Smartest Energy: Demand-side response auction to clear at £25/kW, more support needed

Owens: Unlock DSR by levelling playing field
Owens: Unlock DSR by levelling playing field

The capacity market auction specifically for turn down demand-side response (DSR) will likely clear around £25/kW, according to Smartest Energy. The so-called Transitional Arrangement (TA) auction, which begins tomorrow, has a target of 300MW, although it could technically procure up to 500MW if the outturn is significantly lower than anticipated.

Robert Owens, VP asset optimisation at the supplier and aggregator, has urged policymakers to create a level playing field for DSR, fearing that it will struggle to compete with generation technologies within the capacity market proper. The last capacity auction cleared at £6.95/kW, with most DSR bidders falling away as the price fell below what they were prepared to accept. Existing gas, coal and biomass plant took the lion’s share of contracts, with commentators suggesting plant owners saw the auction as a bonus revenue stream.

Aggregators have long complained that DSR is unable to access longer-term capacity contracts as well as other grid balancing services, such as the (now defunct) Strategic Balancing Reserve and Black Start contracts.

While, as a supplier, SmartestEnergy can access wholesale markets in order to trade flexibility at the best price, other aggregators without a supply licence say their inability to access wholesale and balancing markets puts them at a disadvantage with licensed suppliers. Since industry rule changes have made penalties on suppliers for being out of balance increasingly punitive, suppliers are now aggressively vying with aggregators to acquire flexible megawatts from UK firms.

Although government has created a market for DSR by changing the TA rules so that only turn down DSR can bid for contracts, Owens believes policymakers should do more.

Aggregators have suggested that testing and metering regimes for DSR are overly onerous, with no incentive for metering parties to undertake the work in the required timeframe. Smartest Energy said that should be examined. The firm also called for clarity on whether year ahead (T-1) capacity auctions would set aside contracts specifically for DSR, and for longer term contracts both within the capacity market and across National Grid’s broader ancillary services.

But Owens said aggregators must also help themselves.

“As well as changes to the market structure, there needs to be some responsibility placed on the market participants to develop and deliver DSR in a credible, holistic way. Aggregators have an important role to play in building the market and establishing consistent pricing for flexibility, by providing products that match customers’ requirements and investment cycles.”

 This includes making customers aware of broader DSR opportunities outside of government and System Operator schemes.

 “High peak energy costs still make a powerful business case for companies to provide DSR because of the savings they can make from avoiding peak energy prices,” said Owens. “While there is some uncertainty around the ongoing availability of capacity contracts for DSR, we urge businesses to still invest in DSR because there are significant opportunities available from Ancillary Services and non-commodity cost savings.”

The previous Transitional Auction, which allowed generation forms of demand response to bid for contracts, procured 803MW at a cost of £27.50/kW. Smartest Energy secured 20MW in that round, but is bidding for 100MW of contracts in tomorrow’s auction.

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