Demand response in the German power supply system – an untapped resource for supply security

Demand for electricity varies depending on the time of day as well as the time of year. In the past, the system was physically balanced by adjusting the supply, for instance by managing power generation. Even before liberalisation, Germany opted for the low-cost option of load reduction via supply regulation contracts with industry, rather than meeting peak consumption for a few hours a year with rarely used and expensive generation units. As a result of the competitive nature of the energy market and the expansion of generation from renewables, demand response has acquired a new dimension and is increasing in significance. Increasing generation from renewable energy sources, which is by nature intermitting, represent new challenges for cost-effective strategies to ensure security of supply and increase the need for flexibility. In order to make a direct contribution to system security, these required ‘flexibility resources’ need to be available to the system in real time – something that also applies to demand response. The RAP paper characterises the security requirements with regard to the system as a whole and compares these with the possibilities offered by demand response. Using examples from US and Danish markets, the paper highlights the practical contribution demand response makes to supply security, which can involve providing up to 10 percent of the peak load. In addition, these case studies also illustrate the options for operating reserves and for absorbing potential surpluses from renewables. The development of the individual markets indicates that the potential offered by demand response was frequently underestimated. Only clear instructions to take both demand response and generation units into account, and to remunerate them accordingly, brought about a breakthrough in the US. Building on these experiences, the paper then goes on to identify the opportunities and major obstacles for demand response in Germany, and presents options for overcoming them:

• Demand response requires sufficient income flows for flexibility.
  In the current market design, sufficient income cannot be achieved through selling flexibility services alone. This is because operating reserve, in particular, is provided (additionally) at very low cost by existing base load power plants. As a result, it will be impossible to ensure sufficient income flows for demand response in the foreseeable future.
• Grid tariffs often actively supports inflexibility.
  Grid fees should be based on the ‘user pays’ principle and should not offer counterproductive stimuli. In concrete terms, grid fees for peaks in consumption should be abolished if the peaks were the result of system requirements for supply security, for example, via prior load limitation. Similarly, it would be worth considering a restructuring of the enormous grid fee subsidies for industrial business with even consumption.
• Currently, redispatch is only done by supply resources, demand response is not taken into account.
  Statutory redispatch that is remunerated by the system operator currently only affects generation. Competition mechanisms upstream could potentially be used to integrate demand response.
• The supply of operating reserves is linked to the power balance and to the individual supply contract with the customer in question. This complicates the integration of demand response by specialists outside of current market roles, for example by aggregators.
  The creation of an independent market role of ‘service provider for demand response’ could potentially break up the current links between spheres of responsibility. While maintaining forecasting and procurement responsibilities, the consistent regulation of interacting market roles could achieve more significant progress. Grid contracts, balancing group contracts and supply contracts could be supplemented with standards that make it easier to tap the potential of demand response.

Masthead Author: Andreas Jahn, RAP Senior Associate
Policy consultant and co-author: Meg Gottstein, RAP Principal
Research on international case studies: Sarah Keay-Bright, RAP Associate Special thanks to Alexandra Langenheld and Markus Steigenberger (Agora Energiewende), Dr Marisa Mäder (Entelios) and Jürgen Quentin (DUH) for their critical review of the draft. The publication may be downloaded below but please be advised that it is only available in German.