Demand Response-Overdue in Europe

Without demand response, the European region will struggle to harness the full potential of renewable generation.
Published: Thu 06 Feb 2014

Europe will need to rely more heavily on demand response programs in order to cope with its peak generation capacity, as well as the growing shares of intermittent wind and solar power.

Currently, to cope with peak demand, the region is shaping big industrial loads and is using the large pumped hydroelectric energy storage capacity in Scandinavia.

However, the region will still need to consider demand response as a solution to its grids which grow more unstable by the day.This is due to an increase in intermittent renewable resources and an escalation in consumption levels.

Just as demand response can stabilise the grid during peak demand, it can also assist during peak supply. This would be significant as excess renewable production forces energy prices into the negative. This is where major industrial consumers can absorb the additional power or even more ambitiously, households and electric vehicles.

If European residences and businesses adapt their electricity consumption to price signals, it would lower their electricity bills significantly and reduce peak demand for electricity by approximately 10%. This would generate tens of billions of Euros in energy savings.

This is according to a recent analysis carried out by the European Commission [Incorporating demand side flexibility, in particular demand response, in electricity markets-2013]. Households could save up to 10% on their electricity bills and industrial consumers, more than double. However, the potential has yet to be tapped in to as figures on demand response development show that Europe is falling behind the US and other industrial regions.

Also, by participating in demand response programmes, energy intensive industries have the potential to earn additional income as a result of incentives.

So why is demand response not developing at the rate that it should?

What stands in Europe’s way?

Not the European Commission as it has already given demand response its stamp of approval. The Commission has described demand response as “the simple, cost-efficient answer to Europe’s high energy bills, overburdened power grids and aim to reduce carbon emissions.”

Although some European states have adopted demand response, the region’s figures are still dismal. There are a number of reasons why demand response has perhaps not taken off successfully:

  • The past-Smart Energy Demand Coalition (SEDC), a coalition of stakeholders that promotes demand side action in electricity markets, says the problem is mainly historical: “Demand response is a form of balancing capacity, but the electricity regulation is written assuming generation resources will be providing that balancing capacity.” In the past, supply was varied in order to create a balanced grid. However, supply itself has become extremely variable, thanks to the increase in renewables. This increase in renewables demands a more flexible electricity system and demand response will be the answer.

  • Focus is on power production-Too much focus is being placed on public support for power production. This is evident in the significant public support for investments in new generation capacity. As a result, distortions of competition and investment signals may occur. More focus on demand response will help to create a balance in the sector and grid.

  • Subsidies-when it comes to subsidies, all forms of energy supply are on the receiving end but demand response remains at the back of the queue.

  • The absence of dynamic pricing-this can obscure the financial incentive for demand response.

  • Not the regulations- the EU’s 2012 energy efficiency directive requires member states to “ensure that national energy regulatory authorities encourage demand side resources [...] to participate alongside supply in wholesale and retail markets” However, less than 5 of the 27 member states have created regulatory and contractual structures that support demand response.

  • The customer- Small industrial, commercial and residential consumers often need an aggregator to access the market, but these are mostly unwelcome.

  • Threat of independent aggregators-retailers are worried that independent aggregators will reduce their energy sales and raise their balancing risk.

Demand response has become a necessity in Europe. Without it, the escalation in renewables will play havoc with the grid. A more balanced approach is necessary in order to create a stable power grid for the future.

Further Reading

European Commission-Delivering the internal electricity market and making the most of public intervention [pdf]

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