Demand Response & Industrial Processes. Miguel Marroquín

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1 Demand Response & Industrial Processes Miguel Marroquín

2 About me Miguel MARROQUIN MSc in Engineering Energy & Fuels MSc in Finance International Finance Professional experience in: - Quantitative asset allocation in funds management - Mergers&Acquisitions in the energy and steel sectors - Portfolio management in the energy sector - Management consulting in the energy sector - Senior Originator for dcassetmanagement

3 About Danske Commodities Danske Commodities A provider of energy trading and related products, concepts and services. Founded in 2004 by Henrik Lind An independent market participant We have passion for energy

4 About dcassetmanagement dcassetmanagement The market leader in optimization and short term risk management services in the European energy market. We develop long-term solutions and build partnerships with our customers to make price volatility work for them. Sound experience due to extensive and unique asset portfolio and unrivaled modeling and simulation capabilities.

5 Demand Response

6 Demand Response - There is an increasing number of papers circulating on this topic - What do we generally understand by Demand Response (DR)? DR is any reaction to a stimulus that changes electricity demand in a market - DR allows energy users of all kinds to act as virtual power plants, adding stability to the grid by voluntarily lowering their demand for electricity. - That reaction will seek to achieve a variety of correlated and beneficial results.

7 What is, concretely, DR? DR is any reaction to a stimulus that changes electricity demand in a market A variety of stimulus can be found at inception, e.g. automated control from system operators (ancillary services) curtailment services (curtailment, NEBEF, Triads ) aggregated demand control etc Change in demand is the ultimate expression of the flexibility that is to be put at work. This flexibility can come from a variety of sources, e.g. Complete shut down of operations Load modulation: HVAC Lighting Pumps, compressors and fans etc

8 Why Demand Response - Provides flexibility to System Operators maintaining security of supply and grid adequacy, whilst increasing the available flexibility-resource. - Indeed, as DR emulates the capabilities of manageable power generators, presenting a competitive alternative, it should decrease the overall grid management cost. - In all its forms DR is a suitable tool for easing the intake of energy from renewable resource origin hence indirectly reducing GHG emissions. - Creates value for industrial customers by generating a stream of additional revenue to industrial operations, thereby enhancing their competitiveness.

9 ENTSO-E recommendations on DR - DR is a key component in the successful evolution of the power system. To achieve EU s 2030 and 2050 targets, DR must be broad and deep. - All industry stakeholders need to cooperate more closely to establish and define clear rules, roles, and market approaches. - DR not only brings benefits to system security (through its contributions to balancing and congestion management) and market flexibility, but also empowers end-consumers to manage their own electricity usage and energy bills. - Demand-side participation will also enhance competition and liquidity in electricity markets, while optimizing the utilization of electricity grids. - Implementing DR will require a concerted effort to develop and deploy sound data management and DR-friendly market products, planning and operational standards.

10 Benefits of DR - Trading and Optimization: As stated, DR has a positive effect on market liquidity, but also, in the case of large portfolios, aggregated demand control can have an overall optimization effect on balancing costs to be taken into consideration. - Generation: Given the flattening effect of DR on load curves, conventional and especially renewable generation assets could benefit from better utilization rates. - Distribution: DR provide a solution for grid reinforcement due to lower peak design of transmission infrastructure. - Obligations (Ancillary services): Industries using their generation assets to supply ancillary services, welcome the support from DR allowing them to redirect their generation resources where they are most valuable.

11 The role of the European industry

12 Current Status - Industrial actors have a main responsibility towards energy markets design and therefore towards DR. - Their increased specialization and vertical integration of large industries derives in an increased presence of industries in the various energy markets related processes. - Their participation is in some cases long-dated through mechanisms ranging from the interruption services to the experimental NEBEF mechanism in France. - However, according to some estimations, no more than 4% of total DR capabilities are effectively put at the service of the system operators.

