Thu, 11th Nov 2021

Are we seeing an Electricity Supply Problem or a Demand Problem?

The significant challenges facing Ireland’s electrical grid have been well documented and publicised in recent months. A combination of low wind output, increased gas prices and reduced capacity on the grid have conspired to create a threat to continuous supply over the winter months. Both EirGrid and ESB Networks have warned that targeted disconnections of electricity supply to businesses may be necessary over the winter. In addition to the negative impact of this on consumers, it’s not a good look for Ireland Inc.

The above factors are difficult to address; we can’t simply increase wind output or resolve complex geopolitical issues that have brought about increased gas prices. Efforts are being made to address capacity issues with Huntstown Power back on full capacity and Whitegate scheduled to return later this month, however these are slow moving responses to immediate problems.

We have looked at the increased prices and threats to supply and agree that these are serious concerns. There is a concern however that the solutions being recommended, are not looking at the market overall. While there has a been a lot of coverage of supply problems and some coverage of increasing demand, there has been little focus on the dynamic nature of demand.

Demand on the system varies significantly during the year and during each day. Demand is highest in the winter and is significantly impacted by temperatures. We also see distinct daily patterns, with demand usually being highest in the evening time, when electricity demand in homes is at its highest. This daily evening peak again is most prominent in winter. Peak demand in winter can be 50% higher than peak demand in summer and demand in the evening can be double the demand in the middle of the night. These demand patterns have significant impacts on many aspects of the electricity system and some of these are listed in the graphic above.

Potential impact of demand flexibility on prices

We believe Ireland can leverage existing assets in the power system, reduce prices and reduce carbon emissions through more effective use of demand response, elasticity at a commercial scale and improved incentivisation. Flexible demand has been proven to work. VIOTAS Ireland customers alone can provide more than 185MW of energy to the Irish electricity market by being flexible with their energy.

The above illustration graphs the daily average profile of total demand (grey bars) and Day Ahead Market Price (purple line) for November last year (given the current situation, prices for this winter are expected to be even higher). As expected, the times of highest prices coincide with the times of highest demand. At these times an increase in demand creates a disproportional increase in price – so an increase of demand by 20% (5000 MW to 6000 MW) leads to a price increase of 60% (€65 to €105 per MWh). It is also at these times that there is the greatest risk of load-shedding.

To illustrate the potential impact of demand flexibility, in the graph above the demand at the evening peak has been re-distributed to hours in the day when demand and prices are at their lowest. This would be expected to significantly reduce prices during the peak hours and have a modest impact on prices in the hours where the demand has been redistributed. We recognise that is a simplified example and that price setting in the market is complex, but it does illustrate the potential impacts.

To further highlight some of the conceivable savings, the graphs below show the average daily profile for consumer costs in the same month. This is the Demand volume multiplied by Day Ahead Price (excluding any supplier mark-up). As the periods of highest demand are also the periods of highest prices, the overall effect on costs is magnified. This means that changes in demand patterns can have very significant impacts on overall costs to consumers.

Can €4,800 per MWh be better spent?

The above examples are based on the Day Ahead Market Price as this is where most of the energy is traded. Trading in the intraday and balancing markets is even more dynamic and exhibits higher price volatility. This month’s purchase of emergency supplies of electricity from the GB National Grid at an exorbitant cost of €4,800 per MWh is one such example of this. Surely instead of spending significant sums on energy from GB at such high prices, we should be looking at ways to increase demand flexibility so these funds can be retained in the Irish economy?

Other benefits of demand flexibility?

In addition to the effect on daily market prices and costs, increased demand flexibility would also have further benefits including:

How do we achieve these benefits?

Evening demand peak is largely driven by domestic consumption patterns and we recognise that moving demand is not simple. We don’t expect homes to change their dinner times in the evenings, or delay turning on their lights. However, other energy consumers can change behaviour if incentivised to do so. According to the latest EirGrid Generation Capacity Statement, residential demand will represent just 25% of total consumption by 2030. Given that the majority of consumption is commercially focussed, then why not provide incentives to this this group to change their behaviour?

In the examples above, the peak demand is moved to night-time, but it is important to note that less significant movement would still lead to price reductions. If the demand profile for a number of large energy users (LEUs) moved forward or backward by a few hours, it would make all the difference. While this may seem like a lot of demand, at VIOTAS we have seen the very significant capability of the industrial and commercial sector to provide valuable services to electricity markets when they are appropriately incentivised. We are very confident that if the appropriate market design is put in place, increased demand flexibility will deliver numerous benefits for consumers.

Storage can also play a role, but it is worth noting that this requires significant capital investment and most of this investment is transferred to international manufacturers not based in Ireland. By enabling more flexible demand, more value will be retained in the domestic economy as the market revenue is made available to the energy consumers that provide flexibility.

Solving Demand Inelasticity  

In an efficient market, demand generally reduces as prices increase. However, demand in the electricity market have been shown to be very inelastic. Smart Metering trials at the domestic level have shown limited enduring impact. As mentioned above, this is partly due to the fact that the periods of highest usage revolve around established and important daily activities, like returning from work, school and the preparation of the evening meal. While we think there should be campaigns to increase awareness of the impacts of peak demand, it is not reasonable to expect in a modern society that families limit such activities.

Businesses are used to responding to market signals and many have shown through their participation in current demand response programmes, that they are willing to be flexible with their electricity usage. However, unlike some other international markets, there is a fundamental flaw in the Irish electricity market whereby they do not receive energy payments when this flexibility is provided. This dramatically reduces any incentive to be flexible at times of high prices.

VIOTAS believes that a holistic approach incorporating Supply and Demand side levers is needed to address the current challenges and climate change target. Improved awareness and more detailed analysis of the potential benefits of demand flexibility is needed, and the work on putting in place the appropriate market design needs to start.

If we fail to target the peak, it won’t be the only target we fail to meet.