Ref: (S)978/hf 9 July 2014 IET evidence to the Energy and Climate Change Committee on ELECTRICITY DEMAND SIDE MEASURES EXECUTIVE SUMMARY 1. Permanent Electricity Demand Reduction (EDR) and Demand Side Response (DSR) both have significant roles to play in the management of the electricity system but their role in the UK capacity market remains to be tested. While EDR is an incentive to reward energy efficiency by industrial and commercial users, DSR is a reward for the time shifting of demand to alleviate system stress. 2. In the case of DSR, shifting demand away from times when renewable generation is low and demand is high can have a disproportionately beneficial impact on emissions as the thermal generation typically used on such occasions is low efficiency with correspondingly high emissions. It is important to note that DSR can also be used to temporarily increase demand to deal with the situation that more renewable energy is being produced than is required by the demand. This is a way of optimising system use of renewable energy. 3. The Government s Energy Efficiency Strategy s estimate of potential permanent savings by 2020 of 196 TWh/annum is for all energy, of which electricity is a significant but not dominant part and is not broken out separately in the strategy. DECC has estimated that there is potential to save 32 TWh/annum of electrical energy in 2030 1, a more relevant target for the electricity sector. We believe this 32 TWh to be a conservative figure as it excludes savings the Government believes has been incentivised by existing energy efficiency policies such as in household lighting and appliances where there is very significant potential. 4. In parallel to this there are factors tending to cause electricity demand to increase, for example general economic growth, increased amounts of domestic and commercial ICT equipment, and the potential for electrification of heat and transport. 5. More work therefore needs to be done to establish a clear baseline for the EDR potential in electrical energy as opposed to all energy, and then to test whether the Government and Ofgem s proposals will deliver this potential. 6. National Grid s new Demand Side Balancing Reserve (DSBR) builds on previous schemes by which NG contracted for demand reduction at times of system stress, and we would expect this to be effective in enabling demand side response in the commercial and industrial sectors. There is potential for aggregators of community energy groups to use smart metering to bring the domestic sector into these arrangements, and in due course it will be 1 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/246125/government_response_edr_co nsultation.pdf The Institution of Engineering and Technology Page 1
important to monitor any barriers to this and remove them. DSR shifts rather than removes demand, and given the new issues of variable renewable generation, care will be needed to make sure that demand shifted from one time of system stress does not reappear in a way and at a time that accentuates a subsequent period of stress. 7. This form of DSR is new and its long term impacts are not well understood. There is some international evidence that DSR did not always perform as anticipated at times of system stress, and some regions of the USA, for example, limit the amount of DSR that can be offered to capacity markets. The IET therefore recommends that a DSR pilot is established alongside the proposed EDR pilot, to allow these issues to be explored and better understood. 8. Accurate measurement underpins payment or reward arrangements that will be needed to encourage effective market behaviours. We would recommend some targeted pilots that exercise the technology components and develop the commercial arrangements to validate the potential benefits of DSR. We would also recommend a study to assess the long term reliability impacts on the grid of accommodating large scale DSR. 9. The key enabler for DSR in the domestic sector will be appropriate dynamic tariffs to send signals to allow consumers to manage consumption to take advantage of low price periods and avoid high price periods. This means a greater choice of tariffs would need to be offered, something which runs counter to the direction of Government policy over the last year. There will also be a need for consumer products to be equipped to enable their participation in dynamic tariffs. ANSWERS TO QUESTIONS QUESTION 1: Are the Government s and Ofgem s current proposals for incentivising the development of demand reduction measures enough to ensure the potential energy savings outlined in the 2012 Energy Efficiency Strategy are achieved? 10. The current proposals for incentivising the development of demand reduction measures should be considered not as the culmination of policy and technical development in this area but as the beginning. Much more learning from experience in both policy and technical terms is required as we make the revolutionary changes needed to optimise an electricity system using low carbon and variable output forms of energy in a cost effective way. 11. The coining of terms Demand Side Response (DSR) and Electricity Demand Reduction (EDR) for particular meanings under the Capacity Market arrangements and their abbreviation to three letter acronyms obscures the very significant differences between the two and makes the debate opaque except to the few who are deeply involved in the policies. This is unfortunate as greater understanding by policy-makers and public is vital. Understanding the potential savings 12. In this context, it is important to distinguish between energy and electricity. The Government s Energy Efficiency Strategy of 2012 relates to energy not just electricity, and therefore the figure quoted of 196 TWh/year potential savings relates to all fuels, i.e. including the burning of gas and petroleum for heating and transport. The comparison of this with power station numbers is therefore potentially misleading. 13. Our understanding is that this inquiry relates solely to electricity and to the recent DSR and EDR proposals and we believe the relevant saving potential figure (from the Government s The Institution of Engineering and Technology Page 2