13 European Initiatives There is an increasing presence of providers in the segment of DR related services. In Belgium, REstore led the input of industrials to the strategic winter reserve. In France, thanks to EnergyPool, for the first time an industrial took part to the primary regulation balancing. source: Smart Energy Demand Coalition

14 DR Programs Grid Market DSO TSO Capacity BRP Local DR ( smart grids ) RES feed-in management Capacity traffic light: DSO RES flow curtailment Reserve energy: Can be either positive from delocalised pool of generation assets or negative from pool of industrial loads Load shedding Arbitrage: i.e. managing storage assets Minimizing balancing cost Portfolio optimization: From a portfolio of industrial sites

15 DR Models Germany UK France source: Entelios, Energy Pool & Enernoc

16 On-Site Energy Conversion - This diagram shows the primary energy mix of a set of selected industries. - For each one we can see the energy transformation from gas and oil converted into electricity and steam. - The diagram signals the relative high presence of energy transformation processes within the process industry. source: Advanced Manufacturing Office

17 Industry and Flexibility - One can intuitively imagine that there is a large generation and flexible use of electricity in the pan-european industrial network. - There is evidence that there is a flexible resource to be discovered, but the right incentives need to be present to facilitate the awareness and access to DR. - Ancillary services payments is the most obvious source of economic flow, placing however a huge strain on the industrial process flow given the radical flexibility required and strict participation rules. - In Belgium, Lampiris is running a test this afternoon from 6 to 7:30pm, sending SMS to citizens to lower their consumption to the minimum.

18 From Productivity to Flexibility - Over the last decades, industries (especially process-based industries) have based their resource competitive advantage on productivity. - We can see there is a shift taking place in the market: Large energy consumers get increasing incentives to act on their process flexibility. - In order to do so however, they need to find the economic incentive, and in reality, most flexibility products under current market design in most European countries are not industrial-process friendly. - Indeed, to facilitate the participation of DR, a change in the organization of electricity markets is needed, for instance (as suggested by ENTSO-E) through the creation of friendly products with the purpose to attract and uncover flexibility across markets.

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20 Spanish Example: - Through November 17th-19th, the Spanish TSO Red Eléctrica hosted for the first time an auction for 2000MW of interruptible capacity for the Calendar year The current year s budget for this concept amounted to 550 m in 2014 and 650 m in 2013, presenting already a downtrend over the recent history. - The competitive auction process, based on a multiple Vickerey auction method was designed to incentivize participants to bid their true marginal cost. - In total there were just about 150 participants offering interruption. The large majority of them from small operations offering between 5 and 10MW capacity.

21 The Schedule - The auction was divided into two main parts: First, 9 blocks of 90MW were auctioned, where a total of 12 blocks were offered. Then, a process to auction 238 blocks of 5MW began, and this in three phases: First, 50 blocks were sold on a normal competitive basis. Considering the large number of small participants, those industrial groups which did not win 2 blocks by then, were now given the opportunity to sell their remainder to 2 blocks at the average price of the first 30 auctions. Then, after these participants would have sold their blocks, the remainder blocks available to purchase by the System Operator to the total of 238 would follow again the normal auction process again. This methodology limits considerably the information ongoing in the process

22 Results of Spanish Auction - Two separate auction products: large and small blocks, with no communication - The initial price for the 9 large blocks was set at 350k /MW; one single player accounted for 50% of the total 12 offered blocks. Final price: 295k /MW - Then move to the large auction of small blocks with a starting price of 260k /MW First 50 blocks sold for an average of 85k Such low price yields a little success of the average price selling opportunity The auction is prolonged for two more days The 238 most competitive offers reflect an average price of 93k /MW - Total new cost: 9x90x0, x5x0,093 = 350 m vs 550 m in 2014

23 Conclusions - There is high availability of industrial demand response capabilities, especially when the prices are right. - Access to right prices is however constrained by very restrictive balancing services and products definitions, bringing the appetite from only a few industries. - The experience in Spain proves there is a significantly lower marginal cost to activate flexibility than initially thought by all market actors. - The wide resource of industrial flexibility in Europe is still to be unveiled; and as markets and policies evolve, we shall see them raising to compete with conventional sources of balancing services.

24 Questions