Demand response

Tracking Clean Energy Progress

More efforts needed

Demand-response capacity increased only 4% in 2018, maintaining the average growth rate of the past five years despite vast demand-response potential (equivalent to total annual US electricity demand). Although progress has been made in smart-meter deployment, this enthusiasm has not spread to developing the market designs and business models necessary to take advantage of the potential flexibility available. To raise demand-response growth closer to the SDS level, new markets for flexibility and ancillary services are needed, and existing markets need to be opened to new business models such as aggregation and virtual power plants.

Luis Munuera
Lead author
Contributors: Tim Goodson

Demand response potential in the SDS

	Industry and Agriculture	Transport	Buildings	Share of demand
2016	847	50.79	3070.9	16
2040	1504	1550.69	6220.73	26
{"chart":{"type":"column","height":"45%"},"plotOptions":{"series":{"stacking":"normal"}},"legend":{"align":"right","layout":"vertical","verticalAlign":"middle","reversed":true},"tooltip":{"valueSuffix":" GW","valueDecimals":0},"xAxis":{"tickPositions":[2016,2040]},"yAxis":[{"title":{"text":"TWh"},"reversedStacks":false},{"labels":{"format":"{value}%"},"title":{"text":null},"opposite":true,"min":0,"max":100}],"series":[{"colorIndex":4},{"colorIndex":2},{"colorIndex":3},{"yAxis":1,"type":"line","tooltip":{"valueSuffix":"%","valueDecimals":1},"className":"noline","colorIndex":9}]}

Back to Energy integration sector | TCEP overview 🕐 Last updated Tuesday, June 11, 2019

Tracking progress

At the end-user level, deployment of demand-side flexibility has been limited. Like other forms of traditional flexibility, it is largely centralised and restricted to large industrial or commercial consumers as well as a number of programmes targeting heating services through night-time tariffs.

Around 40 gigawatts (GW) of demand response is in use today through traditional schemes such as arrangements to interrupt service at critical times, or drastically different day- and night-time tariffs, amounting to 0.5% of global electricity generation capacity.

The number of digitally connected energy-related devices has been growing exponentially. As more systems digitalise and more connected devices are deployed, opportunities to increase consumer participation in energy systems are expanding, including through demand response, electric vehicle (EV) charging and behind-the-meter generation and storage.

In addition, tapping into further flexibility through numerous small-scale devices ('deep' demand-side flexibility) can increase the overall capacity of the system to host variable renewables while accelerating the electrification of heating, cooling, transport and industry at lower costs.

A number of jurisdictions around the world are ramping up more sophisticated demand-response efforts, and China and Ireland’s latest plans both consider demand response a key pillar to expand renewable energy production.

To unlock the benefits, countries must first install smart-grid infrastructure in conjunction with smart meters.

Smart-meter investments reached a record of nearly USD 20 billion in 2017, a fourfold increase from 2010.

Regional deployment

Smart-meter deployment has advanced considerably in recent years in several key regions.

China is approaching full deployment to all electrified end points, and Japan, Spain and France are poised to reach full rollouts over the next few years.

In the United States and the European Union, smart meters have reached over half of the overall market.

Penetration of smart meter rollouts in key markets

Despite recent progress, smart meter deployment remains uneven around the world.

	Rest of world	Spain	Japan	Italy	United States	China
2013	43	7	3	36	52	280
2014	55	10	7	37	58	369
2015	69	14	13	37	65	399
2016	90	19	24	37	72	447
2017	125	23	38	37	79	472
{"chart":{"type":"column","height":"45%"},"plotOptions":{"series":{"stacking":"normal"}},"legend":{"layout":"vertical","align":"right","topAlign":"middle"},"tooltip":{"valueSuffix":" million smart meters","valueDecimals":0},"yAxis":{"title":{"text":"Smart meters (millions)"}}}

Progress in expanding demand response capacity also varies greatly by geography.

In the United States, 28 GW of demand response capacity participate in wholesale markets – equivalent to just under 6% of peak demand – and a further 5 GW of capacity participate through retail programmes.

