Demand response in the Nordic electricity market

Demand response in the Nordic electricity market
Demand response in the Nordic electricity market
TemaNord 2014:553
Ved Stranden 18
DK-1061 Copenhagen K
www.norden.org
Demand response in the
Nordic electricity market
Input to strategy on demand flexibility
Consumer flexibility is often mentioned as a solution that
can contribute to improved price formation in spot markets,
increase supply of system services and potentially reduce
local grid investments and operation costs. This report
provides input to a Nordic strategy on how to address the
potential need for consumer flexibility in a cost-efficient
manner. The main recommendation is to focus on increased
market efficiency in general, and not to promote specific
measures on the demand side unless market failures are
identified. However, it is recommended that standard data
formats on price signals to small consumers should be
further assessed.
The report is part of the Nordic Prime Ministers’ overall
green growth initiative: “The Nordic Region – leading
in green growth” – read more in the web magazine
“Green Growth the Nordic Way” at www.nordicway.org
or at www.norden.org/greengrowth
TemaNord 2014:553
ISBN 978-92-893-3771-7
ISBN 978-92-893-3773-1 (EPUB)
ISSN 0908-6692
TN2014553 omslag.indd 1
09-09-2014 12:15:52
Demand response in the
Nordic electricity market
Input to strategy on demand flexibility
THEMA Consulting Group
TemaNord 2014:553
Demand response in the Nordic electricity market
Input to strategy on demand flexibility
THEMA Consulting Group
ISBN 978-92-893-3771-7 (PRINT)
978-92-893-3790-8 (PDF)
ISBN 978-92-893-3773-1 (EPUB)
http://dx.doi.org/10.6027/TN2014-553
TemaNord 2014:553
ISSN 0908-6692
© Nordic Council of Ministers 2014
Layout: Hanne Lebech
Cover photo: ImageSelect; Signelements
Print: Rosendahls-Schultz Grafisk
Copies: 116
Printed in Denmark
This publication has been published with financial support by the Nordic Council of Ministers.
However, the contents of this publication do not necessarily reflect the views, policies or recommendations of the Nordic Council of Ministers.
www.norden.org/en/publications
Nordic co-operation
Nordic co-operation is one of the world’s most extensive forms of regional collaboration, involving Denmark, Finland, Iceland, Norway, Sweden, and the Faroe Islands, Greenland, and Åland.
Nordic co-operation has firm traditions in politics, the economy, and culture. It plays an important role in European and international collaboration, and aims at creating a strong Nordic
community in a strong Europe.
Nordic co-operation seeks to safeguard Nordic and regional interests and principles in the
global community. Common Nordic values help the region solidify its position as one of the
world’s most innovative and competitive.
Nordic Council of Ministers
Ved Stranden 18
DK-1061 Copenhagen K
Phone (+45) 3396 0200
www.norden.org
Content
1. Summary and Conclusions .......................................................................................................... 7
1.1 How may demand flexibility contribute?.................................................................. 7
1.2 The willingness to pay for flexibility varies in space and time ......................... 9
1.3 The future value of flexibility is uncertain ............................................................... 9
1.4 The cost efficiency of demand flexibility is uncertain ....................................... 10
1.5 Input to a Nordic strategy on demand flexibility ................................................ 11
2. Introduction................................................................................................................................... 15
3. What is demand flexibility ........................................................................................................ 17
3.1 Definition of demand flexibility................................................................................. 17
3.2 How may demand flexibility contribute to increase efficiency?.................... 18
3.3 Different types of demand flexibility ....................................................................... 19
3.4 The characteristics of demand flexibility............................................................... 19
4. Supply and demand for Flexibility in the Nordic region ..................................................... 23
4.1 What defines the need for flexibility in the power system?............................ 23
4.2 The value of flexibility varies across the Nordic region ................................... 24
4.3 Meeting the demand for flexibility ........................................................................... 27
4.4 The consumer side is partly flexible ........................................................................ 34
5. Both demand and supply of flexibility is changing .......................................................... 37
5.1 Summary of main uncertainties and developments .......................................... 38
5.2 Changes in generation .................................................................................................. 40
5.3 Changes in consumption .............................................................................................. 42
5.4 Changes in infrastructure ............................................................................................ 48
5.5 Developments in market solutions and regulation ............................................ 50
6. How can demand flexibility be efficient? ............................................................................ 57
6.1 Estimated potential for demand flexibility ........................................................... 57
6.2 The costs side of flexibility .......................................................................................... 59
6.3 Are the consumers faced with efficient price signals? ...................................... 63
6.4 Possible measures to more efficiently use demand flexibility ....................... 66
7. Input to a nordic strategy for demand response .............................................................. 79
7.1 Developing strategy under uncertainty.................................................................. 79
7.2 Overall recommendations for all Nordic countries ............................................ 81
7.3 Recommendations per market area ........................................................................ 84
8. References ...................................................................................................................................... 87
9. Sammendrag.................................................................................................................................. 89
9.1 Forstå etterspørselen etter fleksibilitet bedre ..................................................... 90
9.2 Utnytte billig fleksibilitet før dyr fleksibilitet gjennom effektive
markeder ........................................................................................................................... 91
10. Attachment 1: List of interviewees....................................................................................... 93
1. Summary and Conclusions
Planning and operating a power system can be challenging since production and demand must be exactly equal at all times, bottlenecks must be
immediately addressed and capacity constraints in the network respected. A certain level of flexibility in the system is necessary in order to
address critical situations when they arise. Today, such flexibility is provided by generators as flexibility on the consumer side is generally low.
In order to reduce greenhouse gas emissions from power generation,
the power systems in the Nordic countries, as well as in the rest of Europe, are profoundly changing. In parallel with the “greening” of electricity generation by increased use of renewable energy resources, electricity consumption should be reduced through increased energy efficiency.
However, renewable electricity generation such as small-scale hydropower, wind and solar has limited capacity to deliver flexibility to the
power system. Hence, it is relevant to consider to what extent the provision of flexibility from the consumer-side could and should be facilitated.
This report is commissioned by the Nordic Electricity Market Group
(Nordic Council of Ministers) and provides input to a Nordic strategy on
how to address the potential need for consumer flexibility in a costefficient manner.
The report is part of the Nordic Prime Ministers’ green growth initiative: The Nordic Region – leading in green growth. Read more in the web
magazine Green Growth the Nordic Way at www.nordicway.org or at
www.norden.org/greengrowth
1.1 How may demand flexibility contribute?
In our context, demand flexibility can be defined as a willingness to
change volumes of electricity consumed for short or long periods of time
as a response to market prices, price incentives in grid tariffs or other
economic incentives. The value of demand side flexibility varies significantly depending on such characteristics as volume, reliability and a
range of different time-related aspects, e.g. duration, response time and
recovery time.
Two conditions must be met in order to provide more active demand
response:
 There must be a demand for flexibility.
 Demand flexibility must be able to compete with other flexibility
resources (generation, grid investments and storage), i.e. the demand
side must be able to deliver the valued characteristics of flexibility in
a cost efficient manner.
Demand flexibility may increase cost efficiency in the Nordic power
markets in several ways:
 Improved price formation: If the demand side is inelastic, power price
formation will depend on the generation side alone. With increasing
generation from intermittent technologies, the risk of very high
prices in peak load periods increases. The total risk is also linked to
other developments in the Nordic power system, e.g. the total power
balance and investments in transmission and interconnectors.
However, more price sensitive electricity consumption will mitigate
this risk, as well as the potential market power of electricity
generators in peak periods.
 Provision of system services: The purpose of system services is to
maintain the balance of electricity generation and consumption in
real-time, and to maintain security of supply in all areas of the power
system. The generation side is the main provider of the flexibility
needed for system services today, but even some large consumers are
active in these markets. The geographical location of flexibility is
often crucial for system services, and in some areas the demand side
may be the only provider.
