By 2010 the technical case for demand response was settled. The technologies existed, the benefits for power system management no longer needed demonstrating, and the Smart 2020 report put the global saving from demand management and smart grids at close to 8 billion tonnes of CO2 by 2020, against 29 billion tonnes emitted in 2007. And yet there was no gold rush. The value of demand response was known; its valuation mechanisms were not.
A costly asymmetry
Supply-demand balancing relied on a single controllable lever, generation. That asymmetry is expensive: oversized network assets, permanent reserves, peaking plants rarely called yet indispensable. In 2009 the French spot market hit its €3,000/MWh cap for four hours, more than fifty times the cost of nuclear output. None of it reached the end consumer, whose tariff structure remained static.
Four dynamics brought demand response forward: peak demand growing faster than total consumption (2 % a year against 1.5 %), rising fossil fuel and carbon prices, liberalisation and unbundling raising the question of who bears balancing externalities, and the arrival of intermittent renewables. Smart meters supplied the missing link for residential and SME segments.
Three applications, three levels of value
- Network investment optimisation: €10 to 15/kW/year in the most favourable cases. Not enough to build a business on, but a useful marginal revenue stream for an established service, particularly where load reduction can be geographically targeted.
- System balancing: €20 to 30/kW/year on the French balancing mechanism. An early-structured but narrow market (4 TWh in France in 2009, under 1 % of generation). Insufficient for a pure-play aggregator, valuable for building experience.
- Generation and supply portfolio optimisation: €40 to 70/kW/year in Europe, based on deferring investment in a peaking gas turbine. The main pool of value, and paradoxically the least developed.
The obstacle was pricing, not technology
The core difficulty was a mismatch of units. Power markets value energy (the kWh), whereas the value of demand response lies in the capacity made available (the kW). The result was a blurred signal, compounded by wholesale price caps. An unresolved revenue conflict sat on top: in France, integrating aggregator bids into the balancing mechanism drew complaints from suppliers arguing their energy was being taken from them, since mass-market customers were not metered in real time.
An urgency that would force clarification
Installed demand response capacity in France had fallen from 6 GW in 1999 to around 3 GW in 2009, driven by environmental restrictions on backup generators, the migration of large consumers to market offers without load-shedding clauses, and the poor profitability of the regulated tariffs that embedded it. Meanwhile RTE projected that peak demand could exceed generation capacity as early as 2015.
Two routes were open: a capacity obligation on suppliers, creating a bilateral contract market, or a capacity market run by a central operator, along the lines of PJM or ISO New England. Those US markets were already clearing at €30 to 45/kW/year with demand response supplying up to 96 % of new resources in one auction.
One caveat that still holds
The same capacity cannot be valued simultaneously across several mechanisms. Choosing between value pools determines whether the business model works at all. That was true in 2010 and it remains true.
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