in place for any model:

The supply chain supports Demand Response

Technology supports Demand Response

In home Technology (such as appliance controls) will be available in appropriate

timescales to support more sophisticated and consumer friendly Demand Response

Discretionary load is and will continue to be available

It is assumed that any use of Demand Response will need to be data protection compliant. There are key questions to resolve:

Where does risk lie?

Where do the benefits lie and how do they get realised?

Demand Response may be used to deliver different benefits such as:

Deferment of Investment in networks

Control of available network capacity

Active Network Operation – for security of supply

Effective purchasing

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For example, if a Network requires Demand Response to operate, then there needs to be investment in Demand Response infrastructure, but this investment depends on the shortage of capacity to make the case (and the network need the confidence that the investment will be rewarded). This is to optimise investment, not an alternative to planning for capacity needs. It is assumed that the TSO continues to operate mostly post gate closure and that information provision and TSO system balancing action continues largely as is. There is a risk of lack of participation in any Smart Demand Response schemes. There needs to be alignment with Government policies and the political environment at large.

4.3. Current Market Framework This option does not mean that there is no Smart Demand Response; it means that there is no additional coordination or regulation to support Smart Demand response; it might be called the reference (or counterfactual) case. The costs of capacity provision are recovered in the current market and Demand Response is used in the current market framework. The industry is reimbursed for capacity, for infrastructure as follows:

For large consumption (businesses), connection agreements specify the maximum load. For these and for increase in load amendments to those agreements the cost is recovered at the time of the connection and generally directly from the customer. Distribution and Transmission Use of System Charges include an element of capacity and may include time of capacity use. These are passed on to consumers through the supply contract (although the time of use and capacity signals may not necessarily be visible to the end customer).

For domestic consumers there is a connection agreement at the time of the development, generally paid by the developer with no direct costs to consumers. Theoretically the distributor should be informed of any change prior to “abnormal use” of the supply, and the customer may face a charge or restrictions on use. In the case of an installer installing a mass of installations – say, PV installed over an estate – the installer will be the subject of an installation agreement and be charged for the cost of any reinforcement. Individual installations by the consumer may simply take place without agreement with the distributor.

The costs of generation capacity are recovered through supplier energy charges. Consumers can be incentivised to change the load pattern by a variety of products offered to them in a variety of ways and by suppliers, aggregators or by direct relationships with DNO or TSO. A consumer could agree with one, or even with more than one, party for this service.

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In the assessment of different options, the risks associated with making no change to support Smart Demand Response must be highlighted: In a pure supplier hub model, DNOs and TSO would not arrange Demand Response with customers directly, nor would aggregators except acting as an agent of the supplier; however this is not the model we operate currently as these arrangements are not currently precluded. Under this option, existing Demand Response measures would continue to be arranged. Any party that sees Demand Response benefits can seek to achieve them (by legal means). Different stakeholders can agree contracts or agreements between themselves to achieve Demand Response to their benefit. In this option relationships for Demand Response may continue as now. There may be bilateral relationships between networks operators and customers or aggregators and customers. There may be arrangements between any of these parties. Networks / energy balancing can access large sites (including via aggregators). There may be a need for a Radio Teleswitch equivalent in the future.

4.3.1. DUoS charges / Market forces are unlikely to be enough DUoS charges / Market forces are unlikely to be sufficient to enable network solutions on domestic residential level. An example of the benefits of Smart Demand Response from consumers managing load is Distributors avoiding / minimising / deferring reinforcement. Smart Demand Response has the potential to allow new loads and new load types to be installed / operated with the opportunity to avoid, minimise or defer reinforcement that might be needed. The benefits could actually be large but the amount of DUoS for the year is generally not enough to use to incentivise people change their use patterns.

