Sustainability First’s GB Electricity Demand Project, a major three year study into the demand-side electricity markets is drawing to a close.  Looking back over the three years or so of the project, it is clear how much the electricity demand-side has risen up the energy policy agenda over that time and how our understanding has developed.  While others are now working on different aspects of the subject, notably a team with wide industry involvement under Ofgem’s leadership in Workstream Six of the Smart Grid Forum, Sustainability First’s recent  Paper 12, on how households can participate in the demand-side market, continues to break new ground, raising issues that will require more detailed attention if this market is to develop successfully.  In this and the next few blog items, we shall be looking at these findings.

The analysis in this paper leads us to the conclusion that, in the period up to 2020, the largest overall value from the demand-side rests in the wholesale electricity markets (ie in avoiding the cost of expensive on-peak generation), but that this value has yet to be unlocked to any significant extent.  Once customers have smart meters, the opportunity is there for suppliers to offer time of use tariffs for peak avoidance.  The problem is that for individual households, other than those using on-peak electric heating, the ability currently to shift load and therefore to cut bills is limited.  After 2020, there will be a significantly higher proportion of inflexible electricity generation.  Together with the widespread use of smart meters and the potential for modest adaptations to settlement, and, perhaps, eventual half-hourly settlement for domestic customers, the opportunities for domestic customers will grow.  In addition to benefiting from exposure to the wholesale market itself, domestic customers, either directly or through the involvement of aggregators, may be able to engage in the capacity and balancing markets.  The opportunities here will significantly add to the value which an individual customer can obtain from their demand-side actions.  Households will also be able to assist distribution networks through DSR, but the opportunities are likely to be very location-specific and the value to a particular household may be relatively modest.  Smart meters could, potentially, also allow domestic customers to reduce the transmission charge part of their bill through TRIAD avoidance.

The opportunities for taking part in these markets will certainly exist and the technology for it to happen will also be in place, but are the commercial drivers likely to develop?  Although a number of trials of tariffs and other interventions are currently taking place in projects under the Low Carbon Network Fund and elsewhere, there does not seem to be much appetite by energy suppliers yet to develop commercial DSR offerings to households.  But they will need to develop strategies to deal with the considerable uncertainties they are likely to face in the market going forward.

Another important factor that significantly weakens the commercial incentives for suppliers to encourage domestic customers to embrace DSR is the fact that so many individual components of the final electricity bill are socialised. In other words customers pay their suppliers an average price, not the actual cost of providing them with that service.  First, a flat standard p/kWh unit-rate retail tariff makes no distinction between the cost of generating the electricity at different times of day or year. Second, low voltage transportation charges payable by suppliers to distribution networks may vary to some extent between network operators, but within a particular distribution area, distribution charges do not distinguish between rural and urban, or peak and off-peak usage by households.  Third, the government levies on the bill to pay for the Renewable Obligation, the Energy Company Obligation, the small scale Feed-in Tariff and in due course the FIT Contracts for Difference are recovered from customers either as a fixed amount or as a standard p/kWh sum, regardless of a customer’s location or the time of day they use their power.  Only the levy to recover the costs of the capacity market has sought to incorporate in its design some limited peak-related price-signal for suppliers. DECC estimate that the levies will amount to 33% of the bill by 2020 and 41% of the bill by 2030.  This is a very sizeable bundle of charges which are not time-differentiated for suppliers to simply ‘pass through’ to their customers. The sum of these ‘fixed’ charges relative to the differential between on-peak and off-peak prices in wholesale prices risks reducing the overall incentive on suppliers to encourage their customers to take part in DSR.

But if electricity prices are perhaps made more cost-reflective, won’t there be losers as well as winners?  And how do we protect those who are less able to change their behaviour?  Would an alternative be simply to ensure that the electricity supply companies become more directly exposed to more cost-reflective and variable versions of these ‘fixed cost’ elements?  This would place the risk of responding to cost-reflective incentives largely with the suppliers - who might be expected to be able to understand and react rationally to these stronger price incentives. These companies, making use of the growing body of understanding of customer behaviour, could then each work out their own best strategies for encouraging DSR among their retail customers.

These basic questions of principle regarding development of household DSR markets are ones we shall be addressing in blog items in the coming weeks.