The role of demand-side management in Europe’s energy transition

Energy flexibility and demand-side management are being touted as one of the key business cases vital to help accelerate the energy transition, ensure the reliability of grid networks, reduce consumer bills and retire fossil-fueled energy generation. However, a number of barriers stand in the way of demand-side management being fully maximised for the efficiency of energy systems.

Azad Camyab, the founder and CEO of UK-based demand-side response aggregator Pearlstone Energy, shares his thoughts on the opportunities and barriers within the market and how they can be addressed.

Has demand-side management got enough attention at COP26 and in general from governments/regulators? What are your hopes for the final outcomes at COP26 in relation to demand-side management?

Energy has become front-page news, and the debate about its future has never been so important. Understanding what that future might look like is crucial if we are to meet the long-term challenge of providing safe, reliable, and secure energy in a sustainable and affordable way. Of course, we cannot be certain how the energy future will evolve. Factors such as environmental legislation, energy costs, and economic developments will all have a major impact on the future energy landscape.

Part of the problem is that the supply side currently dominates our market. The inflexible, intermittent and unpredictable nature of renewables, the massive cost and environmental issues associated with adding to, or renovating our existing crumbling energy generation infrastructure, not to mention the issues around global energy supply earlier this year, are all very real concerns for us right now. Increased focus and investment on the demand side management (DSM) will help us to build a more sustainable and flexible energy system that can better accommodate renewables and reduce the chances of the global gas market holding us hostage in the future.

…My hope is that demand-side flexibility schemes will begin to play an increasingly important part in our transition to net0zero 2050 targets…

Azad Camyab

I believe demand-side management (DSM) got some attention at COP26 in Glasgow, but more can be done to promote it. On a more positive note, the strategic landscape for a number of recognised DSM and ‘flexibility’ players will be to develop their own VPPs (Virtual Power Plant) which consists of DSM as well as battery storage and decentralised renewable generation. The latter two initiatives were discussed in greater depth at COP26 and considered to be an important part of the transition to net-zero 2050 emission targets.

In the UK, National Grid’s Future Energy Scenario (FES) modelling published in July 2021 suggests that “the volume of “pure” DSR (demand-side response) could double within two to three years as the value of flexibility sharply increases”. By 2050, FES modelling suggests that “there is a high I&C customer participation in DSR to shift industrial electricity use at times of peak supply or demand, in response to a price signal”. According to National Grid, “the industrial and commercial sectors are expected to offer increased levels of demand flexibility, with significant opportunity for DSR which could reach 16 GW by 2050”.

Given all the recent positive signs in support and promotion of DSM in the UK, my hope is that demand-side flexibility schemes will begin to play an increasingly important part in our transition to 2050 net zero emissions targets and in fulfilling the commitments that will emerge from COP26 in Glasgow.

What role can demand-side management play in the energy transition and stabilising the EU energy market?

The generation of thermal electricity in the UK and EU is coming to an end. A large amount of coal- and oil-fuelled generation has and is retiring because of age and environmental legislation, including the European Union (EU) large combustion plant directive (LCPD). Furthermore, challenging economics for gas-fuelled generation has resulted in few new power plants being built and many, including units only two years old, being mothballed until the business case for their operation becomes more favourable.

The resulting decline in capacity and generator availability has led to very tight capacity margins—the difference between electricity supply and demand levels that can make the role of the National Grid in matching generation and demand quite challenging. Indeed, spare electric power production in the electricity system is predicted to fall to less than 2%, increasing the risks of blackouts across the United Kingdom should an unforeseen operational issue arise or the United Kingdom experience a cold winter.

Demand-side response (DSR) could provide an important contribution to managing the security of supply and cutting energy consumption. It offers a cheaper and greener alternative to building new generating capacity and could make a meaningful contribution towards the security of supply.

Within a few years, the impact of DSR on the UK capacity market will be manifold. It will enable any property owner to exploit his or her building’s untapped energy as a revenue source, provide electricity to the grid when needed, and ensure that all power use is optimized more efficiently and sustainably. In effect, the DSR Aggregator will enable property owners and asset managers to access their assets’ untapped revenue sources while meeting energy-saving demands, cutting costs, and contributing to the reduction of carbon emissions.

Are utilities fully leveraging demand-side management?

Utilities are getting more involved in the DSM. We have seen a number of investments or acquisitions of commercial DSM and flexibility players in the UK and across Europe. On balance, one can conclude that interest in the DSR sector generally is high with large players seeking a platform for market entry. Not only are there a number of EIS funds keen to engage, but there are also a growing number of Corporates looking for an efficient DSR solution. And the good news is that there are now a number of companies uniquely able to offer this to the broadest market at a very low cost. Over the past 3 yrs, Utilities such as Enel, Centrica, ENGIE, Shell and BP have entered the market by investing in or acquiring DSM companies such as Enernoc, Restore, KiWiPower, Flextricity, Limejump and more recently Blueprint Power.

Azad Camyab is one of more than 300 speakers that will be speaking on various topics disrupting the European energy landscape at the very first in-person Enlit Europe event.

Azad will be speaking during the Enabling Flexibility session in which speakers will explore the latest policy developments, technologies and projects enabling and creating vital flexibility at a market, plant and grid services level.
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What energy market challenges are hindering the demand side management market?

