Demand-response services are still fairly new in the electricity market, but their importance is only expected to grow as power grids come under increasing strain from intermittent renewable energy sources. Andreas Flamm and Frauke Thies explain the “fundamental shift” that needs to happen in the policy landscape.

Andreas Flamm is Director, Regulatory Affairs Europe at Entelios, one of Europe’s leading energy management solution companies.

Frauke Thies is executive director of Smart Energy Europe (SmartEn), a business association focussing on the digitally enabled interaction of decentralised and decarbonised energy solutions.

They spoke to EURACTIV’s energy and environment editor, Frédéric Simon.

Interview highlights:

  • Many electricity markets in Europe are still closed to demand-response services, including whole segments like local networks managed by Distribution System Operators (DSOs).
  • Current market size is about 20 gigawatts but the potential could reach 160 gigawatts in 2030, which is about twice the entire generation capacity from coal and gas in Germany.
  • One of the main barriers is regulation, with France, the UK and Switzerland currently leading the way in Europe when it comes to adopting favourable policies.
  • Technically, the grid is ready for demand-response to happen today. But locally – at the distribution level – there is a major opportunity for demand-response to keep the costs down in the future, and avoid unnecessary investments in new grid capacity.

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How big is this market today? I understand this is still pretty niche so you must be betting on future growth?

AF: Absolutely. As we pointed out earlier, some European markets are still closed for us. So simply by opening those up – the capacity products, the balancing markets, the wholesale markets in general –, the market for demand-response is only going to grow. That’s the policy aspect of it.

And then of course there is a fundamental driver, which is the change in the electricity mix, with more and more renewables, which increases the need for flexible assets that can offer Megawatts or Negawatts at times when wind and solar are off.

FT: Today, according to the European Commission, there is approximately 20 Gigawatts of demand-response installed. In terms of potential, the Commission estimates it is much bigger, at around 100 Gigawatt, and could reach around 160 Gigawatt in 2030, which is about twice the entire generation capacity from coal and gas in Germany today.

But the size of the market is quite hard to assess because we don’t have a coherent monitoring of flexibility and demand-response in Europe. It’s something we’re hoping to see introduced in the so-called Governance Regulation.

And one of the main barriers is regulation. Today, independent aggregators in many countries can only access the market if they have prior agreement of a customer’s supplier, which may be a competitor offering generation capacity. So here, we need clear regulatory definitions to determine who is responsible for what to make sure an aggregator can enter the market without depending on the agreement of a competitor.

Actually, some generators are now getting in demand-response too, we see Engie in France doing that for example.

AF: As we said, demand-response is still relatively new. Historically, the rules have been designed from an energy generation point of view. So there is a fundamental shift that needs to happen in the policy landscape. We’ve had some successes but there is still a long way to go.

FT: Generally, demand response can be done both by independent aggregators or be integrated suppliers, or even by large consumers directly. We believe that all of this must be possible in order to create a competitive and dynamic market.

Can you cite best-case examples of regulations adopted around the world that have been helpful in developing demand-side management solutions?

AF: In Europe, France is probably the best country when it comes to demand-response policy. France has had a very high-level political agenda to open up the market for demand-response solutions. They systematically looked at each market segment and thought about what they need to do to open up. And then they also looked at how they can get more competition for demand-response services into the market by opening up for independent aggregators. So this is why France today is one of the European countries with the highest number of independent aggregators.

There are other countries in Europe, like the UK and Switzerland, which have made progress as well. And others are on their way. Germany for instance has made first steps but still has work to do.

Outside of Europe, the market with the highest penetration rate for demand-response is the US. They have also pioneered this segment. And demand-response there has been quite successful because they have been very open from the start for independent aggregators to compete directly with energy companies. And of course the US also has a large chunk of capacity markets in the different regions, which has been quite successful for the growth of demand-response. It’s not a necessary condition but it certainly helps.

FT: No market is perfect. Clearly, Switzerland and France have made more progress than many other countries when it comes to the policy framework for independent aggregators. Several have made good progress when it comes to opening markets. But none of them have opened everything yet. Also the economic environment in some countries is still challenging because of the way markets and mechanisms are designed.

Are you referring to Eastern EU countries?

FT: For some countries in Eastern Europe, you’re right. But also in Southern Europe – Italy or Spain for instance – where the balancing markets are reserved for very large units. And demand-response is rarely one single unit that is large enough to bid into such markets. So they’re out by definition.

Legislators in Brussels are currently negotiating the electricity market design and energy efficiency directive as part of the Clean Energy package of EU laws. Are you confident that the issues you mentioned will be addressed there?

AF: There are two things. One is changing regulations that allow the participation of demand-response. And yes, the Clean Energy Package goes into the right direction there by requesting a framework for independent aggregators.

So that in theory will resolve the issue in those countries that are still closed to demand-response. But in practice it’s always hard to stipulate every detail at the European level, which means it will still most likely leave a lot of room for interpretation at national level.

FT: Things are still under negotiation between the European Parliament and Council. If you look at the Parliament text, for example, the question of independent aggregators is very clearly addressed. We need to see what the final outcomes that comes out of trialogue talks in the end. If legislators manage to be precise enough – yes, we should have aggregator access across the entire EU.

The legislative proposals also include very important elements on general market opening and non-discriminatory conditions for decentralised resources. We are optimistic that these will be in the final legislation.

What policy ingredients do you think are necessary to boost demand-response?

FT: With respect to aggregation I would say three things: 1) First, opening all markets for demand-response and decentralised electricity resources. Which means principled opening and product definitions. 2) Second, define a framework to allow market access to all actors, including independent aggregators. 3) And three, change the regulatory framework for Distribution System Operators (DSOs) so they can also purchase flexibility from the market, where it is more cost-effective than investing in networks.

Read the full article on the EURACTIV website.