4.4. Enhanced Supplier Hub Model It is widely accepted that energy suppliers are currently the central point of contact with the consumer, with a range of agents that they contract with to provide services on their behalf, although this is not currently an exclusive customer relationship for Demand Response. Under this market option suppliers or other parties may contract with the consumer for Demand Response, but the supplier (or other parties) will be made aware of the contract that is in place. This option can include Demand Response in the form of any load shaping activities, so may include Time of Use (or more active pricing mechanisms/tariffs), home automation, or other active calls on demand. Networks can influence the supplier offerings in the form of different use of system charges. The suppliers provide information of available Demand Response and can use it themselves, but they may also be obliged to offer it for network purchase and use.

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The party contracting for the active Demand Response makes the calls for its use, the supplier and other parties are made aware of calls for demand, and the affected parties will monitor the effectiveness of those calls.

4.4.1. Intervention with Enhanced Supplier Hub Model Price signals alone are unlikely to be sufficient to drive widespread take up of Demand Response, therefore it is that some intervention is required to the Supplier Hub model with some form of automated Demand Response, so that Demand Response can be attractive to opt in to. Is there regulation that could improve the effectiveness of Smart Demand Response, e.g.:

EV charging automated off peak period – can this be split it into a tariff

The DNO may be able to prohibit microgeneration export over a level in a particular

area

Suppliers could be incentivised (and even mandated) to provide Smart Demand

Response to DNOs or TSO to stabilise supply

If there are issues introduced by consumer behaviour (e.g. large density of EVs in an area), will DNOs be able to secure investment and reinforce in time? A legislative mandate with regulated support could deliver better customer experience, for example:

A charged car

Secure supply

Do we need a legislative/regulatory mandate for Smart Demand Response to introduce the capability to be able to react more quickly than traditional investment would allow? How does that get introduced – through Price Control or market reform? We are seeing connection agreements become a vehicle for DNOs to introduce enduring commercial arrangements with customers for Demand Response. Suppliers already sell tariffs, products and services to customers to encourage behaviour change and to introduce Demand Response (e.g. ToU tariffs, Radio Teleswitch metering). However, there is a lack of exchange of information between parties and nothing ensures that Suppliers know the impact on their supply positions and DNOs know the impact on their network operations. More transparency and exchange of information is likely to be needed to support more effective Smart Demand Response. What products apply, how are they recorded and to which option do they apply? An Aggregator could be an agent of the supplier to gain appropriate Demand Response from consumers, (could an aggregator provide a service to networks by aggregating Demand Response from suppliers?).

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It would be relatively simple to enforce arrangements that work via suppliers or their agents, as the suppliers licence could be amended to enforce such arrangements rather than needing the creation of new licences.

4.4.2. Suppliers and Network Operators Affected by Other Parties’ use of Demand Response

Suppliers will be affected by other parties organising Demand Response and changing the consumption on sites they supply. If this happens in small quantity then it may appear as “noise” but suppliers are affected in supply and balancing costs and there are consequential costs through the industry. If this is to happen in quantity then there should be information exchange mechanisms for suppliers to be fully aware of the arrangements: the set up and operation (this could include that the supplier makes any arrangements). The arrangement could be similar to that used to remove a generator imbalance when the TSO adjusts their position for a system reason. Without information exchange mechanisms in place it could lead to defensive types of contracts being set up to avoid the impacts on suppliers. Enhanced information provision is the lowest change option to deal with the shortcomings of the current market. This could be via a series of bilateral information exchanges or with the supplier as a hub for Demand Response information.

4.4.3. Variants to the Enhanced Supplier Hub Model There are numerous possible variants:

Network Operators or Aggregators could be allowed to contract with consumers but

obliged to notify suppliers of the contract (and potential uses of these contracts)

DNO / TSO might have arrangements between them for call on Demand Response

There may be a Demand Response operator of last resort (this might be the supplier

if the market fails to deliver the required Demand Response, although this could

take significant development).

4.4.4. Hierarchy for Smart Demand Response Call

In emergency situations only, there is a requirement for hierarchy to ensure system security is not compromised. This is only described for the situation where a last resort over‐ride is required to avoid system outages.

