B
RIEFING
N
OTE
P
OSITION OF
D
EMAND
R
ESPONSE PROGRAMS IN THE
ENERGY MARKET
DSM University
I
NTRODUCTION
This short briefing note will give an introduction to Demand Response (DR) and its position in the electricity market. We will
Define the aim of DR programs – in which sense is it different to that of other kind of Energy Efficiency programs?
Explain three different business models to turn DR into marketable products, and describe which technologies are available to support these models
Define the main market barriers for a massive breakthrough of DR products
Explain how benchmarks and statistic samples can be used to estimate the market potential of DR products, and how market modelling techniques are required to calculate the market value of DR programs with sufficient precision
D
EMAND
R
ESPONSE
(DR)
MARKET CHARACTERIZATION AND PRODUCTS
Demand Response (DR) programs aim at changing the electricity consumption patterns of end-use customers. The intent is to create changes that relieve present constraints in time (peak load) and/or place (network bottleneck) on the electricity network. If structured correctly, they can provide additional energy and capacity to the power market at the time and place it is needed most. Successful DR can help mitigate violent price spikes and the power of the supply-side of the market.
In general, DR products fall into three primary categories:
1) Reliability/Emergency Support: These are products that provide parties in urgent need of additional capacity with the option to call on the DR resources of participating end-users. When entering the program, the end-users define the capacity reduction they are able to provide at any time. They receive a reservation payment for this ability to respond. At the moment when they receive an actual request for such a reduction, they are obliged to make their best effort to meet the request. If they do so, they will receive a second payment.
2) Economic/Demand Bidding: These are products where a consumer (or its agent) bids in a price at which they are willing to sell their consumption reduction. There is no commitment made beforehand; the consumer can decide to bid or not at the each moment. Participating consumers are paid a fee that is proportional to the hourly electricity market price at the moment of their consumption reduction.
3) Real Time Pricing/Time of Use Pricing: In this system, commodity electricity pricing has built-in incentives for consumers to use power according to the actual wholesale electricity price on the market. These consumers are not paid for their actions, but they do avoid paying a high rate for the power they do not consume during peak demand.
The first step in building a solid base for DR is to identify the market actors and their relationships to each other. In the event that there is a publicly visible power exchange, the wholesale price of power and energy is transparent―assuming a fair and efficient market design. If such a power exchange does not exist, the market value of power and energy may be much less transparent. DR will work in either of these market scenarios, but each will need to be structured differently.
Important elements to take into account when evaluating the market for DR include:
Whether the market is liberalized or not
The general market design
The types of consumers on the market
DR
TECHNOLOGIES
Demand Response has become a genuine option thanks to progress in communication and information technology. Options include such solutions as Smart Metering, advanced load control and new systems which aggregate and manage distributed generation resources. It has now become possible to track potential temporary consumption reduction and compare it with the energy cost at each moment in time.
Demand Response technology can presently be divided into three categories:
Technologies that make it easier for the consumer to understand their consumption patterns and energy costs, such as smart metering.
DR control room technologies that assist DR Aggregators and System Operators to better manage their DR products.
Technologies that enable more efficient activation of DR, such as building automation and remote facility monitoring and control systems.
DR
MARKET BARRIERS
Various market barriers presently hinder the growth and adoption of DR. Some of these barriers are unique to a specific local market, while others can be identified almost everywhere. The following table lists some of those common barriers, as a well as potential actions by local market actors (regulators, energy suppliers, DR aggregators, distribution companies, TSOs, et cetera) to mitigate these challenges.
Common challenges Suggested actions
Consumer awareness
End-users do not know about DR Develop case studies showing how others have benefited
End-users are unaware of their demand flexibility Awareness campaigns (radio, billboard, news reports, seminars, et cetera)
End-users are unaware of how they can benefit from DR
Price signals
End-users are used to fixed cost per kWh The use of products that link consumer consumption patterns with the energy cost Wholesale is disconnected from retail Initiate test projects to assess local market adoption
Meter data
Most current meters do not record hourly The use of load profiling methods Data exchange standards are rarely used Enable meter owners to recover costs from
upgrades There are few incentives for investments in new
meters
Make Advanced Meter Reading (AMR) systems compatible with desired DR products
Market operations
DR may be precluded from participating in the wholesale market
Use test projects to demonstrate how the wholesale market can benefit from DR
How to conform DR with the current supply-side market rules (e.g. large trading blocks)
E
STIMATING
DR
MARKET POTENTIAL
Many methods have been developed to calculate energy efficiency market potential. They are very good at estimating permanent kWh reductions, but do not capture the temporary reductions that are typical of DR programs.
The IEA DSM program surveyed more than 40 North American firms. The top performers were then selected from these firms and the degree of DR participation used to develop a reliable DR benchmark. While such a benchmark may not be directly applicable to markets with a different consumer mix, it did make it possible for IEA DSM to develop the DR Market Potential Calculator. This makes it possible to utilize relevant demographic data to translate and apply the survey benchmark to other markets. This DR calculator is simple to use and provides a reasonable first level estimate of market potential.
When this estimate does not provide sufficient insight or specificity, a more detailed estimate can be generated by investigating a statistical sample of the consumer base. This is more costly and labor intensive. IEA DSM developed a sample survey to assist market actors with their own investigation, along with a list of recommendations on how to use it. Besides providing a more precise estimate of market potential, this method also enables a deeper understanding of precisely how consumers in a particular market might provide DR. This will be both valuable and essential information for future DR product design and targeted marketing campaigns.
DR
MARKET VALUE
It is not enough to look at the results of past DR programs to estimate the net present value of DR. Future market dynamics must be taken into account. This requires accurate probabilistic market modeling techniques. Models must be able to predict the interplay between multiple market inputs such as supply and demand growth, fuel costs, and transmission line capacities. Such a model will also enable the answering of more detailed questions, such as:
What is the optimal amount of DR in a market (in capacity and in frequency of use)?
What type of DR products should be used?
The IEA DSM created a sample market to test the modeling technique, resulting in the calculation of the following net present values:
System cost savings (NPV in $M)
Average NPV over 20 years
Callable DR only 48 Callable DR with critical Peak Pricing (peak hour load
reduction only) 574 Callable DR with standard Real Time Pricing
(reduction in demand in all high price hours) 1,984
In addition, the IEA DSM Team worked with Australian experts to create a sample tender (request for proposal) that can be used to select a qualified vendor to perform the valuation analysis. The Australian team used this document to select the vendor that performed the analysis of their market. It clearly demonstrated a sizable benefit. This Australian DR valuation analysis report is available for review on the project portal.
R
EFERENCE
IEA DSM Programme, Task XIII – Demand Response Resources, ‘Final Task XIII Status Report’, submitted by Ross Malme, December 2006