 Reduced investments in the regional or local grid: If consumption
growth drives investments in the regional or local grid, peak load
reductions may reduce grid investments. Peak load is normally
reached during a few hours of the day in the time of year when
energy consumption is high (normally cold winter days in the Nordic
countries). Reduction in peak load may be obtained by shifting loads
from these hours to other times of the day.
In order to obtain the desired effects from increased demand flexibility,
it is important that the flexibility fulfils a certain set of characteristics.
The exact nature of these characteristics depends on the markets within
which one aims to operate. The characteristics concern mainly the volume and various time aspects, such as duration and response time of
load changes and the recovery time between such changes.
Consumer flexibility is mainly about disconnecting loads, but for
some types of flexibility it can also be relevant to connect or increase
loads. For instance, it can be useful for the power system to e.g. increase
consumption in surplus situations when power prices are very low.
8
Demand response in the Nordic electricity market
1.2 The willingness to pay for flexibility varies in
space and time
The willingness to pay for flexibility varies across time and geographical
areas in terms of both the type of flexibility and the amount of flexibility.
The variations are due to differences in the generation mix and consumption patterns, as well as the extent to which network capacity allows trade in flexibility between areas. In the Nordic market bidding
zones (price areas) are established to make the market reflect these
differences. In the long-term both generation and consumption may
fluctuate due to economic development, new technology and politics.
In an area dominated by e.g. stored hydro and large industry daily flexibility is abundant, but there is a need for flexibility to balance seasonal
fluctuations in hydrology. In an area dominated by wind generation and
household consumers flexibility is needed to balance daily fluctuations
in wind and consumption (e.g. challenging peak-loads).
1.3 The future value of flexibility is uncertain
The Nordic power system is facing changes on both the generation and
consumption side, markets are becoming increasingly integrated and
efficient and bottlenecks in the grid are being reduced towards 2025.
How these changes will influence the power system, the power markets
and the overall willingness to pay for flexibility is not fully understood.
Development on different areas of the power system drives the value of
flexibility in opposite directions, this results in uncertainty related to the
future demand for flexibility (both in terms of volumes and the characteristics of the flexibility demanded). Some key uncertainties include:
 Variations in the spot price (price volatility) will probably increase
due to more intermittent generation in the system and increased
interconnector capacity between the Nordics and other European
countries. On the other hand, increased transmission capacity and a
positive power balance within the Nordic market should reduce the
price volatility within each bidding zone. Hence, the impact on both
the level and the duration of price variations are uncertain.
 Some volumes that participate in the markets for system services will
be lost mainly due to reduced demand from power intensive
industries and the phase out of combined oil and electric burners.
This indicates that the competition in these markets will be reduced
and that the willingness to pay may increase. On the other hand, we
expect available resources to be utilized more efficiently across
borders and regions when new market solutions and increased
transmission and interconnector capacity are in place. However, it is
Demand response in the Nordic electricity market
9
uncertain how the competition to supply and the willingness to pay
for system services will develop.
 Based on interviews carried out within the project, we find that, in
general, the capacity in the distribution grids is sufficient. However,
there is a risk that peak loads may increase if/when new appliances
with high power loads are introduced. On the other hand, it is also
uncertain how close to the capacity limit today’s peak load levels are.
If and when tools for measuring of actual loads (smart meters and
other Smart Grid components) are introduced, the actual situation
will be revealed. Hence, the relevance of reducing peak loads should
analyzed in more detail.
1.4 The cost efficiency of demand flexibility is
uncertain
The need for flexibility in the power system can be met by resource on
the supply side, storage of power/heat, grid expansions and interactions
with other energy systems such as heating and gas, and by demand flexibility. The competitiveness of the demand side in delivering flexibility
depends on the cost of demand flexibility and the availability alternative
flexibility in the market. Whether the demand response in the relevant
area has the characteristics of the flexibility demanded, is an additional
question. Descriptions of the potential for consumer flexibility often lack
the detailed characteristics of this potential – and thereby cloud the
technical potential to deliver flexibility services.
One should assume that the value consumers derive from using electricity is always higher than the total cost. Interrupting loads implies a
cost associated with reduced production of energy services or comfort
levels. This cost is normally considerable, which is why the price sensitivity of electricity consumption generally is low in the first place.
Demand response that does not include consequences for production
of energy based services or comfort level may only be possible for loads
when:
 An alternative energy source is installed as a back-up for electricity
(normally the alternative source will be an oil burner).
 The load may be shifted in time due to:
a) Inertia – the temperature in a building or process will not
change instantly if electricity supplies are interrupted.
b) There are storage possibilities – either for energy (battery or
heat storage) or cache in a production process.
c) The load has excess capacity – it is not in use at all times and the
usage may be shifted to hours of low cost.
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Demand response in the Nordic electricity market
Efficient demand response depends on technology and equipment enabling automatic processing of data and calculation of the most economically viable response. Smart meters are also a vital component that will
be installed in all the Nordic consumers before 2020. However, large
consumers (including large buildings) have had smart meters for years
without increasing the price sensitivity of the demand side. Hence, new
and improved data will also be needed to enable different types of demand response:
 Hourly measuring, in addition to simple access to price signals, is a
prerequisite to give the consumer price incentives to respond to
variations in hourly spot prices or hourly time of use tariffs.
 To enable load changes as deliveries of system services, the response
signal must be sent in a safe manner.
 To enable real-time demand response, real-time consumption data
must be available directly from the smart meters.
The cost of time and focus required by the consumers is often underestimated when considering the potential for energy efficiency and demand response. Such costs may represent important barriers for the
enabling of the demand flexibility potential, and even for the potential
that may be economically viable. The smaller the loads in question, the
larger the impact of cost of time and focus on unleashing the economic
potential of demand response. In order to reduce costs, small loads
(buildings) must be handled in a simple and standardized way – or they
will not be cost efficient compared to larger loads (industry).
1.5 Input to a Nordic strategy on demand flexibility
No specific measures to promote demand flexibility should be
implemented without a better understanding on how the value of
(demand) flexibility will develop in view of the likely changes in the
Nordic power system
Consumer flexibility is often mentioned as a solution that can contribute to
improved price formation in spot markets, increased supply of system services, and potentially reduced local grid investments and operation costs.
A condition for developing specific measures for efficient utilization of
consumer flexibility is that the sum of future challenges in the Nordic power system is well understood, included how the fundamental need for and
value of flexibility may develop.
Whether demand side flexibility can compete with flexible generation
or grid investments on costs, or will be able to deliver the needed types
of flexibility, is currently not known. No specific measures to promote
demand flexibility should be implemented without a better understand-
Demand response in the Nordic electricity market
11
ing on of how changes in power generation, demand, grid structures,
technology and regulation are likely to affect the magnitude and characteristics of the demand for flexibility in the Nordic power system. If increased knowledge reveals areas where the need for flexibility has a
high economic value and may be challenging to meet, further efforts
should be focussed at these areas. Specific measures addressing demand
response should focus on correcting market failures.
Future studies of flexibility potentials should differentiate potentials
according to the characteristics of different loads (such as duration and
response time for changes in load, and how long loads must be active inbetween disconnections). Technical potential estimates alone are only
relevant when combined with assessments of the economic potential of
existing (or expected) price signals and regulatory frameworks.
The impact of the full roll-out of smart meters with hourly measurement in Finland (and other areas of early movers in other Nordic countries) on demand flexibility should be monitored and evaluated.
The efficiency of the Nordic power market is generally high, but
further development of the market design can contribute to
increase the efficiency of (consumer) flexibility
During the last 20 years, the integration of the power markets in the
Nordic countries has increased, and thereby, also the liquidity in the
integrated markets. Further integration is expected, with a common
Nordic end-user market, reduction of bottlenecks in the transmission
grid, common balance settlement, and some common markets for system services are under implementation. All these developments contribute to increased integration and efficiency in the Nordic market. However, there are still some areas where efficiency can be increased further.
