With electricity consumption expected to double by 2050 and concerns over the feasibility of the UK’s plans for a clean energy future becoming ever more apparent, the government’s solution to this balancing act – the Energy Capacity Market – has been the subject of much discussion over the past few years. The first of this year’s capacity auctions recently closed at a lower than expected price (clearing at just £6.95/KW), suggesting that many within the industry are starting to get on board. However, sceptics continue to criticise the scheme for not doing enough to encourage new forms of energy generation and worries persist about the consequences for the consumer.
Amidst these discussions, commercial awareness of the scheme seems to be growing. Despite this, for many, misunderstandings about participation and practice remain, with William Caldwell of the Association for Decentralised Energy branding a “huge awareness and education issue around DSR”. This is all taking place as the government continues to put pressure on businesses – as primary energy consumers – to share in the responsibility of the UK’s clean energy transformation. So, ahead of next month’s Transitional Arrangements auction, which turns its attention towards turn-down Demand Side Response (DSR), we take you through the basics of what you need to know…
What does it all mean?
As the UK’s energy demand continues to rise, Demand Side Response – and the Energy Capacity Market in general – aims to secure ongoing energy supply, whilst also contributing to the country’s clean energy initiatives. In essence, the government scheme aims to balance peak time supply and demand. Whereas the Energy Capacity scheme attempt to increase supply to meet demand (as businesses bid to provide back-up power sources), Demand Side Response (DSR) approaches the balancing act from the opposite angle by reducing demand to meet supply. During peak energy hours, businesses participating in DSR will be paid by the National Grid for each kilowatt of demand that can be temporarily turned down – consequently reducing overall energy consumption and relieving pressure on the grid during these times.
So, what does this actually involve?
One of the main confusions around DSR is the belief that businesses will be required to shut down operations and cease all energy consumption during peak times. However, this is not entirely the case. Rather than committing to a complete suspension of energy use, business will simply agree to reduce the amount of energy used between peak consumption hours. For example, a participating supermarket could reduce power to refrigeration sources for an hour or two, a manufacturer could reschedule non full-time production processes outside of peak times, a hospital or data centre could temporarily activate back-up generators. Or, it could even be as simple as turning off non-essential office lighting during required periods.
How will this help?
Reducing peak-time energy use will relieve excess pressure on the grid. Relieving pressure on the grid will, in turn, reduce the need for new power generation facilities to cover peak power times. Not only does this have significant economic benefits, but also has obvious environmental implications as we start to ease our reliance on traditional ‘dirty’ sources of power generation.
However, with recent statistics showing that only 6% of businesses participating in DSR do so to support Corporate Social Responsibility initiatives the question everyone wants the answer to is…
How will my business benefit?
Industry specialists have estimated that a typical participating business can expect to see a return of around £20,000 a year from DSR. This amounts to about 2% of its total annual bill.
Reimbursement for disused energy can offer a not insignificant revenue stream to supplement core business activities. But it’s not just this reimbursement that adds to this cost benefit. During peak times (October – February, 4pm – 6pm), each kilowatt consumed costs an average of eight times more than off-peak power. By curtailing or rescheduling peak-time energy uses, businesses can therefore save up to £68.60/KW during these times. Furthermore, as DSR will require ongoing energy monitoring and management, often involving real-time electricity monitoring, businesses can also take advantage of a new awareness of their energy use – offering the potential to identify further opportunities for efficient energy management.
Clearly, this is an appealing prospect. However, it is important to note that this is not simply ‘free’ money. The newly required energy management initiatives will likely require additional resources to be put in place, which can in itself prove to be costly. Furthermore, on participating in the scheme, businesses will be held accountable for the energy they have bid, with severe penalties for failing to fulfil this contribution.
Who is eligible?
During March’s auctions, businesses will bid to participate in the scheme. This is open to both direct participants putting forward their own capacity as well as aggregators putting forward capacity on behalf of their clients. Businesses with the winning bids will then be paid for each kilowatt of energy they don’t use within peak hours. As demand response is measured in capacity, not consumption, business sites offering a broad range of capacity are eligible to take part – although, realistically, the minimum annual capacity accepted is said to be around 200KW.
For businesses taking part in Energy Capacity and DSR schemes, the benefits that this can provide have so-far been evident. However, while this represents an opportunity for some businesses, recent warnings have arisen for businesses not seen to be taking action, with huge price hikes expected as a result of the capacity market. In fact, according to recent estimates, a typical large energy user could be set to take up to a £1 million hit in 2017 due to the government policy. Therefore, whether choosing to participate or not, being aware of and budgeting for the financial impacts of the capacity market will be vital.