Electricity Market Reform and the Demand Side – an update

In 2011 and in response to the Electricity Market Reform (EMR) White Paper, Steven Fawkes and others argued that Demand Management, Demand Response and Distributed Generation (summarised as D3) should be at the heart of the reform of the electricity market.

The D3 proponents have continued to argue that EMR is a once in a generation opportunity to rebalance the electricity market between supply and demand and unlock the low cost, reliable, clean and quick resource that energy efficiency represents.

Now that the Energy Bill and the Energy Efficiency Deployment Office’s (EEDO) strategy have both been published, OFGEM has said that the supply margin capacity could go as low as 4%. And now that EEDO has launched a consultation exercise on electricity demand reduction, it is time to review where we are on this important topic.

The domination of the supply side lobby is hard to combat and the cynical view that EMR was designed solely to support the new nuclear build programme has been hard to escape. The main ground for optimism comes from the phrase in the Energy Bill’s clauses about the Capacity Market that “”providing capacity” means providing electricity or reducing demand for electricity”.

Demand should be treated equally with supply and this clause clearly recognises this at the highest level. The devil is of course in the detail and it is critical in the next few months to ensure that no regulations or conditions creep in that would discriminate against the demand side.

The Department of Energy and Climate Change (DECC) is working with a Capacity Market Expert Group, which has one demand side representative, to advance the detailed design of the Capacity Market.

DECC expects to have the final detailed proposals by May 2013, consult on the full design in October 2013 with a view to having an answer in 2014 before the third quarter of 2014 first auction date.

We need to ensure in the next few months that the details in the mechanisms for the Capacity Market do not discriminate against demand side measures and allow developers to profit from delivering demand side activities.

Alongside the Energy Bill EEDO issued a consultation on establishing a financial mechanism for energy efficiency which could be in the form of an efficiency feed-in tariff, (the so called E-FIT or as DECC calls it, a Premium payment), as part of the capacity market in EMR, or a Supplier Obligation.

Either mechanism could be market wide, addressing all energy efficiency measures across all markets, or targeted at specific technologies and markets.

EEDO wants evidence for the success of financial incentives in the domestic, non-domestic and industrial sectors and whether a general mechanism is preferable to a targeted mechanism.

Examples from around the world should help to demonstrate the effects of different types of financial incentives. Utilising financial incentives is perhaps a paradox as the energy efficiency industry has long argued that energy efficiency is economic without subsidies and many studies around the world have demonstrated that efficiency is cheaper per kWh than new supply options.

The rationale for an economic incentive is two fold. Firstly, many energy efficiency opportunities are not exploited because they have payback periods longer than the host’s investment criteria. They are, however, economic on a social basis and more economic than power generation projects.

A suitably designed incentive could bring these projects forward by allowing developers to aggregate and invest in projects across many hosts. It will also build a market and capacity, just like the solar FIT did.

In markets where D3 measures have been encouraged by electricity market mechanisms, notably in the USA, a large, economic, reliable and quick resource has been discovered.

The Government is concerned about measurement and verification (M&V) and additionality, (how do we ensure that tax payers money is only used to help implement projects that would not have happened anyway).

M&V can be addressed by insisting on the use of M&V using the International Performance and Measurement Verification Protocol (IPMVP). Additionality could be addressed by requiring recipients of any financial incentive to demonstrate that they have already implemented projects with quicker payback periods or that the projects could not happen without the incentive.

Any organisation claiming an incentive should also have to demonstrate a high standard of energy management through the use of standards such as ISO50001.

As always the challenge is how to create an incentive scheme that works effectively with minimum administrative costs to government and users alike.

If I had answered my question, “EMR – are we going to put supply before demand again?”, a few weeks before publication of the Energy Bill and the EEDO consultation I would have answered “absolutely yes”.

Now it appears that we still have a small but real window of opportunity to incorporate D3 into EMR in some form. The D3 lobby needs to keep up the pressure by responding to the EEDO Electricity Demand Reduction consultation, working to make sure the capacity market group does not make any recommendations that could exclude or limit the demand side in anyway, and taking co-ordinated action to counter the strength of the supply side lobby.

Steven Fawkes is the chairman of Day One Energy Solutions

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