Potential Barriers and Solutions for Active Demand: a Qualitative Analysis

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1 Potential Barriers and Solutions for Active Demand: a Qualitative Analysis Six D. 1, Fritz W. 2 and Kessels K. 1 1 VITO, Flemish Institute for Technological Research, Boeretang 200, B-2400 Mol, Belgium, daan.six@vito.be; Telephone: ; Fax: Consentec Consulting für Energiewirtschaft und -technik GmbH, Grüner Weg 1, Aachen, Germany, fritz@consentec.de, Telephone: , Fax: ABSTRACT: The ADDRESS European Project (Active Distribution networks with full integration of Demand and distributed energy RESourceS) aims to deliver a comprehensive commercial and technical framework for the development of Active Demand in the smart grids of the future. After briefly introducing the project, this paper focuses on the identification of potential barriers for Active Demand (AD) and proposed solutions. First some general prerequisites or obvious requirements for implementing AD are discussed. After that an overview of the identified potential barriers is given. These potential barriers are categorised according to the following topics: 1) the acceptance of AD by different power market participants, 2) regulatory framework issues, 3) existing contractual arrangements, 4) conflicting interests of different power market participants, 5) an appropriate pricing model, 6) the monitoring of service provision, 7) information management and 8) a number of risks that may worry potential users or suppliers of active demand services. Finally, several concepts for solving the aforementioned potential barriers are proposed. INTRODUCTION In the coming years, a growing number of intermittent distributed energy sources (DERs) is expected to be connected to the low and medium voltage network. Current power systems have been designed for traditional top-down energy flows. An increasing share of intermittent DERs requires the current power systems to be changed gradually into mixed power systems. These mixed power systems should be able to deal with both bottom-up and top-down energy flows depending on the time of day and taking into account the varying availability of renewable energy. Ignoring the intermittent nature of some DERs could lead to uncontrolled injection of electricity in distribution networks resulting in a decreased stability and reliability of the system. One way of anticipating or dealing with these potential issues, is activating the demand side or enabling AD. AD refers to the participation of domestic and small commercial consumers in the power system markets and in the provision of services to the different power system participants. In the long term, a more active participation of electricity consumers and small producers should result in a smart(er) operation of the supply system. As consumers are more and more concerned about environmental and energy efficiency issues, there seems to be a growing support for such smart grid concepts. This change in attitude paves the way for a gradual transition towards smart grids with AD. Within this context, the ADDRESS European project ( Active Distribution networks with full integration of Demand and distributed energy RESourceS ) aims to deliver a comprehensive commercial and technical framework for the development of Active Demand in the smart grids of the future, or in other words for the active participation of domestic and small commercial consumers (and prosumers, i.e. consumers operating production units) in the power system markets and in the provision of services to the different power system participants. Involving domestic and small commercial consumers and prosumers will give rise to a number of challenges that have to be overcome. As AD and demand response seem to offer interesting opportunities for the development of smart grids, an assessment of these challenges is crucial. This assessment has been undertaken for both deregulated power system participants (electricity producers, electricity retailers, traders,...) and regulated market players (distribution system operators (DSOs) and transmission system operators (TSOs)).

2 In the following sections, first the ADDRESS project is briefly presented. Then, some general prerequisites for AD are introduced. The main section of this paper gives an overview of potential barriers for AD and proposes solutions for these issues. The ADDRESS project The ADDRESS project is a 4-year large-scale research and development project launched in June 2008 that receives partial funding from the European Communities Seventh Framework Programme (FP/ ) under grant agreement n The project coordinator is ENEL Distribuzione (Italy) and the consortium consists of 25 partners from 11 European countries covering the entire electricity supply chain, qualified R&D bodies and manufacturers [1]. The ADDRESS conceptual architecture is presented in Fig. 1. In a nutshell, ADDRESS will deal with the following subjects [2]: 1) development of technical solutions both at the consumers premises and at the power system level to enable AD and to allow near real-time (20 to 30 minutes) consumer response to market requests. 2) identification of the possible benefits of AD for the different power system participants and development of appropriate contractual and market mechanisms for the exploitation of these benefits. 3) identification of possible barriers against AD deployment and proposition of solutions to remove them. 4) study of accompanying measures and proposition of recommendations for lowering or removing barriers with respect to regulatory, societal and cultural aspects of AD. 5) Validation of the solutions developed and organisation of field tests in 3 test sites with different demographic and electricity supply characteristics. The core concept of the ADDRESS project is the role of the aggregator. Aggregators are the key mediators between the consumers, the markets and the other power system market participants [3], [4], [5]. Their task comprises 1) the collection of signals and requests with respect to AD coming from the markets and the different power system participants (both AD service providers and AD service clients), and 2) gathering ( aggregating ) the flexibilities provided by consumers through various markets to meet the requests. These activities are executed in order to maximise the value while managing the risks and uncertainties. Fig. 1: ADDRESS scope and simplified representation of the architecture.