assessment of electricity demand reduction potential) is 32TWh/year. This is clearly a much lower figure, although we believe it is a very conservative figure as it does not include potential that the Government believes will already be captured by existing energy efficiency policies. This excluded potential incorporates the whole, very significant, potential in household lighting and appliances. 14. It is also important to distinguish clearly between: a) electricity consumption over the course of a year which is what energy efficiency measures have traditionally attempted to reduce. This is a measure of energy in kilowatt hours (kwh). The proposed Electricity Demand Reduction (EDR) pilot is an additional initiative aimed at the industry and commercial sector. There is already a range of other measures in this area such as the Green Deal aimed at domestic users. b) electricity peak demand which is of increasing importance in the next few years as we enter a period of decreasing generation capacity margins and increased reliance on renewable energy. Peak demand is a measure of power in kilowatts (kw) and is the focus of the Demand Side Response (DSR) incentive with the aim of reducing consumption at a particular moment in time. The electricity system has to be provided with sufficient generation to have a very high probability to always meet peak demand, so reducing peak demand by DSR potentially avoids the need to build new generators, and also has a disproportionate effect on carbon emissions because those generators used to meet demand peaks tend to be the least efficient and hence have the highest emissions. 15. For DSR, the main drivers for domestic and SME consumers are likely to be multi-rate time of use tariffs which reward consumers for using electricity at off-peak times, or, increasingly important going forward, when output from low marginal cost generation such as wind and solar PV is high and electricity spot prices are consequently low. These will be essential to the incentives for consumers to manage consumption, for manufacturers to invest in smart appliances, and for service providers to develop new offerings. 16. In terms of mitigating risks of reducing generation plant margins and, in future, ensuring that maximum use is made of low carbon / low marginal cost (but largely intermittent) generation, it is electrical demand (power) at any given time that needs to be controlled, rather than overall electricity consumption (energy). DSR achieves this directly. EDR achieves it indirectly, but its effectiveness depends on the load factor of the relevant technology at times of high total electricity demand. Understanding the base-line for comparison 17. It is also important to differentiate between trends in efficiency and trends in consumption levels. Electricity consumption can, and should, be reduced through reduced wastage (e.g. not lighting unoccupied rooms in homes and offices) and through adopting energy efficient electrical appliances (e.g. A rated appliances and CFL or LED lighting). However, overall electricity consumption also depends on the underlying trends in the demand for the services provided by electricity (electricity services). These tend to move in opposite directions, with efficiency improving, but electricity service demand continuing to increase. Historically, the growth in demand for services has outstripped efficiency improvements, so that electricity consumption has risen. More recently demand has stabilised, even before the economic crisis, and has subsequently fallen, so the National Grid s estimates of electricity demand have been revised downwards. Whether this is a short term blip or longer term trend remains unclear. Future electricity demand is therefore uncertain due to a number of factors: The Institution of Engineering and Technology Page 3
Electricity service demand will tend to increase in line with economic and population growth, which are themselves uncertain. The historic relationship between GDP and electricity consumption is explained by increased manufacturing output; higher employment rates and hence increased electricity consumption in offices and other places of work; and through increased new building activity, and hence additional homes and places of work. Industry is substantially more electricity intensive than the service sector, and therefore future changes in electricity demand will depend on the structure of economic growth. Government data shows that the most significant uses of electricity in the home (lighting, refrigeration and wet appliances ) have been falling for many years, as most homes are close to demand saturation for these appliances and product efficiencies continue to improve. However, higher levels of disposable income (as a consequence of economic recovery) will tend to result in increased sales of entertainment and ICT equipment and hence increased electricity consumption in these uses. Future overall trends therefore depend on product efficiency (largely driven by EU standards) and continuing changes in the digital economy. Electrification of heat and transport will clearly result in new demands for electricity consumption. Under the Government s 4 th Carbon Budget scenarios, electric vehicles and electric heat pumps could result in up to 66TWh of additional annual electricity consumption by 2030, an increase of around 20% on current levels of consumption. However, there is significant uncertainty in the timing of this increase, with neither heat pumps nor electric vehicles yet being mass market products. 