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The state of our market....

Dreamstime.com

I think that the UK energy industry is a mess, more specifically the Demand Side Response Market.

I’ll explain why…..

The Capacity Market has recently been re-instated after it was suspended in Nov 2018. Whilst this is great news for those waiting for payments and general clarity for the market, I think it is a bit of an embarrassment that the European Commission has taken a look at a market that is “rewarding” participants with a price of £0.77p/KW in the most recent auction and then simply re-instated it, suggesting that it is working just fine. I realise their scope was quite refined to the legalities of compliance with state aid regulations, however I was hoping some changes may have been considered taking into account the fact that Demand Side Response customers are having to compete against electricity generators in the same market. https://theenergyst.com/capacity-market-cleared/

A handful of my customers were lucky enough (because CUB made it happen) to enjoy the highs of the TA auction when it cleared at £45/KW. Whilst the market realised this level was likely to be unsustainable it actually started to build further interest and activity in an essential market, curtailment.

Stay with me here…

With the backdrop of the recently set target of Net Zero emissions by 2050, we have and need a massively (and rapidly) changing supply and demand landscape where generation is less predictable, and demand is likely to increase and become more peaky with end users relying on electricity for heat and transportation.

So what do we have in consultation? Surely there is a light at the end of the tunnel due…. Think again!

We have a further piece of legislation TCR (Targeted Charging Review) due that is likely to do just one thing – push up electricity demand from Industrial Users, whilst at the same time costing those very consumers who are already participating in the Smart Grid Revolution more money. That’s a great way to incentivise UK Industry right? https://www.ofgem.gov.uk/electricity/transmission-networks/charging/targeted-charging-review-significant-code-review

Going back to curtailment, when the capacity market cleared at record levels, TRIAD and Red Band DUOS costs were looking to increase and the UK was moving towards a Smart Grid future those customers with the ability to reduce load at peak times were well positioned to be able to participate in the future energy system, and rightly so!

What, however we have now is an absolutely flabbergasting situation where policy and legislation appear to completely contradict the Net Zero by 2050 target. As the old saying goes the cheapest unit of electricity is the one you don’t use and so the same can be said for carbon emissions. If the grid needs to balance supply and demand at peak times, why not rely on customer that are ready, willing and able to balance the grid and have 0 emissions for doing so?

Instead we are heading backwards by considering a policy change that will only incentivise generators of power, that in many cases will result in additional carbon emissions.

What I find most frustrating with all of this is that customers, have and will continue to lose faith in the DSR market at a time when we need exactly the opposite to be the case. All is not lost however!

In theory if we see a higher peak demand, created by a lack of appropriate policy then the wholesale energy market will become more volatile. This isn’t great news for a customer unable to manage demand at peak times (ironically those which the TCR is aiming to protect) as this is likely to lead to higher wholesale costs as a whole. It does however create a more lucrative revenue stream for flexible end users through wholesale market optimisation/Balancing Markets.

Quite simply customers who have purchased power over and above the spot market/balancing market price (likely in the peak hours) can reduce their load at these times and sell the excess power back in return for a financial reward. If you are a flexible end user this is an exciting and increasingly important area to consider now, commercially and environmentally, particularly as it allows  participation in the Smart Grid revolution and therefore moves your organisation towards Net Zero by 2050!

Please give me your thoughts, feedback, opinions or experiences on subjects mentioned in this article and if you want to come and see me in person, I will be attending EMEX London next week on Wednesday and Thursday 27th and 28th November.

Louis Fairfax's picture

Thank Louis for the Post!

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Discussions

Matt Chester's picture
Matt Chester on Nov 20, 2019 1:26 pm GMT

Quite simply customers who have purchased power over and above the spot market/balancing market price (likely in the peak hours) can reduce their load at these times and sell the excess power back in return for a financial reward

How difficult would this be for customers to understand, balance, and actually complete? Does it require an energy manager who is constantly overseeing this type of thing or can it be more automated?

Louis Fairfax's picture
Louis Fairfax on Nov 20, 2019 2:11 pm GMT

Hi Matt, Its really quite straightforward. Any good supplier will off the ability to manage this online. With some initial supervision anyone within a business could get their head around it, provided they know how to achieve the desired on site reduction!

Bob Meinetz's picture
Bob Meinetz on Nov 20, 2019 4:54 pm GMT

Louis, in the U.S., if a customer has purchased power over and above the spot marketing / balancing price he has already used it. It's too late to reduce his load, and (unless he has stored it in batteries) there is nothing to sell back.

Unless physics works differently in the UK, this makes no sense at all.

Louis Fairfax's picture
Louis Fairfax on Nov 21, 2019 9:43 am GMT

Hi Bob, there is an error in the article.

I re-wrote that section and didnt correct the part about the sellback. It should read "customers who have purchased power below the spot market/balancing market price". 

In the UK, provided the customer is on the correct contract type they can purchase as much or as little energy as they need. If the market is trading at a level higher than they have purchased they can reduce the load on the day for the relevant period and sell the excess power back to the market for a commercial return on the difference between the two prices. 

Thanks for spotting this and I hope that makes a bit more sense now!?

Bob Meinetz's picture
Bob Meinetz on Nov 21, 2019 3:56 pm GMT

Thanks Louis, makes a lot more sense now.
Question: what would prevent a customer from deliberately purchasing gigawatthours of energy more than they need in advance, then selling the excess power back to the market at spot prices (typically higher) to profit handsomely, while artificially inflating the price of electricity for everyone else?

Louis Fairfax's picture
Louis Fairfax on Nov 22, 2019 9:49 am GMT

Hi Bob, no worries! 

Energy users on this type of agreement are allocated an appropriate monthly consumption banding based on their previous years usage, taken from actual metered data.

Therefore they can only buy upto the amount of energy they are expected to use during a "normal" working day. 

Should they choose to respond to a price signal in the market the revenue is generated only from the units sold back, providing the market with additional power at peak times which in turns helps to balance the system and stabilise the price for everyone! 

Bob Meinetz's picture
Bob Meinetz on Nov 23, 2019 3:16 pm GMT

Louis, maybe experience dealing with unethical renewables & gas promoters in the U.S. has warped my outlook, but I can't help but imagine the potential ways this kind of arrangement can be exploited. For example: would customers without a year of prior data be exempt from the 'previous years usage' rule? Why would any company participate in an electricity market that would limit its potential growth by limiting the amount of electricity it can consume?
All of these tweaks to electricity markets (many in the U.S.) are, in essence, efforts to simulate a "free market" where one doesn't exist at all. Electricity end users are served by a single entity, either a municipality or an investor-owned utility. Choice doesn't exist, and choice is essential for any free market to function properly. This is not some "disruptive" recent discovery, but a timeless truth.
Thus, its absence creates a market that is anything but free, one prone to manipulation and fraud. It's a lesson already learned by pioneers of public electricity over one hundred years ago, and none of the essentials have changed since that time. Regulators in the U.S. realized the best way to provide reliable, affordable electricity to everyone in society was via the regulated utility model - throw the "free market" BS out the window, and start from scratch. We're a decade or two from going through the same painful process again, and though it's unnecessary, it would be helpful to have a few people in public service familiar with the history of utility electricity, who might be able to make it a little less painful.

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