Consumer flexibility should preferably be clarified before the operational hour. Hence, consumer flexibility should be utilized in the spot market
rather than in balancing markets when possible. Increased granularity of
time resolution in the spot markets (e.g. from one hour to 15 minutes) and
bidding closer to the operational hour could make more short-term flexibility available to the market, and reduce the need for balancing. More efficient
allocation of grid capacity and redefinition of bidding zones, namely so that
they are only defined by congestions (and not country borders) could cater
for more efficient spot price formation as well.
A specific measure to ensure that consumer flexibility is not moved
from spot markets to balancing market is to make aggregators balance
responsible parties.
Balancing markets can be improved by increased integration among
the Nordic countries and harmonized product definitions across borders.
Should balancing markets not be further integrated, product definitions
should be reconsidered in each country. Reduced bidding sizes (from 10
to 5 MW is now tested), the duration of load adjustments, response times,
and intervals between disconnections are (non-exhaustive) examples of
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Demand response in the Nordic electricity market
product characteristic that should be assessed. Also the need and possibility to impose mandatory provisions of system services from the demand
side, e.g. frequency control, should be investigated.
The introduction of standard data formats on relevant price signals
to support the development of technology and services for energy
management would promote efficiency
As stated, specific measures to promote demand flexibility should not be
implemented without a better understanding of the future value of such
flexibility. An exception should be made for low-cost measures with an
expected positive future value. Imposing standard data formats for price
signals in the power contract, tariffs and other relevant data will reduce
the cost of automated demand response from small consumers. Cost
efficient automation is a precondition for the development of technology
and services for energy management based on price signals. In addition
to promoting demand response, such automation will also promote energy efficiency. Nordic coordination could further increase the market
potentials for new technology and energy services.
Grid tariffs should reflect the underlying grid costs to yield efficient
demand response
Grid tariffs according to marginal losses, interruptible contracts and
capacity pricing may incentivize increased end-user flexibility. Such grid
tariffs should however not be implemented in order to increase flexibility, but in order to reflect underlying grid costs more efficiently.
Demand response in the Nordic electricity market
13
2. Introduction
This report summarises the results of a study commissioned by the Nordic
Electricity Market Group (Nordic Council of Ministers). It is part of the
Nordic Prime Ministers' green growth initiative, “The Nordic Region –
leading in green growth”. The initiative identifies eight priorities aimed at
greening the Nordic economies, one of which is to promote flexible consumption of energy. The overall aim of this project is to give input to a
Nordic strategy on how to promote demand flexibility in the Nordic power
system in an efficient manner.
Generation and consumption have to always balance in the power system at all times. Power systems have since the start of the industrial
revolution been expanded and developed to cater for a steady growing
demand for electricity. The perspective has been to ensure security of
supply at a national level, and power has in most cases been provided by
one or a few large utilities owning both generation and networks. The
dominant provider of flexibility to balance variations in load has been
the generators themselves, but power intensive industry has to some
extent also contributed with flexibility.
The way the power system is balancing is now changing in a very
profound way and in many respects. First, the supply side is in a transition to become emission free and fossil fuelled generation is replaced
with renewables. Second, the demand side is affected by economic
downturn, enhanced energy efficiency, replacements of oil burners and
new consumption patterns that may increase the peak loads (charging of
EVs, tankless water heaters etc). Finally, power systems are to a growing
extent integrated both physically though interconnections and commercially though integration of markets and agreements of cooperation. All
these developments affect both the need for flexibility (value of flexibility) and the ability of the power system to provide flexibility (cost of
providing flexibility).
The flexibility demands from the power system are met by generators and consumers. In the long-term perspective investments in generation, consumption and grid may all be alternative ways to address flexibility needs. Even intermittent generation may serve as a source of flexibility. Flexibility can also be delivered by electricity storage facilities and
by efficiently integrating the power system too that of heat and gas, exploiting flexibility across energy carriers.
In this report we specifically discuss the potential for exploiting flexibility from electricity demand (consumers) in the Nordic market. However, one should keep in mind that demand flexibility has to compete
with flexibility from generation, grid investments, power storage and
from exploiting flexibility across markets for heat, gas and power. In
general efficient demand response implies that demand is price sensitive, promoting efficient pricing and efficient utilization of resources
employed in the power system at all times.
In this report we first define demand flexibility, demand response
and different types and properties for flexibility (Chapter 2). Then we
discuss the value of flexibility across the Nordics and how the value
might change during the next 10–15 years (Chapter 3 and 4). Next, we
describe the cost side of demand response and what price signals the
demand side face in today’s power market (Chapter 5). Finally we discuss different types of measures that are relevant to promote efficient
use of demand flexibility (Chapter 5) and summarize input to a Nordic
strategy on demand flexibility (Chapter 6).
We have interviewed people representing TSOs, DSOs, retailers, industry organisations and consultants/ researchers in the Nordics in
order to get a better understanding of the value and potential for demand flexibility and the development in this area in general. The interviewees are listed in attachment 1. Their input has been very useful to
the project. Nevertheless, all conclusions in this report are THEMAs responsibility alone.
16
Demand response in the Nordic electricity market
3. What is demand flexibility
In the market place demand flexibility comes in three shapes. First, consumers may find alternatives to the use of electricity creating price sensitivity
that reflects a limited willingness to pay for electricity. Second, consumers
may be willing to “move” loads from periods where the system has high prices to periods of low prices (load shedding), contributing to less price volatility and lower peak prices. And finally, changing loads (up or down) may help
balancing generation and consumption during operation and thereby contribute to security and quality of power supply. Different types of demand
may provide flexibility with different characteristics (volume, reliability,
duration of load changes, response time and recovery time) to meet variations in the demand for flexibility from different markets.
3.1 Definition of demand flexibility
Demand flexibility can in our context be understood as a willingness to
change volumes of electricity consumed for short or long periods of time
as a response to market prices, price incentives in grid tariffs or other
economic incentives. In this definition, the consumers’ flexibility is reflected in the price sensitivity on the demand side. Changes in volumes
may also be imposed on electricity consumers, but this type of flexibility
is not considered in this report.
Demand response is in this report referring to the reaction (activity)
from a consumer driven by different types of price signals.
The consumer may have flexibility to regulate consumption both up
and down, e.g. to increase consumption to take advantage of low prices
in the market or in the grid tariffs.
Providing a specific demand response comes at a cost to the provider.
The value of a certain type of demand response may vary over time and
between areas. The value is set by the basic market conditions of supply
and demand:
 Demand for flexibility: What is the demand for flexibility in terms of
volumes, reliability and characteristics such as duration, response
time and recovery time? What is the willingness to pay (the price of
flexibility in the market)?
 Supply of flexibility: What is the competition like on the supply side?
What is the cost for alternative providers of flexibility (generators,
consumers and imports) and what type of flexibility may the different
providers deliver?
3.2 How may demand flexibility contribute to
increase efficiency?
A more active demand side may provide value to the different parts of
the Nordic power system. There are two preconditions for making a
given demand response able to deliver value to the power system:
 Value: The willingness to pay for flexibility has to be sufficient in
order to cover the cost of providing the demand response.
 Competitiveness: The demand flexibility has to be competitive with
other resources delivering similar flexibility like generators, other
consumers, storage facilities and imports.
Demand flexibility can potentially add value in three areas:
 Price formation: If the demand side is inelastic, the price formation will
solely depend on the generation side. More intermittent generation
and an inflexible demand side may lead to more constrained situations,
price volatility and peak prices in peak load periods. However, a strong
power balance, investments in grid and interconnectors and more
flexibility (price sensitivity) among consumers may all serve to limit
price volatility and peak prices and reduce the market power of
generators (SWECO, 2011).
 System services: The purpose of system services is to balance the
power system by ensuring balance between supply and demand
throughout the operational phase. Balancing resources are mainly
delivered by generators today, but also to some large consumers
provide flexibility to the power system.