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At a high level this would prioritise protection of system security: 1. TSO – Transmission system balancing –

2. DNO – Distribution system Balancing

i. EHV

ii. HV

iii. LV

3. Products and services to customers.

This is for physical network security purposes only and in normal operation there is no

prioritisation of Demand Response in this market model. Such prioritisation also needs to

be cognisant of system constraints which will limit actions that can be taken. These

combinations of commercial and technical complexities present the key challenge of a

DRMO model.

There may be new priorities over time. In a market scenario with an abundance of nuclear

and wind generation, we may need to increase demand at times and we will need suitable

mechanisms to deliver this.

4.4.5. Multiplicity of Contractual Arrangements If there are no constraints placed on participants, then there will be a multiplicity of commercial agreements struck that will all need to be understood and notified to market participants, for example connection agreements could include a reduced connection charge for allowing Demand Response.

4.4.6. Information Requirements There are a set of common information requirements for models over and above the Current Market Framework to consider:

Notifying parties about Demand Response arrangements and calls for response

their sites: because they are affected they need to know information such as

instructions to change load, the amount, time and duration. They need to be able

to assess the effect before and after the “call”.

Notifying parties of the use of stand by generation to fill calls for demand (notified

pre‐event and post‐event to demonstrate the certainty of delivery)

Distinguishing between customer types

The need to work out how rapidly these notifications are needed, there may be a

need for automated notification of the introduction of:

o Stand by generation

o Intelligent generation

o Intelligent EVs etc

We have discussed previously the consequential impact on other parties and these requirements need to provide relevant information to mitigate the impact.

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4.4.7. Differential UoS Charging It is noted that differential UoS charging – (postcode tariffs) is politically difficult yet it is a potential mechanism to manage LV in this model. UoS tariffs are unlikely in general to affect location of load, but it is possible that in particular locations, if there were a constraint or a potential need for reinforcement, some form of incentive such as ToU tariffs might be able to defer the point when new investment were needed. In such circumstances, there could be justification in making incentives large enough to impact behaviour. Is there an existing HH UoS tariff at HV?

4.4.8. Assumption There is an assumption that DNOs shall be operating as DSOs, but a question remains to be answered over who will do the balancing and how.

4.5. Demand Response Market Operator This option introduces a role for a Demand Response Market Operator (DRMO) to make decisions on how Smart Demand Response is called in a smart market. It is a market operator function, rather than a physical operator function, as the individual market participants will be the ones that actually operate the Smart Demand Response (e.g. TSO, DNOs, Suppliers, Aggregators, potentially customers where there is flexibility given by generation or storage). The DRMO will notify the relevant parties of action to be taken. The model will need to take into account fault or event triggered Demand Response. This option concentrates on active demand calls. Under this option, one party, the Demand Response Market Operator (the DRMO) – coordinates the use of active Demand Response. A variety of parties may be able to contract with consumers for the Demand Response, but the resultant contract is provided to the DRMO for assessment. The DRMO provides information of Demand Response available (and predictions of future availability) to market participants ‐ based on contracts and use of those contracts. Parties may make “Bids” to the DRMO for response (including the requirements for amount, time, duration, and location of the requirement). The DRMO needs to decide on which bids are accepted based on availability (contractual and physical) and some form of prioritisation. Where a bid is rejected, this information is returned to the bidder, and all relevant parties are informed of accepted bids. The DRMO makes calls for response and monitors and reports the outcome of the call. To operate effectively, the DRMO needs to understand the total position for demand within the market and within the network not just any incremental element of demand that may be available for response. The incremental effect of Demand Response is meaningless on its own. The DRMO needs to:

be aware of contracts and networks

manage bids for response

be able to make calls for response and monitor results

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make available information of response available and calls on demand made.

References to this sort of solution are made in the The Council of European Energy Regulators consultation “Draft advice on the market take off of a Demand Response electricity market with Smart Meters”5 and the Eurelectric response to that paper6. There are options for different combinations of local and national operators coordinating the operation of Demand Response. There would be a need for the DRMO to manage activities within a distribution network at close to real time, requiring knowledge of the network configuration. There would also be a need to interface with the Transmission System Operator with aggregated information.

