The Power to Choose Demand Response in Liberalised Electricity Markets

1. APEx Conference 2004 11-12 October 2004, Leipzig The Power to ChooseDemand Response in Liberalised Electricity Markets Ulrik Stridbaek International Energy Agency

2. Outline • What is Demand Response? • Why do we need it? • The role of prices • Recent developments • Conclusions

3. Demand Response - Definition • At its most general level, demand response is the ability of (electricity) demand to respond to variations in market prices • Can be achieved through demand reduction, by shifting load to a less expensive time period, or by substituting another resource for delivered electricity (such as gas or self-generation). • Elasticity is the unit of measurement of Demand Response

4. DR – “soft” definition The electricity consumer… • PRICE, value, free choice, willingness to pay, demand participation • NOT demand side MANAGEMENT Heart transplant Pig farming Cooking supper Car manufacturing Watching the news on TV Heating up the swimming pool

5. DR in liberalised marketsSome observations • DR has so far not emerged ‘naturally’ as a resource in liberalised electricity markets • During periods of resource scarcity there are price spikes and markets are vulnerable to market power abuse • Few examples of wide-scale deployment of DR enabling technology • Market structures and regulation policies does in general not take consumers’ market accessibility properly into account.

6. Regulated Captive Markets - Demand Side Management Deregulated Markets - Demand Response Measures Wholesale Market N/A. Market time use of demand resources Ancillary Services N/A. Commercial Service. Requires access to Ancillary Services Market. Network Congestion Planning resource. Commercial Service. Requires access to Congestion Charging Mechanism. Efficiency & Environment Regulated / Corporate Governance / Market Driven Regulated Corporate Governance / Market Driven Network Reliability Planning resource. Limited market access. Market Power Mitigation N/A. Key transitional role. The changing role of demand

7. Outline • What is Demand Response? • Why do we need it? • The role of prices • Recent developments • Conclusions

8. Demand response makes the market work • Balancing supply & demand  investment • Mitigate abuse of market power • The “philosophical value” of free choice

9. D2 – Elastic Demand D1 – Inelastic Demand Supply Curve P1 - Inelastic Clearing Price P2 - Elastic Clearing Price • 5% reduction in demand would have reduced the highest wholesale prices in California by 50% • 10% of retail load on a real-time price would have mitigated the US Midwest price spikes of 1998/99 by about 60%

10. Balance

11. Outline • What is Demand Response? • Why do we need it? • The role of prices • Recent developments • Conclusions

12. Something to respond to! • Real value of DR based on real market prices • Spot exchange, markets for balancing power and ancillary services, competition, solid market rules etc. • The price must reach the consumer • Interval meters with remote reading • Transparent and easily observable prices • Low transaction costs • Smart retail contracts • Smart technology => automated response for households

13. Information http://currentenergy.lbl.gov • 100,000 visits/day during California 2001 crisis • housewives, factory managers, utility staff, governors…

14. Outline • What is Demand Response? • Why do we need it? • The role of prices • Recent developments • Conclusions

15. On the right track • DR has so far not emerged ‘naturally’ as a resource in liberalised electricity markets • But consumers need something to respond to. Price spikes in Scandinavia has led to some DR. • Few examples of wide-scale deployment of DR enabling technology • But it is picking up. Solid business case for full scale remote metering. E.g. ENEL in Italy • Market structures and regulation policies does in general not take consumers’ market accessibility properly into account. • High political focus: EU directives, FERC, Australia, Nordic ministers…

16. Outline • What is Demand Response? • Why do we need it? • The role of prices • Recent developments • Conclusions

17. Key Findings • Significant benefits can be achieved with small amounts of demand response • Lower Prices for all • Reduced Price Volatility • Security of Supply • Relief of Network Congestion • Peak Loads Reduction • Reduction of Short Term Market Power Abuse • Environmental Benefits • Efficient Long Term Investment Planning • Low elasticity • Result of a lack of incentives and ability for consumers to control demand • Customers will respond • If opportunity, incentives and information are present • Governments & Regulators must act

18. Key messages • The need for market efficiency will increase during times of resource scarcity • Demand Response remains a significant untapped market resource which, if incorporated, will deliver more efficient use of infrastructure, lower end user cost, increased security of supply and less constrained markets • Market design and regulation policy will be the primary factors in the establishment of equitable and efficient demand side participation