 Limit investments in the regional or local grid: If peak demand is close
to the capacity limit in regional or local grid, reducing peak load may
postpone or limit the need to invest in new grid. Demand response
may further be important to maintain security of supply e.g. to
manage incidents such as power lines tripping. Demand response
may thus limit the costs of fulfilling the requirements for grid
security (the n-1 criteria).
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Demand response in the Nordic electricity market
3.3 Different types of demand flexibility
The willingness to be flexible varies between different consumers and
over time for each individual provider. It will also vary depending on
what kind of flexibility they are to deliver. In principle there are three
types of flexibility in electricity consumption:
 Shut down of energy use.
 Shift to an alternative type of energy source.
 Shift in time of energy use.
The three alternatives are illustrated in Figure 1. The two first types,
shutting down or shifting to an alternative energy source, will have the
same impact on power consumption – the load will be removed for a
given period and overall consumption is reduced. Alternatively (type
three) the load could be shifted in time. In this case total power consumption is not reduced; it is allocated differently across the time of the
day (or possibly another timeframe).
Figure 1: Illustration of different types of demand flexibility
Shut down or shift in type of energy use
Shift in time of electricity use
Note that the demand response may also imply increasing load during in periods of e.g. low electricity prices. In this case other energy sources may be phased out and replaced by electric (e.g. district
heating switching from using gas to using electricity).
3.4 The characteristics of demand flexibility
The characteristics of flexibility needed in the power system are described
in section 3.3. Important properties for flexibility delivered to the power
system are volume, reliability and several time-related properties like
duration of disconnection, response time and recovery time. Consumers
are different and the type and quality of the flexibility they may provide
varies. Some loads may have flexibility to disconnect for longer periods of
time and for specified periods (e.g. seasons for heating or cooling), for
Demand response in the Nordic electricity market
19
certain hours during certain days of the week or they have flexibility for
very short periods within the hour. Loads from industrial production processes and service buildings may not be available for downward regulation during weekends simply because they are not in operation.
Shutting down electricity consumption without alternative energy
sources implies that e.g. industrial activity is reduced or completely
stopped with reduced production and economic losses as a result. Such
demand flexibility is therefore only relevant in extreme cases when electricity prices are exceptionally high. Demand flexibility is more relevant
when there are alternative sources of energy available or it is possible to
move consumption to another point in time. Characteristics of the flexibility such as response time, duration and recovery time of demand will
affect the attractiveness (value) of the flexibility in the market. Loads
that may shift to an alternative energy source can be disconnected instantly, for a long period of time – days, weeks or even months and may
also be activated again shortly after the disconnection.
Shifting loads is limited by characteristics of the given load. For heating, cooling and ventilation the inertia will depend on how long it takes
for temperature and CO2 levels to change and to what extend the consumers will accept the cost of reduced comfort. The response time of
load shifting varies between providers. Possible buffers in temperature
etc. may make it possible to disconnect the load without reducing the
comfort levels or limiting the industrial output. Such buffers (caches)
may e.g. be provided by buildings, batteries or heat storage.
Loads that are not running 24/7 have limited potential for intraday
flexibility. The loads may be scheduled to run at hours when electricity
prices are low or outside peak hours, within the limitations that apply.
For instance, green houses need to be lit most of the time, but lights can
be turned off some hours per day without harming plant growth. In
principle, the same logic apply to appliances as dish washers and washing machines in households, but in practice the flexibility of when to run
the machines may be limited by other time restrictions.
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Demand response in the Nordic electricity market
Table 1: Categorization of flexible loads
Type of flexibility
Type of load
Example industry
Example buildings
Processes that may be
interrupted
Stops in continuous
processes with reduced
production as a result
Electrical equipment like
lightning, lifts or TVs
Loads supported by
back-up with alternative energy source
Electrical heat boilers
with alternative oil or
gas boilers
Electrical heat boilers
with alternative oil or
gas boilers
Processes with cooling
or heating
Heating, cooling or
ventilation
Loads or processes with
storage or cache
Grounded biomass in
pulp and paper
Batteries and hot water
tanks for tap water or
heating. Batteries
Processes or appliances
with excess capacity
Greenhouses where
lights may be shut down
4 hours per day
Dish washers and
washing machines that
does not run 24/7
Shut down energy usage
Shift in type of energy source
Shift in time of electricity usage
Loads with inertia
Demand response in the Nordic electricity market
21
4. Supply and demand for
Flexibility in the Nordic region
Flexibility is needed in the power system to balance the generation and
consumption of electricity. This flexibility is handled through various
markets. The wholesale market reflects the power balance and prices
increase when there is a shortage of energy within a given time frame.
The TSOs purchase different types of reserves to secure short and long
term security of supply. Also DSOs provide to some degree price signals
to promote demand flexibility through grid tariffs. Generation, mainly
hydro power with reservoirs, provides most of the flexibility in the Nordic power system today. But also power intensive industry is active in
the market, providing price sensitive bids in the wholesale market and
different types of reserves for the TSOs. Heating systems in buildings is
also to partly flexible if there is heat storage (in Finland) or alternative
heat sources (oil burners) available.
In this chapter we describe the demand for flexibility and how the
willingness to pay for different kinds of flexibility may vary across the
Nordic region depending on the local characteristics the power system.
We further describe how the demand for flexibility is met through market based solutions and how consumers contribute with flexibility in
these solutions. The description is fairly high-level defining a starting
point for discussing future developments in the supply and demand for
flexibility, future challenges and the possible roles of demand response
in the Nordic region.
4.1 What defines the need for flexibility in the power
system?
The value (price) of flexibility in the market is set by the supply and demand of flexibility, as described in section 2.1. Figure 2 illustrates the
balance in the power market between generation and consumption and
that this balance can be composed of very different mixes of generation
and load. The resources may be base load with stable and predictable
(and adjustable) levels of consumption and generation, e.g. large industry and generation from nuclear plants, thermal plants and large hydro
plants. Other resources may have more or less predictable fluctuations
intraday or intraweek, like consumption from households and service
industry. Yet other resources may be less predictable and fluctuate due
to temperature, wind, sun and precipitation like run-of-river hydro
plants, wind generation and solar panels. In the long-term both generation and consumption may fluctuate due to economic development, new
technology and politics.
Figure 2: Power systems may be very different, but they always balance
Coal
Gas
PV
Wind
Large industry
Nuclear
Generation
Always balance
Oil
Hydro w/ storage
Run of river
Always someone
adjusting generation
and/or load
Households
Services
Consumption
Small industry
Transportation
Generation and load creating the local power balance in Figure 2 may
partly be located outside the area and be imported. The Nordic power
system is integrated physically (interconnections), through cooperation
(common system operations) and market-wise (market coupling). In
spite of cooperation and integration – there is and will still be physical
bottlenecks in the power system and the Nordic power system will thus
be divided into areas that may have very different mixes of power generation and consumption. The demand for flexibility may thus vary significantly both in terms of volumes and types of flexibility requested
across the Nordic areas. In the Nordic market bidding zones (price areas) are established to make the market reflect these differences.
An area dominated by e.g. stored hydro and large industry need flexibility to balance seasonal fluctuations in hydrology while an area dominated by wind generation and household consumers need flexibility to
balance daily fluctuations in wind and consumption (e.g. challenging
peak-loads).
In addition to managing more or less predictable variations in generation and load, the power system also need flexibility to manage unforeseen incidents that may provide shocks in the power system. Such incidents may include when generators trip, when large industrial loads
suddenly drops or when gridlines are disconnected due to failures of
some sort.