4.5.1. Features of DRMO Market Industry needs to identify roles in operating a Smart Demand Response market. Demand Response really is part of a DSO balancing system with DRMO taking responsibility for directing balancing actions. Note – for convenience, we talk of a DRMO – as described above this could be one body or a number of bodies acting at regional and aggregated levels. We do not make any assumptions as to who candidate DRMOs might be. The DRMO needs to know how the network is operating:

‐ Dynamic DNO system operation data

‐ Supplier contracted Demand Response

‐ Aggregator contracted Demand Response

‐ Response in use / response available etc

‐ TSO operating / contingency plan

‐ DNO operating / contingency plan

The DRMO needs to notify parties of smart Demand Response action so that they understand the impact on their part of the market (customer contracts and wholesale market contracts) and operational (system balancing) positions. The hierarchy set out in emergency situations for the Enhanced Supplier Hub model above still applies to this model. Security of supply is paramount and if there is an over‐ride or failover to protect TSO/DSO operations then this needs to be set out in detail.

5 www.energy-regulators.eu/portal/page/portal/EER_HOME/EER_CONSULT/CLOSED%20PUBLIC%20CONSULTTIONS/CUSTOMERS/PC-62%20CEER%20Draft%20advice%20on%20the%20take-off%20of%20a%20demand%20response/CD 6 www2.eurelectric.org/DocShareNoFrame/Docs/1/EKOHDOPBIJIPNENEPNHODKEG59VLOL5RVG5CYD6E476D/Eurelectric/docs/DLS/EURELECTRIC_response_to_CEER_advice_on_demand_response-2011-030-0581-01-E.pdf

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With the DRMO managing Demand Response, then it is expected that market participants could bid in for Demand Response to deliver their desired outcome (e.g. DNO for system balancing; supplier for customer/wholesale contracting). There is likely to be an impact on the competitive market if the DRO build rules /constraints that affect how suppliers can contract with consumers. The biggest challenge will be to set the algorithms and mechanisms for decision‐making in dispatching Smart Demand Response; they must be fair and transparent to all parties. This will be a complex commercial debate.

4.5.2. Increased Understanding of Demand Closer to Live Operation Industry needs to understand how quickly the DRMO will know of Demand Response actions from market participants ‐ the picture gets clearer as the time of an action approaches. There is a need to analyse how this increase in certainty may be built into any DRMO operations, does it operate under a regime similar to the TSO balancing mechanism with gate closure, units for bids/offers etc, recognising that the TSO has real time security and balancing responsibilities. It is important to note that whatever mechanism is used, the responsibility will still be for the bidding/offering party (e.g. DNO, Supplier, Aggregator) to take action to deliver Demand Response and feedback physical delivery.

4.5.3. Location of Smart Demand Response Understanding the location and granularity of Smart Demand Response is essential to understand its impact on the networks. Industry needs to identify available demand, build experience and understand how a DRMO would operate with locational Demand Response and whether there is a different value/price that can be applicable to different locations.

Network level

National TSO

HV DNO HV

Localised DNO LV

The relationships between TSO, DNO and different locational drivers could make the DRMO an extremely complex agent, managing DNO/TSO conflicts and constraints and introducing complex requirements for information exchange and decision‐making. Co‐ordination will be very difficult and the complexity of these interactions should not be underestimated. Is Smart Demand Response needed nationally? Can it be retained regionally (e.g. by DNO area) when suppliers and aggregators may not know where the demand is if they have contract for volumes from multi‐site customers. Will we have Demand Response at LV level, given the level of granularity required? This could be a short term issue for current network designs. Response can be aggregated to deliver at a higher level, but where the requirement is local Demand Response should be delivered locally. A DRMO could deliver localised action.

