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Foreword

Whenever a customer in the North West flicks a switch, they can take for granted that the lights will come on. As we move to a lower carbon economy, where our electricity will be coming from less controllable resources, such as wind energy, the energy system will need to adapt to continue to provide the same high standards. In order to deliver affordable energy prices in the low carbon future, we will need to help customers to participate in the energy balancing process. This is likely to be best achieved through the provision of “demand–side” and “generation-side” response services, where customers change the time they choose to use energy to benefit from lower prices or even payments. In order to facilitate this we need to understand how the current UK energy market mechanisms affect the value and flow of benefits to the participants including customers, and in particular how those mechanisms might need to evolve.

Electricity North West is proud of its track record in innovating and leading the commercial development of distribution networks. As part of our ongoing commitment to developing the networks needed for the low carbon economy we invest in new technologies, new operating practices and new ideas. Together with National Grid (Electricity Transmission) we have recently commissioned Pöyry to examine the relative value of the likely range of interactions and transactions between the market participants in the future. In particular this important report examines the relative strength of signals available as an alternative to investment by network operators and as an alternative to energy generation by wholesale market participants. This report builds upon the work published by Department of Energy and Climate Change in June 2011 and takes this work on to explore potential scenarios and outcomes where energy balancing signals overlap or contradict network balancing signals. The report contains key findings for all electricity network operators and therefore, we are pleased to publish it in full for all to benefit.  

Key learning

The report illustrates a number of significant points pertinent to the development of demand side response mechanisms. We have highlighted three key observations:

1. The report concludes that when the needs of demand response purchasers coincide the value of demand response provided to the energy market outweighs the value capable of being provided to distribution network operators. Should the energy and network needs also coincide then this is constructive, however should they have opposing needs, for example excess wind availability versus feeder loading, then the dominance of the energy signal is likely to prevail. This risk may therefore increase the likelihood of the network operators having to invest in asset capacity.

2. The current structure of the energy and balancing markets means that an energy price signal for a demand/generation side response is concentrated into a relatively small period of time, which results in a high spot price value for its provision. In contrast the price signal provided by a network operator for a demand/generation side response will generally cover a much longer timescale and therefore its value in an equivalent time period is much lower. This aggravates the risk identified in point 1.

3. Distribution networks experience outages for a variety of reasons such as maintenance work or faults. To ensure security of supply to customers in outage conditions networks are designed with various levels of redundancy. Generally as the network voltage level increases the redundancy built into the network increases. The table below shows the design levels of redundancy across the voltage levels.

Voltage level

Redundancy

Extra high voltage

Single or double event redundancy

High voltage

Single event redundancy

Low voltage

No redundancy

 
The value of the network price signal for a demand/generation side response will be concentrated into a smaller time period when a section of network is temporarily operating with reduced redundancy. Under these conditions the value of the network signal can become comparable to or surpass the energy signal for demand/generation side response. For example, when a planned outage on the high voltage network means the network will be operating abnormally, ie with temporarily lower redundancy the network operator should be able to procure a demand response to reduce the risk of a power cut. 

The report has identified that a market structure potentially exists that would enable network operators to send appropriate and material signals to customers, but only under abnormal operating conditions. Such signal parity would provide network operators with a means by which they could viably schedule load or call on generation locally, to ensure security of supply on their networks. This important learning will form a fundamental foundation upon which the future participation of network operators in the demand side response market is likely to be designed.

Read the full report here.