4.2 The value of flexibility varies across the Nordic
region
Figure 3 illustrates the differences in the mix of generation and consumption across the Nordic region. The mix of generation and consumption defines the demand for flexibility. The current situation in the Nordic countries may in short be described as follows:
24
Demand response in the Nordic electricity market
FIGURE 3
Figure 3: Differences across the Nordic market in generation and consumption mix
Power generation (2011)
Power consumption (2013)
Thermal Wind
1%
4%
Wind
1%
Thermal
35%
Other
industry;
7%
Hydro
17%
Other
renewabl
es
15%
Hydro
95%
Other;
14%
Power
intensive
industry;
29%
Transpor
t; 1%
Househo
ld and
services;
50%
Nuclear
32 %
Thermal
4%
Wind
4%
Other; 10%
Wind
27%
Thermal
66%
Other
renewable
s
7%
Nuclear
39 %
Hydro
45%
Other
renewabl
es
8%
Other;
11%
Other
industry;
14%
Other
industry;
19%
Power
intensive
industry;
6%
Household
and
services;
65%
Other
industry;
11%
Other; 5%
Power
intensive
industry;
37%
Household
and
services;
46%
Transport;
1%
Househol
d and
services;
48 %
Power
intensive
industry;
25%
Transport;
2%
Transport;
1%
3
Denmark
A large share of generation is intermittent and there is no power intensive industry. Households and small industry / services do not use electricity for heating purposes and a mix of electricity, gas and heat cover
their energy needs.
 Have flexibility to manage seasonal variations in consumption.
 Need flexibility to manage fluctuations in renewable generation,
peak-load demand, short-term balancing of the power system and
reserves to manage incidents in the power system.
Finland
A large share of generation has day/night flexibility (hydro and new coal
power plants) and a significant, but falling, share of consumption is price
sensitive power intensive industry. Demand response from industrial
freezers is to a growing extent used as system services (frequency control). Single home buildings have water based heat storages that are currently switching heat loads from day to night. This set-up combined with
hourly metering for all (97 per cent) consumers represents opportunities
for further exploiting demand flexibility from small consumers.
 Have day/night flexibility, but a falling share of price intensive
industry and of condensing power generation may be challenging.
 Need flexibility to manage peak-load and incidents.
Demand response in the Nordic electricity market
25
Norway
A large share of generation is flexible large hydro with reservoirs and a
significant share of consumptions is price sensitive power intensive industry. Demand response from industry is to a growing degree used as
system services. The hydrological balance may vary between areas. Electricity dominates as energy source for heating in households.
 Have flexibility to balance short term fluctuations in supply/demand
and to manage incidents.
 Need flexibility to manage possible seasonal shortages (dry years) and
surpluses in hydrological balance (periods of high inflow and low load).
Sweden
A large share of flexible hydro storage in the north and a significant
share of the consumption is power intensive industry. Both generation
and consumption are less flexible in the south. PII is providing more bids
in markets power reserves. Electricity is the main energy source for
households (approx. 60 per cent), but district heating is the main source
of heating in buildings.
 Have flexibility to balance short term fluctuations in supply/demand
and to manage incidents in the north.
 Need flexibility to manage seasonal variations in hydrological balance in
the north and flexibility to manage peak-load challenges in the south.
Nordic region
The frequency in the synchronous Nordic area (Denmark-East, Finland,
Sweden and Norway) is a regional concern, and the task of ensuring a
stable frequency has become more challenging over time as illustrated
in Figure 4.
 Quality of frequency is challenged by intermittent generation and of
new interconnectors.
 The Nordic TSOs need short-term flexible resources in order to
ensure system security and quality of supply.
26
Demand response in the Nordic electricity market
FIGURE
4 per week where the frequency is outside “the normal band”
Figure
4: Minutes
4
Source: Statnett.
4.3 Meeting the demand for flexibility
In this section we describe the market solutions and regulations that are
established in order to ensure that the demand for flexibility is always met.
The value of flexibility varies across the products and over time. Flexible consumers and generators constantly have to consider “where and
when” to sell flexibility. In this section we describe the how this is done,
how flexibility is priced in spot markets, balancing markets and in markets for reserves.
4.3.1
Trading of flexibility in the wholesale markets
Table 2 provide an overview of how flexibility is addressed in the wholesale market. Flexibility is however not a product itself, but an implicit
element of all trading in the wholesale market. The willingness to change
volumes consumed or generated varies between market players and
over time. Balance responsible parties (BRPs) connected to the highvoltage grid (generators, utilities, large industries and retailers on behalf
of consumers) are nominating schedules in the day-ahead and intraday
markets, and are charged for the cost of imbalances (deviations from
scheduled consumption or generation). The aggregated imbalances in
the power system are managed by the TSOs real-time (see 3.3.2).
Demand response in the Nordic electricity market
27
The forward market provides an opportunity to trade power for future
delivery (financial), and the prices reflect future price expectations of the
market players. Generators and consumers having flexibility will have
incentives to consider the future price curve carefully and seek to generate when prices are high and consume when prices are low, thus limiting
overall price volatility in the market. Ultimately the forward price curve
would be completely flat if flexibility was abundant in the market.
Generators and consumers that have “forward-looking” flexibility
(e.g. possibilities to plan a three week shut-down for maintenance or
when to generate from a hydro plant with storage) can use derivatives
to manage future price risk. Thus, the market provides incentives to
consumers and generators on how to utilize flexibility promoting both
economic efficiency and security of supply.
The generators and consumers that have flexibility place price sensitive bids/offers in Elspot or they may want to provide block-bids (condition on being activated for four consecutive hours) or to flexible one-hour
bids (a bid that can be activated for only one hour during 24 hours).
Short-term flexibility may further be sold in the intraday market (Elbas) to market players that want to adjust their schedule closer to the
hour of operation.
The various products traded in the wholesale market are defined by
the following characteristics:
 Volume: the size of the contract in MW.
 Duration: the period for which the volume is to be generated/
consumed in hours.
 Price: there could be both an option price (price for being available).
 Energy price (price for actual energy generated/consumed).
Table 2: Possibilities to trade and hedge flexibility in the Nordic wholesale market
Decision making on utilization of
flexibility
Energy and forward markets deliver
in total
Schedule and contract short-term
flexibility between hours day-ahead
Price sensitive bids
Flexible hourly bids
Four hour block-bids
Future prices provide alternatives to
the current spot price
Energy market
Elspot:
Day ahead
allocation
Elbas:
Intra day
allocation
Forward market
Derivatives
market
28
Trade short-term flexibility between
hours close to real time within the day
Thus, the combined markets provide
incentives on timing of when to
generate/consume, when to do
maintenance and when to invest
The wholesale market provide both
incentives and tools for managing
flexibility
Hedge long-term flexibility in timing
of consumption/ generation between
weeks, months, seasons and years
Demand response in the Nordic electricity market
Price volatility in the spot market can be short-term (Figure 5) or longterm (Figure 6). Price volatility in the Nordic market is quite limited in
the three most northern price areas in Sweden and most of Norway,
however somewhat stronger in South-Sweden, Denmark and Finland.
Figure 5 show the price during 13th of January for the last four years for
one price area per country. The daily price volatility during normal conditions is not sufficient to promote large volumes of demand response.
Figure 5: Examples of short term price variation (within the day) in Elspot
Source: NordPool spot.
Seasonal price variations are larger than intra-day volatility, often driven
by the hydrological balance. Industry may however have limited ability to
exploit the seasonal price differences since it will limit their core production of goods and services. In general, the price is normally higher than the
system price in Finland and Denmark (price area DK2/ Copenhagen), but
with some low price periods (probably caused by high generation from
wind) in Denmark. The prices in Stockholm (SE3) and in Oslo (NO1) follow the system price more closely. The prices may vary from summer and
winter, but also the winter/ summer prices vary over time.
Demand response in the Nordic electricity market
29
Figure 6: Weekly price variations for one price area per country. 2012–2013
FIGURE 6
600
Weekly average price [NOK/MWh]
500
400
SYS
300
SE3
FIN
DK2
NO1
200
0
jan- 12
jan- 12
feb- 12
mar- 12
apr- 12
apr- 12
mai- 12
jun- 12
jun- 12
jul- 12
aug- 12
aug- 12
sep- 12
okt- 12
okt- 12
nov- 12
des- 12
des- 13
jan- 13
feb- 13
mar- 13
mar- 13
apr- 13
mai- 13
mai- 13
jun- 13
jul- 13
jul- 13
aug- 13
sep- 13
sep- 13
okt- 13
nov- 13
des- 13
des- 13
100
Source: NordPool spot.