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Could similar arrangements to TRIADS work? TRIADSs are the mechanism by which National Grid recover capacity costs from Suppliers based on peak usage, the suppliers recover this from their customers leading to incentives for large customers to avoid that peak usage. The suggestion is that this sort of arrangement could be extended. There is a need for understanding of:

the network (cable sizes) / connectivity (and potentially in real time)

what information is needed by whom

The value of Demand Response varies according to the amount and its location and the time against a background of other changing load. It is possible to aggregate up to achieve a result and a value at a higher level on the network ‐ it isn’t possible to disaggregate down to achieve an effect more locally! For network use – there has to be a detailed picture of the network and this may place significant requirements onto the DRMO to know how the network “looks” in detail. There will be a value in understanding by customer type the volumes of meters and the amount of Demand Response that is available at those meters by:

I&C / HH…

PC 5‐8

PC 3‐4

PC 1‐2

4.5.4. Timing Different drivers will influence the timing of Demand Response. There is a need to understand the amount of Demand Response that is needed / expected and when. Is there a phasing in of Demand Response required from EHV > HV > LV under the DRMO model so that the benefits of HV system operation can be realised early and an assessment be made on the timing of implementation for any LV DRMO operation? By 2050 – there may be need to manage Demand Response at low granularity and high volume, given the scenarios that may play out. There may be phased implementation of Demand Response market models for HV and then LV operation.

4.5.5. DRMO with Demand Response Capacity Market Demand Response delivered in different ways will vary in the “firmness” of Demand Response that is delivered. We have discussed in the earlier option that there is an increased understanding of demand and Demand Response opportunities closer to live operation, therefore there is the opportunity to open a market to deliver firm response early, e.g. a Demand Response capacity market.

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This is seen as a potential evolutionary variant of the DRMO model and is included in here for illustrative purposes and completeness to demonstrate that it has been discussed. A Demand Response mechanism allowing different parties to bid to make use of the same demand is a form of capacity market. This option treats capacity in a more complete way as it allows various parties to offer and take capacity in a centrally operated market. Demand response contracts can be offered into this market as in options above, as can large and small generation response. The various providers can / must sell capacity to the market, and the users must buy capacity from the market. The mechanism would reward reliability of delivery with better prices but could also be used to promote “clean technologies”, renewable generation or Demand Response with subsidised prices, or penalise less desirable technologies. This sort of solution is described in the DECC consultation “Planning our Electric Future: a White Paper for secure, affordable and low‐carbon electricity”. However, for such a solution to be relevant to the benefits being sought from Demand Response, it needs to reflect the granularity in time and location required by the users. There is different action required depending on the timescales and how close to operational real‐time we are operating:

Long Term Medium Term (1‐2 years)

Short Term System Operations

Parties contract with customers for Demand Response (connection agreements, tariffs, RTS etc.)

Parties Bid for Capacity

DRMO notification and dynamic execution of calls

Physical Action and then post‐event notifications

UoS structures in place DRMO notifies results

Again, for there to be right investment in the solution, longer term certainty is needed. A DNO can achieve some of this through connection agreements with larger customers and suppliers through products and tariffs. However, parties acting independently will not necessarily deliver the optimum solution for GB. The example of interruptible contracts for gas was given where the networks need to know 10 + years in advance for their investment in networks. There are interruptible contracts in place to help manage network constraints.

4.5.6. Questions for Assessment What would the regulatory / political impact of this type of market be? How can the solutions be made to work ‐ given the assumptions that the contracts and technology shall /can be in place

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5. Assessment of Market Options Having set out some high level options of increasing levels of sophistication we have looked at whether these options are exclusive or whether there might be a development path over time. Is there a spectrum of options from:

No Market Change To Comprehensive DRMO solution

There is value of Demand Response to network operators in the current market although valuation is approached differently (e.g. STOR equivalent, cost of reinforcement) There is value to suppliers with better energy purchasing and demand forecasting and innovation in products/services

This will clearly cost to deliver, but there is a need to justify with a business case:

What is the saving

Who pays and takes risks

Where is the benefit seen?

We need to clearly define the options across this spectrum and what an appropriate roadmap for delivery may look like. We have concluded that it is likely that this will need to be a staged implementation to deliver market benefits, so this needs to be worked on. We do not believe that it is a simple choice of which of the market options are best to implement. It seems that there can be a path whereby the sophistication of the market support for Demand Response can be increased to match the need to get greater amounts of response and greater numbers of arrangements. It will be invaluable to understand where the tipping points to more sophisticated markets are in order to make these moves planned rather than responses to markets that are already failing. It is also essential to understand the incremental cost benefit case for implementing change.

