Isra-Mart srl: Energy firms predict "negawatt market" could help keep the lights on

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The government has been warned it risks harming investor confidence in the UK's emerging "negawatt market", after failing to reveal how it will administer payments for back-up plants and demand management schemes as part of the wide-ranging electricity market reforms whitepaper released last week.

The Department of Energy and Climate Change (DECC) confirmed last week that it will develop a specific "electricity systems policy" designed to enhance grid resilience and flexibility, and address the challenge of meeting high electricity demand at times when weather conditions mean low levels of renewable energy are being generated.

The policy, slated to be published next summer, will set out the role of electricity demand management initiatives, energy storage systems, new interconnection links to the continent, and the roll out smart grid technologies.

It is expected to detail plans for a range of energy monitoring and generation technologies, such as smart meters, standby power plants, and advanced grid technologies that allow companies to either reduce electricity demand or feed extra power back to the grid when the national system is under strain.

The UK and most of Europe is trailing market-leader North America, where so-called demand-side management (DSM) arrangements now supply up to 20 per cent of the energy required at peak periods.

Industry players estimate that DSM deals, where firms agree to supply so-called "negawatts" by either reducing demand or returning energy to the grid at times of peak demand, could cover between 10 and 15 per cent of the UK's peak demand, up from just a few hundred megawatts currently.

Graham Meeks, director of the Combined Heat and Power Association, said the electricity market reform whitepaper demonstrated that the government was finally willing to take co-ordinated action to boost the DSM sector.

"Demand response is often among the cheapest ways to deal with the challenges of variable and inflexible low-carbon generation on our energy system, and there is huge scope for innovation and cost saving," he said. "But the benefits of the demand-side will only be realised if consumers are given the opportunity to access the market."

However, he warned that concerns remain over the government's on-going failure to provide more details on how it will support demand management and administer capacity payments for back-up plants.

DECC's initial EMR consultation showed the department was keen to bring in a "targeted" payment that would only be available to those generators which provide extra back-up capacity. But after a number of stakeholders expressed concerns about the targeted model, DECC is now considering "a market-wide system", paying all generators for supplying reliable plant.

The whitepaper also hinted this capacity mechanism could incorporate support for demand management initiatives that do not provide additional carbon-intensive back-up capacity, but instead help reduce peak demand levels.

The paper said that the government would support demand management in some form, but failed to confirm whether it would be eligible for targetted payments similar to those proposed for back-up power plants.

Dr Alastair Martin, chief strategy officer and founder of demand management firm Flexitricity, is urging the government to move quickly to decide whether targetted payments will be introduced and what types of back-up plants and DSM agreements will be eligible.

"Investment requires clarity, and the government hasn't yet made clear its intentions for a capacity mechanism," he told BusinessGreen. "A targeted capacity mechanism could help the electricity system to absorb wind and other renewables, while maintaining security of supply – replacing the coal and oil power stations coming offline over the next 10 years... but a new capacity mechanism cannot be a charter for high carbon sources of reserve."

He is also keen for the government to rapidly introduce standards for demand-response metering, monitoring and auditing.

"The distributed nature of the resource and the variety of individual units will lead to wide variations between participating sites, [so] we need to be sure that all demand response, whatever its scale, really can deliver when required," he said.

Ziko Abram, co-founder of demand management firm KiWi Power, believes a targeted capacity payment will encourage more companies to take up DSM services and install their own small-scale back-up power technologies.

KiWi has already written to DECC recommending a number of ways the government could encourage companies to install standby plants, including clarifying the carbon reduction benefits of installing back-up plants.

The company notes that while it is relatively simple to convey the environmental benefits of firms lowering their energy use, many businesses are concerned that their emissions will increase if they install their own standby plants.

This particularly applies to diesel power. According to the CRC Energy Efficiency Scheme Order, diesel fuel leads to greater carbon emissions than electricity generated by the grid. However, KiWi believes this is not always the case and is keen for DECC to provide greater clarity over emissions from onsite generators.

KiWi is also urging National Grid to make it easier for firms to sign up to DSM agreements by increasing the time companies are given to respond to a call for them to reduce energy demand.

The existing short-term operating reserve system gives companies just 240 minutes to deliver energy to the grid, in return for a premium payment.

However, Abram said that if companies had up to a day's notice, they could better plan energy demand and supply, and the system would appeal to a broader market.