4.3.2
6
TSOs contracting flexibility to ensure system
security and security of supply
Table 3 provide an overview of how flexibility is addressed in the “TSOmarkets” to enable TSOs to balance the power system real-time and to
promote long-term security of supply.
The schedules for the real-time operations of consumers and generators are based on power purchased and sold in the wholesale market
(Elspot and Elbas). TSOs purchase reserves in the balancing market in
order to manage imbalances and bottlenecks, incidents and disturbances. To this end TSOs purchase different kinds of reserves, including
manual restoration reserves (FRR-M or “regulerkraft”) used to manage
congestions and imbalances and automatic reserves used to ensure system security (frequency) and manage imbalances.
TSOs may want to contract manual and/or automatic reserves in a
long-term perspective (capacity markets), providing the TSOs with more
certainty for their operations and the market players with long-term
incentives to provide a specified kind of flexibility. TSOs may also purchase long-term energy reserves (guaranteed volumes in Elspot) from
consumers and generators to ensure security of supply in possible future constrained situations (e.g. strategic reserves and energy options to
power intensive industry). Long-term contracting promotes investments
in flexibility by both providing long-term price signals and opportunities
to limit risk.
30
Demand response in the Nordic electricity market
The various “TSO-products” may have features in addition to those listed
in 3.3.1. In addition to price, duration and volume features may include:
 Activation period: the time period for which a volume is reserved and
can be activated.
 Response time: the time it takes to activate a bid.
 Recovery time: minimum time between activations.
Table 3: TSOs purchasing flexibility in markets for reserves, balancing the power
system
Decision making on utilization of flexibility
Manual reserves
Restoration
Reserves (FRR-M)
Consumers/generators nominate willingness to adjust consumption
(or generation) within the hour
The TSO will contact the market player who then adjust their volumes
Long-term
reservation
Consumers/generators commit to provide manual reserves (FRR-M)
in defined future periods
Example: the Norwegian RKOM (weekly and seasonally purchased)
Automatic reserves
Real-time
balancing
Generators let TSOs automatically adjust volumes in order to manage
bottlenecks and safeguard the frequency
Examples: Frequency Restoration Reserves (FFR-A) and Frequency
Containment Reserves (FCR)
Large consumers and generators may be automatically regulated in
order to manage incidents and frequency distortions (“systemvern”)
Long-term
reservation
Generators commit to provide automatic reserves (FRR-A or FCR) in
defined future periods
Example: the Danish long-term LFC auctions
Long-term
reservation
Consumers/generators commit to contribute to the energy balance
for longer periods of time in the future
Examples: strategic generating reserves in Finland/Sweden and
energy options for large consumers in Norway
Energy reserves
Figure 7 illustrates the TSO costs for system services. The cost increase
from 2010 to 2013 has been more than 50 million EUR, and the TSOs
expect this cost to increase further during the next years.
Demand response in the Nordic electricity market
31
Figure 7: The TSOs costs of balancing services 2010–2013. Million EUR
300
250
200
150
100
50
-
2010
Norway
2011
Sweden
2012
Denmark
2013
Finland
Source: energinet.dk. SvK, Fingrid, Statnett.
4.3.3
The value of flexibility reflected in the grid tariffs
The grid tariffs play an important role as price signals for consumers of
electricity in both the short and long term. There are several grid tariff
models within each country. The various tariff contracts discussed below is based of contract types offered by the largest DSOs1 in the four
Nordic countries. The components in the grid tariffs, and therefore the
incentives for demand flexibility, differ somewhat between large and
small consumers:
Small consumers
 Hourly meters. Finland has in addition hourly meters for small
consumers. Sweden introduced smart meters to all grid customers in
2009, but the measured time frame is daily, not hourly. Dongs tariff
to small consumers with smart meters include time of use tariffs for
different time of day, weekdays and seasons.
 Fixed and variable tariff components. Small consumers have a twopart tariff with a variable (energy used) and fixed (yearly/monthly)
component. The level of these components varies between suppliers.
The energy tariff is higher that the marginal loss of the distribution.
 Time-of-use. Several grid companies in all Nordic countries offer timeof-use contracts. Norwegian and Swedish customers may choose
tariff contracts where the tariff varies between seasons while they in
──────────────────────────
1 Sweden: Vattenfall and E-ON, Finland: Fortum and Helsingin Energia, Denmark: Dong Energy Distribution
and Norway: Hafslund Nett AS.
32
Demand response in the Nordic electricity market
Denmark and Finland offer contracts where the tariff varies due to
time of day, time of week and time of year.
Large consumers
 Hourly meters. All large customers are hourly metered in the Nordic
countries.
 Three-part-tariff. Large customers have a three-part tariff with a fixed
part, a capacity part and an energy part. Most large customers are
obliged to buy a time-of-use contract where the variable price is
higher during peak load periods.
 Time-of-use. Time-of-use tariffs are mandatory for large consumers in
all Nordic countries. Time or year is the most commonly used timeframe, but time of day is also in use.
 Switching energy source. In Norway and Sweden may large
customers, with alternative energy sources, enjoy lower tariff if they
allow the grid company to disconnect load in certain situations. The
size of the tariff discount varies.
 Capacity. Sweden, Finland and Norway require large customers to
have capacity based tariffs. These customers have an incentive to
keep their consumption below a certain level.
Table 4: Tariffs offered to customers is based on consumption volume
Norway (Hafslund)
Sweden
Finland
Denmark
Energy only
Customers with
consumption below
100,000 kWh
Customer with main
fuses below 80 A
Customers connected
to the low voltage
grid
Customer with main
fuses of 63 A and
below
Customers connected to grid with
voltage level
below 10 kV
Power
Customers with
consumption above
100,000 kWh, 125 A
in 230 V grid or 80 A
in 400 V grid
Customers with main
fuses above 80 A.
Customers connected
to grid with a voltage
level above 6 kV
Customers with
main fuses above
3 x 80 A
> 100,000 kWh/ y
No
Time of use
Offered to small
consumers with
consumption above a
certain level.
Seasonal time-of-use
is mandatory for
large customers
(consumption above
100,000 kWh)
Offered to all customers by some grid
companies.
Mandatory for
customers with main
fuses above 80 A
Offered to all
customers.
Mandatory for large
customers
Customers with
hourly metering.
Mandatory for
customers connected to grid with
a voltage level of
10 kV or higher
Flexible
loads
Reduced tariff for
flexible loads (alternative fuel)
Reduced tariff for
flexible loads (alternative fuel)
Sources: Dong (2014), (Vattenfall, 2014) (Helsingin Energia, 2014) (Fortum, 2014), Hafslund (2014).
Demand response in the Nordic electricity market
33
4.4 The consumer side is partly flexible
Generation has dominated as a provider of flexibility. In this section we
describe the current contribution of consumers in providing flexibility.
4.4.1
Power Intensive Industry
Large industry (PII) contributes in three ways as providers of demand
response:
1. Wholesale market. Power intensive industry (PII) is participating in
wholesale markets (Elspot, Elbas and forward markets). PII use these
markets to optimize their consumption, purchasing physical power
and hedging future price risk. The cost of electricity constitutes a
significant part of the overall costs to PII. Thus, the price of electricity
may influence their willingness to consume electricity and operate
their factories. This flexibility is visible in the wholesale market.
Price sensitive bids (including flexible one-hour bids) in the spot
market from PII promote competition and limits possible imbalances
(if the consumer has real incentives to reduce consumption at a
certain price level). In a long-term perspective is PII able to limit
consumption in dry years. One example is that the Swedish power
intensive industry reduced their load with 400 MW combined during
the price peaks in the winter 2009/2010. Consumption equivalent of
200 MW was activated through the “effektreserven”, while the rest
was activated through the spot market (NEPP, 2013).