5.1. Not all benefits may be achievable at the same time

The requirements section highlights a list of benefits. Whilst all of these may be genuine potential benefits, we should not expect them to be complementary:

they may not all be achievable at the same time

they may not all be achievable from the same property

the nature of the “best benefits” and priority may change over time.

An action to achieve one benefit may also help achieve another benefit, or it may be neutral to another benefit or may have a negative effect on another benefit area ‐ the relationships are not obvious.

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An example of the change in use of Demand Response over time might be that Demand Response for deferment of investment benefits may have a stronger case earlier in our pathway to 2050 and Demand Response being used to aid balancing intermittent generation later.

5.2. Price Control Submissions

Is there a need to balance cost of security with cost of Demand Response measures in the next set of regulatory submissions for Distribution Price Control? Is there a choice between using Demand Response to help with deferring network reinforcement against using it for energy balancing? There is likely to be different approaches required for different networks with different topographies in different geographic areas. We are not just looking at cost avoidance, there can be customer driven Demand Response at the right price. However there is still a cap to what can be delivered in each set of market arrangements and there may need to be some flexibility to allocate budget to reinforcement and to Demand Response and to change these budgets over time. There needs to be clarity on where the commercial liability and accountabilities sit.

5.3. Current Market Framework

Under the current market framework there is a limit to which consumers can really be involved. This model will be challenged by the amount of Demand Response arrangements. It is questionable if it can work as a cost effective solution to very localised network issues that may be created by clusters of loads such as Heat Pumps and Electric Vehicles.

5.4. Enhanced Supplier Hub The Enhanced Supplier Hub is a way of requiring relevant information to be made available to relevant parties and this will stimulate the Demand Response market allowing increased numbers of Demand Response arrangements to operate. Such an approach could still encourage innovation, but this solution could give sufficient certainty for parties to invest in Demand Response and keep the suppliers sufficiently informed for their wholesale position.

5.5. DRMO

This is a solution that will be extremely complex to set up, requires a great deal of regulatory intervention so has a greater lead‐time and cost. There is a need for a defined hierarchy of Demand Response. Although, the more efficient use of current assets is theoretically more cost effective than the investment in new assets, as the proportion of intermittent and less flexible generation increases and assuming total demand continues to increase then the wider use of Demand Response may become a necessity for the market.

5.6. Triggers and options

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Having set requirements for smart metering and seen that the development of sophistication in support for Demand Response could take place over time, the group have considered what the triggers are to move to these greater levels of sophistication. It seems that the market options can be a progression from the existing market to options with more sophistication in coordination and obligation. The workshops have looked at what the triggers would be that prompt the move from one option to the next.

5.6.1. From the Current Market to Enhanced Supplier Hub

The current market does allow an amount of Demand Response and can support more. As the drivers develop, such as additional demand and as supporting technology develops, the desire to use Demand Response will grow.

The challenges such as:

Supplier constraints

The arrival of: o Electric vehicles o Heat Pumps o Renewable Generation

will all lead to increased attractiveness of Demand Response as a resource. There seems to be a reasonable fit with the timeframe up to 2020 ‐ although it is stressed that this is an illustrative date. Transmission requirements for greater Demand Response could arrive sooner prompted by generation challenges. Network challenges such as local concentrations of new loads, or the removal of Radio Teleswitch services, could lead to the desire to make use of Demand Response delivered through smart metering. It was generally felt that widespread use of Demand Response without information sharing as described could lead to increased costs in the market such as imbalance costs to suppliers and the need for suppliers to take this into account in pricing. All this would suggest that there would be a need for increased coordination and lead to the need for at least the Enhanced Supplier Hub type of solution if the Demand response solutions are to give the net benefit desired.