18. It follows from the above that in order to judge the effectiveness of energy efficiency polices, and progress against the Government s identified potential for EDR, it is necessary to evaluate against an uncertain counterfactual rather than simply track electricity consumption trends. In particular it is necessary to consider the net energy saving resulting from electrification and, more importantly, the overall impact on greenhouse gas emissions and energy costs. A continuing lack of effective incentives for energy efficiency 19. Whilst smart metering (electricity and gas) will provide the means for consumers to have greater visibility of their energy usage, it is only through incentives that consumers will make significant energy usage behaviour changes. 20. The incentives for reducing energy demand vary in effectiveness. Climate Change Agreements (CCAs) and the Carbon Reduction Commitment (CRCs) provide some policy driven incentives for energy intensive and larger businesses respectively. But policy drivers in the sectors where the potential for efficiency is largest, homes and smaller businesses, are minimal. The move from CERT to Green Deal and ECO abolished the option for energy suppliers to support efficient lighting and appliances. Whilst product standards are very important, they are, by definition, set at levels that can be universally achieved, and therefore do not provide incentives for innovation and early movers. Question 2: How will National Grid s new Demand Side Balancing Reserve (DSBR) enable demand-side response (DSR) to play a positive role in avoiding capacity shortfalls in the coming years? What improvements to the scheme are required? 21. DSBR is effectively building on established and proven mechanisms by which National Grid, as GB system operator, is able to call on consumers to reduce demand when the system is (or is expected to be) under stress due to a shortfall of generation. This will supplement existing reserve services include Short Term Operating Reserve (STOR) and Fast Reserve. Such services are often provided by Commercial Aggregators who assemble portfolios of The Institution of Engineering and Technology Page 4
industrial and commercial consumers who are able to reduce demand and/or start standby generation when called upon to do so. DSBR provides a mechanism by which commercial or industrial consumers who are already required to have half-hourly metering can participate in providing demand reduction services at specified times of day / times of year when capacity margins are critical. 22. DSBR is aimed at large electricity users but it is not inconceivable that commercial Aggregators or community energy groups could also assemble larger portfolios of domestic consumers with smart metering (and hence half-hourly data) to provide DSBR services. Indeed, there are already examples whereby domestic electric storage heating is switched remotely by a third party in order to provide reserve services to National Grid. 23. It is however important to recognise that DSBR capacity, other than that provided by distributed or standby generation, will be largely provided through shifting the time of consumption rather than actual energy saving. It is therefore also important to understand the impact on electricity demand immediately following the DSBR period. Much of the deferred energy use will be recovered in this period and, moreover, the normal natural diversity in demand will be lost until such time as the energy recovery is complete and normal cyclic demand patterns resume. It follows that electricity demand may be abnormally high during this period and it will be important to ensure that the overall effect is not simply to shift a similar peak in demand to a later period, achieving no net benefit. Question 3: What problems (if any) are there with the proposed Capacity Mechanism (CM) Transitional Arrangements (TA) in relation to DSR? To what extent does participation in the TA limit the future potential of DSR in the CM? 24. Not answered. Question 4: How can the Government ensure that new technology which facilitates DSR is deployed in a timely manner, now and in future, to reduce peak demand for electricity? 25. It will be important for Government, in conjunction with Ofgem, to ensure that the potential for DSR across all consumer categories is fully exploited. Whilst the emphasis initially might be on peak demand reduction in order to minimise the risks arising from reduced generation capacity margins, of greater importance in the medium and long term future will be the need to more closely align electricity demand with the real-time output of near-zero marginal cost intermittent generation such as wind and solar PV. This will on occasions mean demand shifting in order to increase demand when output from wind and solar is particularly high as well as reducing demand when output from intermittent generation is low. Fixed time of day pricing (i.e. where the price bands are fixed, such as the Economy 7 tariff) will not be sufficient to do this; more dynamic pricing tariffs (where the price bands are moveable, and notified in advance such as one day ahead) will be required. It should be noted that this runs counter to recent government policy to simplify tariffs, and this discrepancy will need to be worked through. 26. Smart metering will provide an important enabler of incentives on domestic consumers and SMEs to participate in DSR through enabling time-dependent tariffs. For example, dayahead dynamic tariffs have been demonstrated (both in France and UK) to have the potential to encourage consumers to manage consumption to take advantage of low price periods and avoid high price periods. The Institution of Engineering and Technology Page 5