2. Balancing markets. In the balancing market PII mainly contribute with
restoration reserves both in capacity markets (RKOM) and in the daily
auctions for FRR-M. PII will in most cases contribute with resources for
upwards regulation (reduced consumption).
PII are to a very limited degree participating in auctions for automatic
reserves, but a Nordic market for FRR-A (Load Frequency Control) that
is in the process of being established may develop prices that could
attract volumes from PII. PII are however providing “systemvern” as
an automatic reserve – this is automatic reductions in consumption
due to incidents in the power system (e.g. tripping of lines).
3. Energy reserves. PII is participating with significant volumes as
energy reserves in e.g. a case of hydro storage in the Norwegian
market for ENOP (Energy Options). The ENOP market is tailored to
explicitly attract volumes from PII. Statnett spend for the period
2012–13 close to 30 MNOK on purchasing options to cut 555 GWh
(442 MW) of industrial consumption across the country.
34
Demand response in the Nordic electricity market
4.4.2
Buildings
Many buildings in the Nordics have alternative heating sources such as
wood-burning stoves, open fireplaces or oil/ gas heaters in addition to
electricity. End-users with access to alternative heating sources have
higher price sensitivity due to the opportunity to switch between energy
carriers based on relative price differentials. These customers are flexible both in the short and long term perspective.
In Finland, time-of-use tariffs are commonly used. Large price variations between day and night since the 70s have given Finnish households an incentive to install the necessary equipment to move a large
share of their electrical consumption from day to night. Time switch in
smart meters, water based heat distribution and tanks for accumulating
and storing heat makes it possible for Finnish households to utilize price
differences to lower their total electricity costs (Toivonen, 2013). The
possibility for Finnish households to store electricity in large water
tanks makes them flexible on short-term.
Figure 8 illustrates how Finnish households with electric heating utilize their flexibility by moving their electricity demand from day to night.
Residential buildings without electric heating have a normal load profile,
with their largest demand during daytime.
FIGURE 8
Figure 8: Load profile of residential customers in Finland
Source: VTT (2007).
Source: THEMA Consulting Group
In Norway,
large customer with annual electricity consumption above
100 000 kWh pay a grid tariff based on their energy and capacity usage.
There are service providers helping municipalities and property companies to optimize their energy usage, both by reducing the overall level of
energy consumed, but also to reduce the costs of the energy used. Avoiding power limits in the grid tariff is their main economic motivation to
shift loads in time.
8
Demand response in the Nordic electricity market
35
5. Both demand and supply of
flexibility is changing
More intermittent generation in combination with increasing numbers of
electrical vehicles and the phase out of oil burners is by many considered
as clear signs that the value of demand flexibility is increasing. We do not
fully agree, and argue that the future value of demand flexibility in fact is
uncertain and not fully understood as there are changes in the Nordic
power system affecting the value of demand flexibility in opposite directions. Some examples of developments that may decrease the future value
of demand flexibility are i) a positive power balance that will reduce the
risk of energy scarcity and high peak prices, ii) increasing transmission
capacity between price areas that will both further reduce the risk of local
price peaks and make existing flexibility (reserves) available in a larger
geographical area and iii) increased energy efficiency in new and existing
buildings and industry that may limit peak loads at the DSO level.
The most common demand response is reduction of loads for a given
period of time. As a result of a positive power balance in the Nordic market
the next 10 years combined with an increased share of intermittent wind
generation, spot prices may be very low, or even negative, at times. The
most relevant demand response for some consumers (i.e district heating)
will therefore be to switch from other energy sources to electricity during
low price periods and thereby increase their electricity consumption.
In Chapter 3 we describe the current solutions for meeting the demand
for flexibility in the power system. Policy makers, investors and market
parties have to both understand this picture and alternative future developments when they make strategies and plans for the future. In this
chapter we discuss changes in the Nordic power system that will influence the future value of demand flexibility. It is not within the limits of
this project to assess the implications of all future developments of the
Nordic power system, the discussion is therefore at a high-level. To get a
clear understanding of how developments influence the total value of
demand flexibility, further assessments are necessary.
5.1 Summary of main uncertainties and
developments
Table 5 sums up our discussion on expected developments and the effects both on the power system/market in general and on the supply/demand for flexibility. There is significant uncertainty both related
to the magnitude and timing of the developments and of the effects these
developments may have on the power system, the power market and on
the demand/supply of flexibility.
Table 5: Summary of possible changes in the value of flexibility
Possible developments
Possible effects on power
system and power market
Possible effects on supply and
demand of flexibility
Increased share of intermittent power generation
More intraday and intra-week
price volatility
Increased price signal for
intraday flexibility
Power surplus in the Nordic
region
Downward pressure on price
(possibly negative prices)
Incentive to increase consumption
Small scale and at DSO-level
More complex distribution
Balancing at DSO level?
Less congestions
More exchange of flexibility
Reduced risk of high peakprices
More intraday price volatility
Less seasonal price volatility
Increased price signal for
intraday flexibility, reduced
risk for high peak prices
More complexity of operation on
DSO level
Need for balancing on DSO
level?
Heavy investments in DSO grid
Increased capacity
Decreased value of reductions
in peak load
Smart Grid – measuring, surveillance, control
More accurate data on loads and
flows
Uncertain
Increased peak load
Increased demand for flexibility at DSO level
Reductions in flexible loads with
long duration at DSO level
Price sensitive volumes reduced
(heating)
Reduced potential for flexibility
Energy management systems on
a large scale
Possibility for more small scale
flexibility
Less price sensitive bids and
system services from today’s
consumers
Increased demand for flexibility from other sources
More efficient market solutions
Flexibility available in a larger
market
Increased competition
Business opportunities to
providers of flexibility
Power generation
Transmission and inter-connectors
More capacity between bidding
zones
Interconnection to Continental
Europe
Infrastructure at DSO level
New feed-in of intermittent
generation at DSO-level
Consumption in buildings
Increased use of appliances with
high power demand
Phase out of oil burners
Energy efficiency
Consumption in industry
Less large industry
Market solution and regulation
Harmonisation and integration
of markets
38
Demand response in the Nordic electricity market
Reduced potential for flexibility
There are uncertainties related to how the willingness to pay for flexibility will develop during these developments. Each of the developments
listed will individually have an impact on the willingness to pay for flexibility, but what will the aggregated effect of all developments be and
how fast will various developments take place? Further, how will the
developments affect the willingness to pay for the different types of flexibility, such as peak-load, system services, capacity for periods of energy
shortage etc.?
In sum we assume the following developments and uncertainties to
be important for the development in supply and demand for flexibility:
 Variations in spot price (price volatility) will probably increase due to
more intermittent generation in the system. Variations in generation,
and the influence on power prices, will be seasonal for run-of-river
hydro power and seasonally/ weekly/ daily for wind generation.
Increased capacity between the Nordics and other European countries
will increase intraday volatility. Investments in transmission and a
positive power balance within the Nordics will on the other hand
decrease the volatility within each bidding zone. Hence, both the level
and the duration of price variations are uncertain.
 Some volumes that participate in the markets for system services will
be taken out of the market (mainly due to reductions in consumption
from PII). This indicates that the competition in these markets will be
reduced and the value (willingness to pay) may increase. On the
other hand, we expect the same resources for flexibility to be utilized
over a greater geographical area when new market solutions and
new interconnections are in place. Thus, there is uncertainty on how
the competitiveness and the willingness to pay for system services
will develop.
 In general the capacity in grid at the DSO level is sufficient (based on
interviews made in this project). However, there is a risk that peak
loads and voltage disturbances may increase if/ when new
appliances with high power loads are introduced. Increasing levels of
demand response based on price volatility in the spot price may in
itself increase the peak load in local grids. This may in particular be
the case in Finland where much of the electricity demand for heating
may cause problems for the local grid in areas with a high share of
single home buildings. On the other hand, there is also uncertainty
about how close to the capacity limit todays peak load is. Introducing
tools for measuring the actual load (smart meters and other Smart
Grid components) will reveal the actual situation. Hence, the actual
relevance of reducing peak loads is uncertain and should be looked
into in more detail when more data is available.