5.6.2. The triggers to move to DRMO

The same sort of elements that would push the move to the Enhanced Supplier Hub are true of the move to have a party or parties that coordinate the Demand Response in a more sophisticated and formal way, but the potential risks have to be a step change greater to compensate for the significantly greater cost and regulatory intervention. The same challenges such as widespread use of EVs along with other potential drivers such as Consumer pull for Demand Response brought on by successful offerings and improved

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technology. These drivers for Demand Response along with increased conflicts in use of Demand Response could lead to the need for an operator of the Demand Response market. The DRMO could have the responsibility to maintain a level playing field and ensure that the competition for supply is not disrupted. The function could be extraordinarily complex as they may need to coordinate Demand Response and to prioritise uses of Demand Response that are wanted at very particular locations and very different timescales: The current ways in which Demand Response is called on give a reasonable indication of the potential complexities that may be faced ‐ in that the same sorts of response will be wanted and these or their equivalent will need to be assessed in looking to make the best use of Demand Response example mechanisms are provided below for illustration:

Time of use tariffs – These may have annual, seasonal and within day effects

Radio Teleswitch (RTS) – the call for a change in load can be immediate call – but

has limited flexibility

Critical Peak Pricing (CPP) –How far in advance notification of CPP events and the

duration of those events for GB is to be discovered.

Dynamic Pricing – The appropriate granularity and latency is to be discovered for GB

Short Term Operating Reserve (STOR) – STOR operates by a STOR provider

delivering an agreed level of power (generation or Demand Response) this reserve is

delivered within 4 hours – for 2 hours‐ recovery not more than 20 hours, 3 times per

week.

Fast reserve ‐2 minute response to start or start to cease ‐15 duration

Frequency response ‐ 2 second – Sub second response

The DRMO may need to change the way priorities over time as the value of balancing intermittent and inflexible generation grows in importance relative to the value of deferring investment in reinforcing networks. There is a clear potential for value in coordinating Demand Response however this role is extremely complex, as highlighted in the market model description above. In summary: The benefits identified can all be delivered to an extent under the three market descriptions, but there are limits though as to how far each model can deliver.

5.7. Further Qualitative Assessment 5.7.1. Potential Cost

There will be costs for implementation of any of the options above:

Cost of regulatory development

System and process changes for industry participants

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Potential definition of new DRMO role, regulatory framework, procurement and implementation of any agent

The costs increase significantly with more intervention.

5.7.2. Potential Benefits

There are a set of benefits that will apply to all models, but we expect the scale of benefits to increase with the incremental models, including:

Avoided cost of generation

Avoided network investment

Improved wholesale purchasing

Customer value realised for innovative products If the scenarios for the energy market unfold as set out in the context section of this paper, we also expect the benefits to increase over time as the energy system becomes more stressed.

5.7.3. Scale of Regulatory Change

There may be implications of regulatory changes needed to protect customers in the existing model, even without a market level change. If we are to move to an enhanced Supplier Hub model, then changes to the regulatory framework will need to be assessed. Will this need a Licence Condition change or can this be delivered via existing industry modification and change processes? Implementation of a new DRMO model would require a step change in regulatory intervention, is likely to require Licence Condition Changes (and potentially primary legislation) and the difficulty of landing a consensus position should not be underestimated (consider recent market reform programmes). It is probable that new codes would be needed to define how the new operations work. If so, how is it funded, governed and how is the appropriate level of influence given to the right parties? These are all complex discussions from a regulatory, commercial and operational perspective.

5.7.4. Scale of Operation & Systems/Process Implementation

Moving to an enhanced Supplier hub model would require changes to industry information exchange mechanisms and consequential change to industry party systems and processes to process new information received. Moving to a DRMO model would require a whole new set of systems and processes for the DRMO and a much more extensive set of systems change for industry. The parallel of the Balancing Mechanism systems has been drawn and the relative cost and complexity involved in these. The operational complexity of considering balancing at a level below TSO should not be underestimated due to the configuration of networks and the complexity of regional interconnection. Could this be implemented on a regional basis?

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6. Analysis and Conclusions There are no firm conclusions in this document on the best market model to be used for Smart Demand Response. This is intended to be a discussion paper to raise awareness of the options and the associated pros and cons with each option.