27. Perceived issues over complex tariffs need to be balanced against the benefits of allowing consumers to take advantage of tariffs which reward behaviour that shifts demand in ways that enable system security goals to be met with lower supply side costs. 28. The development of smart appliances which are able to respond directly or indirectly to tariff price signals would further enhance the scope for domestic consumers to participate in DSR. Similarly, smart EV charging systems that enable EVs to be charged at times when there is sufficient network capacity (typically overnight) and/or sufficient low carbon generation would enable EV users to take advantage of lower priced electricity. 29. Demand Side Response is an emerging mechanism and its long term effects on the power network at high levels are not fully understood. It is primarily a contractual and behavioural mechanism for consumers to alter their energy usage when required or incentivised to do so, rather than a physical asset that has well understood characteristics that provide grid reliability. There is evidence from US experience that at times of high system stress DSR did not always perform as anticipated. As a result some regions of the US limit the amount of DSR that can be offered to capacity markets, in order to minimise system risk. 30. The IET would advise that early demonstration projects should be used to model and evaluate the longer term potential grid reliability issues it should be ensured that grid operators have visibility and control of DSR that is integrated into energy management systems. Question 5: What problems (if any) are there with the proposed Energy Demand Reduction (EDR) pilot scheme? How should the Government ensure that the pilot provides sufficient evidence to assess the viability of a long-term EDR scheme (including in the forthcoming CM)? 31. The EDR pilot raises two important questions that need to be clearly distinguished from each other. What is the potential role of EDR in the Capacity Mechanism? 32. The pilot is designed to answer this question as there is currently insufficient evidence. Experience from the two US capacity markets that allow demand side participation (PJM 2 and ISO-New England) indicates that there is an appetite for large scale demand side measures but neither include EDR as defined by DECC. UK markets (for both capacity and EDR) are significantly different and therefore the extent to which the US experience will map over to the UK is not known and a pilot is a sensible approach. 33. However, there are concerns about the design details of the pilot: It is quite small ( 20 million) and currently planned that this will be undertaken via two auctions. This should deliver the lowest cost EDR potential for providing capacity, but may not provide much information about the wider potential; The relatively short timescales of the pilot may exclude projects requiring longer term investment and with longer paybacks. 2 PJM Interconnection LLC (PJM) is a Regional Transmission Organization (RTO) in the United States. It is part of the Eastern Interconnection grid. The Institution of Engineering and Technology Page 6
They could also exclude those who would find it too risky to participate in the pilot without certainty that they would in future be eligible for a further revenue stream from the CM. What is the role of Capacity Mechanism payments in incentivising energy efficiency improvements (that might be valuable for other energy policy purposes, e.g. affordability and carbon emissions)? 34. There is no experience anywhere, including in the PJM and New England markets, of capacity payments being the main driver of energy efficiency improvements. In New England, for example, both energy company obligations and carbon market revenue recycling are far bigger sources of revenue for energy efficiency programmes. This is unsurprising as CM payments are designed to be a fair reward for the capacity benefits. It would be difficult, and inappropriate, to reflect the value of other public benefits, such as reducing carbon emissions and improving energy affordability, in capacity markets. There must therefore be some doubt as to whether the CM (alone) will ever have a major impact on energy efficiency improvement at the scale that is required. And EDR may only be a significant player in the CM if there are other sources of support for energy efficiency. Question 6: How will the Government s latest detailed design proposals for the forthcoming CM help to develop an enduring regime for demand reduction measures? 35. It is not clear to us that the CM is the most appropriate mechanism through which to incentivise demand reduction initiatives at this time. There are significant challenges in designing a market that can compare the costs of investing in measures to deliver long term reduction in overall demand, against the costs of building or refurbishing a large power station, and also against the incentives necessary to temporarily shift demand on request. 36. Government efforts have to date focussed on setting up a market that works for generation. For either EDR or DSR to be able to compete in the same market in a way that is fair for all participants they will need to accept features that will increase their risks, for example a penalty charge for failing to deliver on a commitment made in advance to reduce demand. 37. It remains to be seen how demand participants will respond to the requirements of the Transitional Arrangements, let alone to the more onerous reality of joining the main Capacity Market auction in 2017. The increased risk and complexity for potential demand side participants may well mean that demand reduction will lag behind expectations in the medium term. 38. In the long run it is appropriate that the full costs of demand response and generation capacity should be able to be compared, so that the right decisions about the design of the UK electricity system can be made. The forthcoming Capacity Market may in time be effective in allowing this comparison, however we believe that the timeframes over which the Government expects to implement full integration of demand side participation in the main auction may prove to be optimistic. About the IET 39. The Institution of Engineering and Technology (IET) is one of the world s leading professional bodies for the engineering and technology community and, as a charity, is technically informed but independent. This submission has been prepared on behalf of the Board of Trustees by the IET s Energy Policy Panel. The Institution of Engineering and Technology Page 7