Leading regional markets include the PJM, CAISO and MISO transmission regions, and a number of states are expanding time-based rate pilots, particularly for off-peak charging of EVs.

In Europe, the United Kingdom, Italy and Ireland have become key growth markets. UK capacity auctions have created a market worth GBP 50 million for demand-response aggregators, but in November 2018 the European Court of Justice ruled that the market contravenes EU state aid regulations, increasing uncertainty.

Selected DSR initiatives

Programmes and policies for supporting DSR are varied.

In Ireland’s auction for 2019 20 capacity, 426 MW were cleared for demand response out of 8 266 MW of capacity including all other technologies. Elsewhere in Europe, Belgium and France have both defined the roles and responsibilities of independent aggregators, and available capacity tripled between 2013 and 2015.

New business models

A shift towards emerging business models such as aggregation and VPPs has been happening slowly. They often have a strong digital component and activate flexibility from many distributed energy resources including DSR, and their numbers are on the rise.

By pooling resources with widely differing characteristics and consumption patterns, such digitally enabled business models improve the overall economics of individual units and reduce transaction costs, allowing distributed energy resources to participate in a wide range of markets.

More fundamentally for the system, big data analytics and control will increasingly allow VPPs to adjust consumption and production patterns and tap into new flexibility at smaller scales, helping the integration of DSR.

The current market for VPPs alone is estimated at 20 GW, with one-third of capacity focused exclusively on demand response. Some Nordic countries, the Netherlands and Austria have implemented some form of demand-response programme, but have not yet recognised aggregators.

Demand response from EVs

DSR also has important latent potential in electric mobility, as it could both integrate higher shares of EVs and enhance overall system flexibility, which could in turn enable greater renewable electricity generation. Smart charging strategies that shift the time of day that EVs draw electricity from the grid can unlock some of this flexibility.

There are currently few smart charging schemes (leading pilots are in the Netherlands, Germany and California), even though untapped flexibility is already significant. If demand response from EVs were enabled for the full EV fleet today, 2 GW of flexibility would be immediately available to the system – similar to the amount of all non-pumped hydro storage capacity.

The range of possible business models to ensure that both customers and service providers are adequately remunerated for demand response is relatively complex.

This is the result of diversity in demand response applications; the end users who can potentially provide it; the regulatory environments in which it occurs (including electricity markets and regulated utility models); and the participants who can enable it in these different environments.

For business models to capture demand-response potential, they must engage with a large end-user base, accommodate a wide range of technologies and minimise participation barriers.

The wide diversity of applications and end uses means that policies must also be sufficiently diverse to ensure that market designs are adequate, and markets must be granular enough that the capacity of demand response to meet certain system needs can be seen by the market.

Encourage new business models

New business models such as aggregation, virtual power plants and other distributed energy resource platforms offer great promise for enabling demand response.

Through trials or other direct-observation methodologies that reflect local regulations and electricity sector structures, governments and regulators should study the feasibility of using ICT platforms and smart contracts to help consumers respond to price signals or signals from system operators.

They should also consider implementing time-based rate programmes as well as regulatory structures that monetise flexibility at the point of use.

Finally, governments should facilitate consumer and third-party (including aggregator) access to smart-metering data and dynamic pricing and other signals.

Promote the adoption of new financial systems

The potential of supporting billing, allocation and reconciliation with more sophisticated ICT solutions, including distributed ledger and blockchain technologies, should be explored.

Increase awareness of DSR benefits and challenges

Governments and industry should actively disseminate information on the benefits of demand response and advanced metering in general, and also promote socio-economic research to better understand the needs and engagement potential of different types of consumers, end uses and activities.

Roadmap and deploy comprehensive data strategies

Governments and regulators should work with utilities and the ICT sector to develop data strategies to adapt to extensive deployment of advanced metering infrastructure and smart appliances and their integration with systems at higher grid voltages.

Strategies should address the uncertainties of demand-response schemes, particularly those related to forecasting and balancing, and the uneven impacts pricing schemes can have on certain consumer groups.

Additional resources