3 General prerequisites for AD Potential issues for the development and acceptance of AD services have been subdivided into general prerequisites and potential barriers. General prerequisites are very obvious aspects that are required to make AD services feasible, e.g. the installation of an appropriate communication infrastructure and the need for smart metering. Potential barriers are less obvious aspects that depend more on a specific situation or interests of certain actors involved and that can have technical, economic, socio-economic and/or regulatory reasons. In this section, the general prerequisites are discussed. The following section deals with the specific barriers. In the ADDRESS project, the following general prerequisites have been identified: Technical prerequisites: The implementation of the AD concept requires smart meters with certain technical requirements to be installed, as well as an appropriate communication infrastructure. For these prerequisites, standardisation of protocols, meters and services will be a key issue. Economic prerequisites: As a fundamental prerequisite, the total investment and operational cost of the provision of AD services has to be lower than the expected economic benefit, not only for individual participants but also for the society at large. In order for AD to be competitive, its total cost must also be lower than the cost of alternative solutions that are available on the market to fulfil the same needs. Acceptance by consumers: AD implies involvement of the demand side or, in other words, the consumers. Only if consumers are willing to take part in the provision of AD services, there will be such services, at all. There can be several reasons for consumers having low interest or even fearing of being engaged in the AD provision, like the impression that the financial incentives are very small, or the fear of discomfort or even loss of control over their appliances. Market access: Those actors who are expected to benefit from the use of AD but also the ones who would like to offer AD services need to have appropriate market access. Restricted access to the market can for example be due to minimum requirements for the demand or generation volume of a market participant, or due to tariff conditions for subsidized decentralised generators. Regulatory framework: The success of the implementation of the AD concept also depends crucially on the willingness of regulators, lawmakers, governmental bodies, etc., to design the legislative and regulatory framework such that it supports the use of AD. Some of the abovementioned prerequisites can be fulfilled by appropriate measures such as the development of required technical infrastructure, design of contractual and regulatory arrangements etc. Other prerequisites cannot easily be controlled, e.g. additional costs for implementing and using AD cannot be avoided but the economic benefits of these measures should be higher in order to be economically viable. Next to that, there will always be certain technical limitations for AD applications. Economic and technical aspects like this can be called usability limits : they should be taken into account when analysing a range of AD applications but it should be kept in mind that these usability limits can shift over time due to technological progress, future development of the economical context or other factors. Potential barriers for AD and their solutions In this section an overview of specific potential barriers for AD is presented. Those barriers are clustered into 8 groups, based on their nature and/or underlying reasons: 1) the acceptance of AD by different power market participants, 2) regulatory framework issues, 3) existing contractual arrangements, 4) conflicting interests of different power market participants, 5) an appropriate pricing model, 6) the monitoring of service provision, 7) information management and 8) a number of risks that may worry potential users or suppliers of AD services. For each category of potential barriers, concepts for solutions are proposed. Acceptance of AD by different power market participants Besides the acceptance by consumers whose engagement is crucial to make AD exist at all (as described in the section about general prerequisites), the development and use of AD also requires the acceptance by the other market players, such as electricity producers, retailers, balance responsible parties (BRPs), DSOs, TSOs, etc. There can be a multiplicity of reasons for a lack of interest or acceptance by those players:

4 Electricity producers who are not subject to obligations or incentives to minimise imbalances between forecasted and actual production, may not be interested in the use of AD services. Furthermore, AD can in general be perceived as a new form of competition on the market for flexibilities. Nevertheless, someone will have to balance the system and therefore AD services might offer interesting opportunities if they can be provided at lower cost. Retailers and/or BRPs may be concerned that the implementation and use of AD services will reduce the predictability of their portfolio, increasing the complexity and controllability of matching supply and demand. These barriers can be overcome by creating transparency on the use of AD, by assuring that the potential benefit of using AD overcompensates the additional risks that are introduced, by designing the AD activation in such a way that demand response is rather smooth and predictable, and/or by introducing an additional fee to be paid by aggregators when impacting another actor s portfolio. The loading situation of distribution and even transmission networks can be changed by introducing AD. In the first stage of AD implementation, those effects could be expected to be rather insignificant. However, if AD becomes broadly applied or in a very synchronised way (high simultaneity factor), violation of network constraints cannot be excluded. For these situations, appropriate and transparent principles and/or procedures should be developed (e.g. technical validation of the feasibility of the AD requests). The need for such measures can be highly country-specific. Network operators may be concerned that a reduction of peak demand caused by the use of AD could have a negative impact on their efficiency score as determined by the regulator using benchmarking techniques. Although this effect is unlikely to be of major concern, it should be avoided by adequately taking it into account in a regulatory benchmarking exercise. TSOs may be concerned about increasing uncertainties in the prediction of the control area balance as a consequence of AD, and thus an increasing demand for balancing power. This effect can also be expected to have rather little importance, especially in the early stages of the implementation of the AD concept. The most appropriate solution to minimise such risks is probably to create sufficient transparency on the use of AD. Regulatory framework Several potential issues related to the regulatory framework have been identified: The current regulatory framework might impose too restrictive minimum requirements on the volume of services or too high fixed charges or transaction costs to be paid by providers. In order to remove such barriers, it may be adequate to allow the grouping of AD aggregators or the reduction of certain minimum requirements or costs, or to support the development of liquid markets for standardised AD products. For certain power system participants, AD services may only become interesting if the regulatory framework would allow the compensation of generation imbalances by demand flexibility. In general, adequate incentives should be provided for the minimisation of imbalances between supply and demand. If DSOs and/or TSOs are strongly incentivised to minimise operating costs while having little incentives to reduce capital expenditure, they may be reluctant to use AD services as an alternative solution to cope with network constraints. Contractual issues Contractual arrangements might be a barrier for AD if they do not provide the contractor(s) with sufficient flexibility for using AD as a means to fulfil their obligations. This stands not only for new contractual arrangements but also for existing contractual agreements which might be too restrictive and exclude the use of AD services. Conflicting interests Two or more different actors might be interested to use AD from the same consumers at the same time, in the same or in opposite direction. It is questionable and open to further investigation if this would actually impose problems in case markets and contracts for AD are designed properly. If it does cause problems, solutions like the creation of transparency on the use of AD or the establishment of particular processes for the identification and elimination of conflicts can be considered.

5 In case DSOs or TSOs have to validate the technical feasibility of certain AD requests, they might see themselves faced to an internal conflict of interest, as they might be interested to use the same quantities of AD at the same time for their own purposes. Clear rules and procedures for the technical validation of AD should avoid this potential issue. Pricing model The usability and success of AD services will be highly dependent on the proper and correct reflection of the value of a particular AD service. Only when priced correctly, AD services can be used in an efficient way and lead to active participation of the consumers. The need for an appropriate pricing model is relevant for the relation between aggregators and consumers on the one hand, but also for the relation between aggregators and buyers of AD services on the other hand. Monitoring of service provision The issue of monitoring the provision of AD services includes two aspects: 1) monitoring the service provided by the aggregator to the buyer of AD services and 2) monitoring the service provision by the consumers to the aggregator (consumer or demand response). A number of suggestions with different characteristics in terms of practicability and accuracy have been identified for further investigation: Estimation of AD response by deriving a baseline expectation of the load profile without using AD, and comparing it with the measured actual load profile. Practical difficulties seem to be the level of accuracy, the risk for gaming opportunities and the difficulties to determine a fair and correct baseline load. Monitoring the volumes of flexibilities that are kept available (instead of those that are actually activated). This differs from monitoring the actual utilisation of flexibilities and would lead to a capacity-oriented rather than a use-oriented model of monitoring and pricing. Logging information on the actual activation of AD in the smart appliances This approach would lead to highly disaggregated monitoring data. In general, the role of smart meters and their capability of providing data for monitoring the use of AD will be crucial. Two different purposes of monitoring and metering should be distinguished: 1) to assess if a service has been delivered at the desired volume and at the agreed point in time and 2) to provide a basis for the billing of energy and AD services. It is possible that different approaches can be applied for these two purposes. The need for an appropriate level of monitoring for service delivery check or pricing purposes might become a barrier if the required level cannot be reached from a technical or organisational/practical point of view. Information management The development and use of AD services leads to new requirements for information exchange and gives rise to potential confidentiality issues. Therefore, an adequate framework for information management in terms of transparency as well as restrictions to access rights and to the use of sensitive and/or confidential data will be important for the acceptance (or reluctance) of potential providers and users of AD services. Risks A number of risks should be addressed in order to remove certain concerns of potential users of AD services and to favour general acceptance of AD. There are different reasons for uncertainties regarding the actual availability of AD services at the time of delivery, like technical unavailability, uncertainty about consumer behaviour, momentary load situation, the contractual situation between aggregators and consumers, etc. Since it will not be possible to eliminate all of these uncertainties, it will be important to provide information on the expected amount of uncertainties, and to support the view that uncertainties are associated with any type of services in the electricity system, so that they do not represent a knock-out argument against the use of AD services. DSOs and TSOs wishing to use AD for network-related purposes may be concerned that the aggregators do not have proper information on the location of their demand flexibilities in the network. Solutions to this barrier could be a well-organised process of supplying and updating of network-related information from DSOs/TSOs to aggregators, or, in case network-related information should stay at the operators side, the use of less network-specific information for referencing the location of users, like address data.