There are commercial challenges, especially for new entrants, due to a lack of investor certainty and reliance on multiple revenue streams. Therefore, some demand-side providers would like to see longer-term contracts. Others suggest that more frequent tenders, a move to regular auctions, standardisation of products would enable wider market entry, and potentially lower minimum size thresholds. However, there have been some concerns by a number of industry observers that DSR had not received sufficient attention and was disadvantaged compared to generation capacity. However, since last year, DSR providers can bid for and receive capacity agreements of up to 15-year contracts, on a par with new generation capacity.

Evidence from markets in other countries, where equal contract lengths are awarded to both generation and demand capacity, suggests that DSR can make significant contributions, without being at the expense of new generation.

Furthermore, in the UK, National Grid’s balancing mechanism (BM) initiative will be worth £500 million ($670 million) per year. Non-BM players will have the opportunity to bid their capacity and flexibility into half-hourly settlements. This is different to the traditional NG ancillary services where auctions were happening well before any DSR event. This provides a significant opportunity to monetise flexibility through wholesale trading markets and in real-time. It is also worth noting that intraday or day-ahead trading was only available to the BM players and licensed suppliers until last year, but this is no longer the case.

Local flexibility markets will also allow DNOs to procure flexibility services as an alternative to traditional grid upgrades which are capital intensive and unsustainable. 

Any other factors that are hindering the demand side management market?

There are other challenges too. For business customers, it can be confusing to navigate the different products and routes to market. There are cultural, informational and behavioural barriers. Confidence is critical and can be undermined by conflicting sales messages from demand-side providers. Industry standards are needed, and are being developed. For customers, senior buy-in and cross-business commitment is often required. Demand-side flexibility should link into the significant opportunities for energy efficiency.

Transmission system operators (TSO) across the UK and EU are keen to promote demand-side management. TSO’s and regulators are keen to provide ‘equilibrium’ in the energy system but not at any cost. Until recently, DSM was the premise of small diesel and gas generators providing the much-needed capacity (Megawatts) at times of distress for the TSO’s. However, there is now a greater focus in providing ‘clean DSM’ (Negawatts) which is cheaper as well as carbon neutral and more sustainable – i.e. provide customers with a new revenue stream by enabling them to sell the energy they don’t need at certain times, for short periods of time and currently can’t sell on their own.

Real-time data on the energy system and energy use will become the high-value commodity, not the energy itself. That will dictate the direction of travel for the future.

For that reason, the other notable challenge and risk is cyber security which is an important component of the smart rid and companies are getting more concerned about it. Large industrial and commercial customers are increasingly putting their trust into DSM aggregators to allow access to building controls. Highest levels of cyber security (physical security, server security and client security) should be addressed by using platforms such as the OpenADR Digital Security Certificates & Multi-layered Encryption to minimise any potential risks. OpenADR benefits are clear. It provides a non-proprietary, open standardised DR & DER interface that allows DSR service providers to communicate DR, DER, and TE (Transactive Energy, Blockchain & IoT) signals directly to existing customers using a common language and existing communications such as the Internet.

What are some of the measures in need to be implemented to unlock the full potential of demand side management?

…Real-time data on the energy system and energy use will become the high-value commodty, not the energy itself…

Azad Camyab

The most established market for demand-side flexibility today is balancing. The Capacity Market transitional arrangements have successfully started to attract new demand-side participation. Suppliers are also beginning to offer products to manage volatility and their imbalance position ahead of gate closure. Future opportunities are anticipated in the wholesale market, with DSM aggregators seeking to participate directly.

The market expectation is that change will occur. However, if change does not happen quickly enough, there is a risk of discouraging new non-traditional market participants. Likewise, as business customer interest grows, we need to ensure they are able to participate, and do not miss the opportunity. For example, some customers wanted to take part in the capacity auctions but couldn’t respond within the required timescales. Oversubscription for the new Enhanced Frequency Reserve (EFR) scheme in the UK also meant disappointed bidders.

Favourable regulatory regime and support, and, positive price signals will facilitate the uptake of demand-side management. As an example, only last week, most big UK firms and financial institutions will now be forced to show how they intend to hit climate change targets, under proposed Treasury rules in the UK.

By 2023, they will have to set out detailed public plans for how they will move to a low-carbon future – in line with the UK’s 2050 net-zero target. This clearly is a positive step for considering DSM initiatives in large industrial and commercial facilities – to promote and implement meaningful carbon reduction strategies at scale.

A shared vision of an end-point, or at least the principles for a future market is required, are the incremental steps to get there. This should be an evolutionary pathway – to ensure that we build on lessons learned and maintain investor confidence in the transition from existing to future arrangements.

About the author

For over 25 years Azad Camyab has held senior business development and project management roles in the energy, renewables and sustainability sectors. He started his career with CEGB and International Power in the UK where he was involved in the development, financing and construction of a number of power plants in the UK. He was previously the CEO of Marchwood CCGT Power Company and was also involved in developing, managing and financing a number of IPP energy projects globally; China, Mexico, Tunisia and Egypt.

Camyab is the Founder and CEO of Pearlstone Energy, an innovative Demand-Side Response Aggregator in the UK. His focus in the past 15 years has been in developing and financing renewable energy and other low carbon projects and initiatives. He is a Visiting Fellow on the Masters programmes in Sustainability Leadership, and Industrial Manufacturing at the University of Cambridge.

He is a Fellow at the Energy Institute and the Institute of Engineering and Technology (FIET), and, a member of the Enlit Impact Circle advisory Board (formerly European Utility Week and POWERGEN Europe).

He has a PhD in Materials Science and Engineering from Imperial College London and an Executive MBA from Bristol Business School.