COLUMN-German demand response market shows promise: Wynn

Wed Sep 18, 2013 8:51am EDT

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(The author is a Reuters columnist. The opinions expressed are his own)

By Gerard Wynn

LONDON, Sept 18 (Reuters) - Industrial energy consumers can help balance electricity grids and avoid deeper government intervention in power markets, as part of global efforts to integrate more wind and solar power, a new German scheme suggests.

However, the scheme also shows that involving energy consumers in balancing electricity demand and supply is a big step, and with complications.

Grid operators presently pay power plants to ramp up or down to correct imbalances, for example when demand unexpectedly peaks, or there is a crash in supply at a major power plant, or to ease congestion because of a fault in a transmission line.

The annual frequency of extreme incidents in Germany, when operators scramble to balance grids at short notice, has multiplied by three orders of magnitude over the past decade, according to TenneT, a Netherlands-based German grid operator.

That is largely because of forecasting inaccuracies in wind and solar power generation which can lead to large short-term deficits or surpluses in supply.

Germany's regulation on interruptible loads last December gave operators an additional grid balancing tool, allowing them to pay big energy users to cut demand.

There are lessons for Germany and further afield.

First, involving energy consumers requires strict pre-conditions which limits the number of participants.

That in turn has reduced competition, and so has sent bids sky-rocketing to up to 10 times present wholesale power prices.

And second, the scheme works in principle, and could perhaps avoid deeper power market interventions to keep the lights on, such as a so-called capacity market.

LOADS

The main goal of the German regulation, passed last December, was to give both energy consumers and grid operators the chance to road test a demand response market.

It complements an existing "ancillary services" market, where operators tender for fast-response generating capacity, called control reserve, mostly involving power plants.

In theory, energy consumers can also participate in that ancillary services market but there have been two complications to date.

First, power prices are too low for energy consumers to compete with power plants, given the administrative and technical cost of participating in the market for the first time.

And second, the market is at present insufficiently flexible to accommodate industrial processes, which can only survive without power for a certain minimum period.

FAST

Under the new regulation, big energy consumers are paid to reduce demand.

It classifies interruption as either an instantaneous shutdown within one second without warning, or a fast interruption within 15 minutes.

The regulation required the country's four grid operators to tender collectively for up to 1,500 megawatts (MW) per month each of immediate and fast interruption, or 3,000 MW of disconnectable capacity in total.

It applies exclusively to big energy users connected to the high-voltage network (at least 110 kilovolts) which grid operators can switch off remotely.

In other pre-conditions, users must bid a minimum of 50 megawatts interruptible capacity, and must have all but continuous energy use, so that grid operators can be sure that when they switch off the unit there will be a drop in consumption.

The regulation gave participants a menu of three options for interruption: up to one hour per day at least four times a week; or four hours with a seven-day break in between; or eight hours with a 14-day break.

Participants earn 2,500 euros per month per MW of reduced capacity, and can offer 50-200 MW.

And they earn 100-400 euros per megawatt hour (MWh) of actual reduced energy consumption, with the amount determined at competitive auction.

BIDS

So far operators have run four monthly auctions from July through October.

Contracted capacity - where grid operators accept bids from big energy consumers to allow their supply to be interrupted - has fallen short of the target 3,000 MW, peaking at 782 MW in the month of September.

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All successful bids have been in the range 395 to 400 euros per MWh, showing that the scheme is not yet sufficiently competitive.

Grid operators report that bidders so far are mainly from the aluminium industry, but they report interest from the paper, steel and chemicals sectors.

It is unclear whether any of the contracted capacity was actually interrupted, or simply available.

ADVANCE

So far this year, German intra-day power prices have exceeded 100 euros per MWh several times, for example after over-optimistic wind and solar power forecasts.

Given that price history, an allowed bidding range of 100 to 400 euros for foregone power consumption seems reasonable.

By setting a maximum price of 400 euros per MWh, however, authorities have simply invited participants to bid at that level so long as the market is insufficiently competitive.

The network regulator is monitoring the scheme for possible amendments after 2015.

One step could be to increase competitiveness by involving more companies and sectors, for example by cutting the 50 MW minimum bid and the one-month contracting period.

Another might be to try and use the new experience to widen the existing ancillary services market to involve interruptible load.

That would require greater flexibility, including introducing minimum break times between interruptions, adding to the complexity of that market.

However, the experience to date shows that a rapid demand response market can work, and with tweaks could be made more competitive.

That should at least give pause for thought about whether deeper interventions are necessary, such as capacity markets which would try to ensure security of supply by allocating generating capacity years in advance.

(Editing by Pravin Char)

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