6 Users of AD as well as network operators might be concerned that after a period of AD activation, a strong change of demand takes place in the opposite direction to compensate for the demand decrease/increase during the AD activation period. This load recovery or payback effect can be minimised by different means, e.g. designing price signals such that the demand response becomes smoother, or making use of energy storage capacities (thermal and/or electrical storage). As far as AD is used by TSOs as a contribution to tertiary reserves, the activation dynamics of demand response will play a critical role. It may become important to provide statistical evidence of the activation characteristics of AD in order to demonstrate to TSOs that the response can be predicted sufficiently well. Conclusion Active demand has the potential to play an important role in the smart (distribution) grids of the future. AD services will provide power system participants with new opportunities to optimise their portfolios. As the involvement of the demand side is completely different from the traditional top-down approach, the AD concept leads not only to opportunities but also to a number of challenges which have been presented in this paper. Several general prerequisites or obvious necessary conditions have been identified such as technical prerequisites (smart meters, communication infrastructure, standardisation,...), economic prerequisites (economic viability of proposed technical solutions), acceptance by consumers who are supposed to offer their flexibility as an AD service (fear of discomfort, lack of substantial financial incentives,...), market access for the relevant market players and an appropriate regulatory framework to allow and stimulate the development and implementation of AD. The major topic of this paper is the assessment of the potential barriers and suggested solutions for AD. Those barriers have been clustered into 8 groups: 1) AD acceptance by power system participants (eliminating or determining the level of uncertainty, indicating and arguing potential benefits for each of the power system participants, clear rules and procedures for using AD); 2) Regulatory framework (adapting the framework towards AD incentives and allowance for demand flexibility as a recognised means of portfolio optimisation); 3) Contractual issues (incorporating the possibility of using AD); 4) Conflicting interests (creating transparency and clear rules and procedures for possible conflicting situations); 5) Pricing model (should reflect a proper and correct value of AD services); 6) Monitoring of service provision (both consumer - aggregator and aggregator buyer of AD services, not only from a purely technical perspective in the case of service delivery but also with respect to billing); 7) Information management (balance between required transparency for a well-functioning AD market and well-chosen restrictions from a confidentiality point of view); 8) Risks (should be limited to remove reluctance to AD and are related to uncertainties, information aspects, responsiveness and potential payback effects). The work presented in this paper is the basis for further research within the ADDRESS project in order to prepare the development and implementation of AD. Acknowledgement The authors would like to thank the following ADDRESS participants for their contributions: C. Linke (Consentec), F. Bouffard and J. Su (University of Manchester), A. Vicino, M. Casini, R. Rossi and G. Bianchini (University of Siena), Michel Rivier (Universidad Pontificia Comillas), J. Jimeno (Labein), S. Melin (Vattenfall), M. Lombardi and A. Musio (ENEL Distribution), A. Losi (University of Cassino), D. Hirst (RLTec), C. Yuen and A. Paice (ABB), S. Karkkainen (VTT), R. Belhomme and M. Entem (EDF SA). References [1] R. Belhomme, R. Cerero Real de Asua, G. Valtorta, A. Paice, F. Bouffard, R. Rooth, A. Losi, 2008, ADDRESS Active demand for the smart grids of the future, Proceedings CIRED Seminar 2008: Smart Grids for Distribution, Paper No [2] E. Peeters, D. Six, M. Hommelberg, R. Belhomme, F. Bouffard. 2009, The ADDRESS project: An architecture and markets to enable active demand, Proceedings EEM09 6 th International Conference on the European Energy Market, Paper No 272.

7 [3] E. Peeters, R. Belhomme, C. Battle, F. Bouffard, S. Karkkainen, D. Six, M. Hommelberg. 2009, ADDRESS: Scenarios and architecture for active demand development in the smart grids of the future, Proceedings CIRED 2009: 20 th International Conference on Electricity Distribution, Paper No [4] R. Belhomme, M. Sebastian, A. Diop, M. Entem, F. Bouffard, G. Valtorta, A. De Simone, R. Cerero, C. Yuen, S. Karkkainen, W. Fritz, ADDRESS commercial and technical conceptual architectures Core document, Deliverable D1.1, available on [5] R. Belhomme, M. Sebastian, A. Diop, M. Entem, T. Coste, E.Lambert, G. Valtorta, A. De Simone, J. Jimeno, R. Cerero, S. Karkkainen, F. Bouffard, C. Yuen, W. Fritz, D. Six, ADDRESS commercial and technical conceptual architectures - Appendices, Deliverable D1.1, available on