In early 2016 the demand response market was going through a difficult patch. Power prices were low, around €33/MWh for three-year baseload, and the system was in overcapacity in France as across continental Europe. Demand response revenues had fallen along with those of other generation assets. The work done to create valuation rules on energy markets, NEBEF alongside the balancing mechanism, had not restored an economic space for the activity.
RTE’s demand response tenders were clearing lower, at €5 to 15/kW/year against markedly higher levels over 2008-2012, despite volumes rising 15 % between 2015 and 2016.
We tested eight dynamics presented as promising. The verdict is mixed.
The end of EJP tariffs released capacity but created no rush
Until end-2015, around 1.9 GW of demand response was tariff-based, tied to regulated tariffs with the EJP or Tempo option. Their expiry on 1 January 2016 released roughly 1 GW, some ten thousand sites, potentially switching to market offers.
The switch did not happen. Consumers focused first on changing supply contract, with flexibility valuation a secondary concern. More decisively, the comparison was unfavourable: EJP was worth €40 to 60/kW/year net, against €3 to 10/kW/year on RTE tenders.
Market offers also imposed far heavier technical constraints: up to 60 activation days against 22, short formats of 30 minutes to 4 hours against 18, several calls possible per day, and mobilisation times under two hours. Many older gensets, even fully depreciated, stopped being profitable on those terms.
Fast reserves pay better, but the pool has plateaued
Faced with weak tender prices, operators moved towards fast reserves (€36/kW/year) and complementary reserves (€21/kW/year), two to three times better. Volume settled at around 450 MW across 2014 and 2015, out of a 1,500 MW tender pool.
That plateau reflects the constraints: activation within 13 and 30 minutes, mandatory real-time observability above 200 MW aggregated, and a requirement for night-time consumption. Competitive supply is therefore limited.
The other routes run into uncertainty
- Ancillary services: high regulated remuneration for obligated parties, around €160/kW/year, but few buyers, an even narrower pool than reserves, and a symmetry requirement only a handful of highly flexible industrials can meet.
- Capacity mechanism: a potential new source of value, but the European Commission inquiry and the absence of public auctions fed a wait-and-see stance. Only 38 MW of demand response had been certified.
- Local flexibility on distribution networks: opened experimentally by the energy transition law, but blocked by technical, economic and regulatory unknowns.
- Pairing with a renewable portfolio: an opportunity most operators identified, but of limited value in France, a few euros per MWh, given low imbalance costs.
Stacking mechanisms is not the obvious answer
Contrary to a widespread assumption, stacking revenue streams on the same capacity adds little. Mechanisms without an availability commitment create little value, and combining current streams with the capacity mechanism is more likely to offset than to add up.
The national energy programme then envisaged a rise to 6 GW of demand response. Set against the economics of the activity, that ambition required new regulatory provisions, failing which the gap would remain wide for at least two to three years.
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The downloadable PDF of this study is available in French only.