What it has highlighted is the opportunity to approach the implementation of Smart Demand Response in a number of incremental steps, each of which can be analysed for cost benefit to GB. Evolution of potential Smart Demand Response models is essential to match the developing market scenarios. There will be a need to adopt and maintain common definitions as to what services are included, which parties can and must do what: common definitions will be needed, and developments need to be cognisant of operations including those in development – such as the work being carried out by European Network of Transmission System Operators for Electricity (ENTSO‐E)7 so that the new arrangements are understood and work with, rather than disrupt, existing arrangements.

There must be a positive cost benefits case to implementing any new Demand Response model and we need the right incentives in place at the right time to facilitate Smart Demand Response.

Timing of implementation will be key to any cost benefit analysis as the case for action on Smart Demand Response may be closely associated with the stress on the networks and the corresponding savings of network investment, but it may later be driven the energy mix and matching demand to the generation available. Trigger points could arrive quickly, so they need to be prepared for. Alternatively, events such as price control windows could be used as the key drivers.

The following diagram illustrates how, over time, there are opportunities and challenges that may influence if the industry should move to a more coordinated treatment of Demand Response products and use.

We recognise that the current market has inefficiencies and that more coordination could help achieve more use and benefits from Demand Response, however any change to the current market means cost and will create constraints of its own so needs to be supported by a costs benefit case.

7 https://www.entsoe.eu/

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This diagram is simplistic but illustrates that there are a range of initiatives and programmes that will influence how Demand Response may be made available and how much it needed. Many of the challenges and opportunities are complex programmes with their own timescales and milestones.

Smart Metering rollout opens a range of meters to use Demand Response. Other initiatives generally present challenges to which Demand Response could be a tool providing part of the answer. New loads or microgeneration challenges networks, the increased mix of major renewable generation means that becomes more difficult to match generation to demand and so on.

The list could continue with more rows for: further initiatives, social, political, economic and climatic factors all of these may make Demand Response more or less desirable. We also have much to learn from technological advancements and international developments. There is another dimension in that the calculation could be quite different in different locations, in different networks or for different customer groups or load types.

However the suggestion is that these strands may have a significant effect on the analysis of whether the industry should involve more coordination in the use of Demand Response.

More analysis of these strands is needed but the suggestion is that these should all feed into cost benefit analysis of what and when/if the industry needs to support more coordination of Smart Demand Response. This work needs to be quantified at an appropriate point in advance of operational issues occurring.

This begs the question of when to implement market change to better facilitate Demand Response. It does not appear urgent but the conclusion needs to be reached before the industry fails to deliver and in time to put the solutions in place; the bigger the change the more lead‐time is needed. Although a variety of industry stakeholders

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are involved, it would seem prudent to align this analysis with distribution price control timescales.

7. Recommendations and Next Steps A key objective of this work is to raise awareness of Smart Demand Response and effectively communicate the work done to date so that it can be taken into account in other work.

This report is published on the ERA and ENA web‐sites and will be communicated to, amongst others:

DECC

Ofgem ‐ The Demand Side Working Group (DSWG) and other groups

The Smart Grid Forum8

The Energy Networks Futures Group (ENFG) Smart Grid GB9

Eurelectric10

Consumer groups

We intend to convene a stakeholder event to communicate the collective view.

This work will feed into and learn from Low Carbon Network (LCN) Fund projects.

By having a current industry view set out above which has not been constrained by promoting particular solutions, we believe that we can progress debate from an informed starting point and hope to provoke thought in an uncertain environment.

We want to encourage debate and feedback, take stock of how this paper is received and what debate it initiates and then consider our next steps as an industry.

If there are any questions on this paper, please address them to:

ENA

[email protected]

or

Energy UK

smart@energy‐uk.org.uk

8 www.ofgem.gov.uk/Networks/SGF/Pages/SGF.aspx 9 www.smartgridgb.org/ 10 www2.eurelectric.org/Content/Default.asp?

Scottish and Southern Energy Power Distribution

SSE Supply

UK Power Networks

Western Power Distribution

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