An important discussion in later years has been whether the necessary reserves in the electricity market are to be generated through normal market mechanisms, i.e. with price as the primary controlling parameter, or if it requires a collectively financed capacity reserve and how regulations in such a case should be shaped. The issue is first and foremost a matter of where the line is drawn between that which ‘the market’ should handle and that which can be assured through regulation. Autumn 2002 Svenska Kraftnät (the Swedish TSO) presented an investigation to the government in which it
was suggested that the capacity balance should primarily be managed through the use of normal pricing mechanisms, but that the state should strengthen responsibility for the
nation’s capacity balance in the period up until 2008.
When approaching an effect loss situation, spot prices and balancing power prices will skyrocket. Today, most people are in agreement that a condition for maintained delivery safety is that normal pricing mechanisms are in place and that consumption actually is affected by high prices. The main reason for this conclusion is that it is very expensive to keep production facilities in reserve for situations that are expected to occur very seldom – it is cheaper to encourage large customers to reduce their consumption. The other reason is that increased price sensitivity creates conditions for a more stable and more predictable pricing development in strained situations.
While being aware that a response to increased demand is needed, we see too little of that on the market today. The aim of this project is to present concrete measures that
will awaken this slumbering resource.
In order to judge how much demand response that can reasonably be expected and if there is any financial gain for customers, electricity suppliers and grid operators; it has been necessary to cast a few predictions about future price peaks. We estimate price peaks in the 3-10 SEK/kWh interval for an average of 40 hours per year.
Judging from the work presented in this report, it appears probable that there is a significant ability and interest among customers to reduce their consumption as long as the economic incentives are large enough. With price peaks we have estimated it should be possible to achieve demand response of around 2 000 MW, probably more. It must be made clear that this is not a persistent capacity reduction. What we have mainly focused on are the consequences of a price peak over three hours in the morning. A large part of this untapped potential lies in the many electrically heated family homes. In order to extract this capability, a large obstacle must be overcomed. With the metering equipment we have today, and even the minimum required equipment after 2009, this
group is of no interest.
In our report we have highlighted five different business models that can contribute to realizing the existing potential. They are clear concepts and relatively simple to carry out, as well as having the potential to provide economic benefits to all involved: customers, electricity suppliers and grid owners.
Perhaps the most interesting business model aimed at smaller customers is one we have called “Fixed price with the right to return” after a model by Trondheim Energi in
Norway. If this model were to be offered widely to smaller customers instead of today’s “Take and Pay contract” it would open up for many new possibilities.