Demand response in the Nordic electricity market
39
5.2 Changes in generation
New generation technologies have very different characteristics compared to the “old” plants and the new plants are located in new geographical areas and sometimes at lower grid levels.
5.2.1
More intermittent generation
Three trends contribute to less flexibility in Nordic power generation:
there will be more intermittent generation, less flexible thermal generation and a stronger power balance (surplus in a year with normal
precipitation).
Power generation from wind, intermittent hydro and nuclear will increase in the Nordic countries. In Sweden and Norway is the electricity
certificate system likely to foster investments of 26.4 TWh new renewable generation, mainly in wind but also some run-of river and bioenergy.
Tender processes for new wind power in Denmark and feed-in tariffs in
Finland will further add to the growth in Nordic renewable power generation towards 2020. Generation from different technologies in 2012
and estimated production in 2020 is shown in Table 6.
Table 6: Generation per technology in 2012 and estimated for 2020
Wind
Hydro
Other renewables
Nuclear
Thermal
Sum
2012
2020
Change
17
200
24
80
56
377
53
215
28
99
46
441
212 %
8%
17 %
24 %
-18 %
17 %
Fossil fuelled generation is price sensitive and able to adjust output in line
with seasonal demand. Intermittent plants do however generate when
there is wind, sun and running water. Typically yearly generation profiles
are illustrated in Figure 9. Intermittent hydro has a distinct seasonal profile with the peak inflow in the spring when snow is melting in the mountains. Wind generation have string weekly variations, and to some extent
seasonal variations (in general more wind in the winter time).
40
Demand response in the Nordic electricity market
Figure 9: Example of yearly generation profiles
FIGURE
9
80%
70%
60%
50%
40%
30%
20%
10%
1
191
381
571
761
951
1141
1331
1521
1711
1901
2091
2281
2471
2661
2851
3041
3231
3421
3611
3801
3991
4181
4371
4561
4751
4941
5131
5321
5511
5701
5891
6081
6271
6461
6651
6841
7031
7221
7411
7601
7791
7981
8171
8361
8551
0%
CHP
Umagasinert vann
Vind
9
Source: THEMA Consulting Group
Source: THEMA Consulting Group.
Finland has a substantial share of condensing power plants that are
reaching the end of their economic life time before 2020. This resource,
in combination with hydro power, is the main source of flexibility in
Finland. Fingrid (2014) expects the capacity in condensing power plants
to be reduced from 3200 MW in 2013 to 1500 MW in 2020.
We expect a substantial positive Nordic power balance in 2020 due to
the investments in renewable power.
The changes in Nordic power generation will individually and all together influence the value of different kinds of flexibility:
 Surplus of power will reduce the risk of energy shortage, limiting the
risk of high peak prices, and possibly leading to low and negative
prices in certain periods.
 Power surplus and low electricity prices may increase electricity
consumption and create peak load challenges in local grids.
 Price volatility will increase with more intermittent generation
providing incentives to deliver flexibility.
 Duration of price differences may increase – periods of high/ low
generation from wind may last several days.
 Demand for intra-day trade and/ or balancing services may increase
in order to manage intermittency.
Demand response in the Nordic electricity market
41
5.2.2
Generation in new geographical areas
Thermal plants in Denmark, Sweden and Finland are located close to
cities with high demand for electricity (and also heat). Norwegian hydro
power was built to supply power intensive industry and where located
close to the industrial sites.
Intermittent hydro and wind are however located where there is water and wind, and the plants generate electricity whenever there the
water runs and the wind blows. The location of generation may be far
from consumers and the pattern of the generation may deviate substantially from that of the consumers. The high increase of intermittent hydro and wind generation in the Nordic countries will thus put strain on
the transmission grid and increase the need for grid enforcements.
Traditionally power has been generated in large facilities and transported from the generators via high-voltage transmission grid and into
local grid to be delivered to the consumers. The distribution grid has connected the transmission grid and the consumer. Intermittent, small scale
power generation from run of rivers, wind and solar panels are more often connected at lower grid levels and thereby increasing the strain on
local grids. This will induce investments also at lower grid levels and is
increasing the complexity of grid operation at this level. At the DSO level
there are no system services to help balance the system and to means of
congestion management. Increasing complexity at the DSO level may in
theory create a demand for introducing system services at lower grid levels. This will then create a local market for flexibility, both from consumers and generators that are connected to the local grid. At lower grid levels, the volumes needed to handle disturbances and limitation in grid capacity will be smaller than at the TSO level. Hence, the demand side may
be more relevant for delivering system services at DSO level. However, we
do not see any development towards balancing markets at the DSO level,
and do not see this as likely during the next 10 years.
5.3 Changes in consumption
There are two major trends in energy consumption in Europe serving to
limiting the flexibility of consumers, increasing the cost of flexibility and
potentially also increasing the risk of peak load challenges. First, the
price sensitive consumption from PII is reduced and second, there is less
use of fossil fuels in buildings. New services and price sensitive households may however counter some of this development.
42
Demand response in the Nordic electricity market
5.3.1
Industrial consumption
Due to the financial crisis, the electricity consumption from industry in
the Nordic countries has been reduced the last 5–6 years. The reduction
has been most evident in the Finnish forest industry (Figure 10). Fingrid
(2013) states that the flexibility on the demand side is reduced due to
reduced consumption in this sector.
Figure
10: Electricity
consumption from Finnish industry 2003-2013. TWh
FIGURE
10
Source: THEMA Consulting Group
Source: Energia (2014).
10
PII constitutes a significant part of consumption in Norway and Sweden.
Consumption from forest industry has also been reduced in Norway
over the last few years. PII is exposed to global markets and global competition and there is a continuous risk of closures and fluctuations in the
levels of consumption.
Reductions in power consumption from PII may be partly replaced by
new demand from district heating. Electricity consumption from district
heating is highly price sensitive, will likely exploit periods of low (or
negative) electricity prices and substitute other energy sources with
electricity.
In Denmark there are currently 4 TWh of energy delivered from rural
gas fired CHP plants. The gas fired CHP plants are no longer economically viable due to a combination of too high gas prices, too low power prices, less hours of operation due to the growth in renewables and due to
regulatory changes. The owners are considering ways to replace the gas
fired CHP plants and a report from Dansk Energi (2013) indicates that
large heat pumps supporting district heating may be the way forward
post 2020. Klimakomissionen came to a similar conclusion in 2010 suggesting that heat pumps may represent a source of flexible electricity
usage if they are connected to large heat accumulation tanks.
Demand response in the Nordic electricity market
43
A similar increased use of electricity in district heating can be observed
in Norway, both as base load from heat pumps and as a flexible middleand top load. According to Norsk Energi and THEMA (2013), 10–15 percent of district heating was produced in electric boilers the last few years
(from an installed capacity of 400 MW). Most electric boilers have flexible
grid tariffs, which mean that the grid company can disconnect them on a
short notice if needed. A flexible connection (tariff) is often required from
a commercial perspective. For the 10 largest district heating plants in
Norway, 73 percent of the installed capacity are heat pumps (31 MW
power input) that may be disconnected by the grid companies.
PII represents the most flexible consumption in the system. Reductions in of the consumption of PII may increase the value of flexibility in
the power system, especially for system services. Increased value of
system services (or costs for the TSO) will increase the pressure for adjusting product definitions in the balancing markets in order to attract
more volumes (increase liquidity).
5.3.2
Changes in energy use in buildings
There are three main trends that may change the electricity usage from
buildings:
 Increased energy efficiency may increase or decrease the peak load
depending on how energy efficiency is implemented.
 Phase out of oil burners used for heating will reduce price sensitivity
from buildings that may switch between using electric and oil
burners today. Replacing oil burners with electric heating (included
heat pumps) adds to peak load challenges.
 New electric appliances with high power usage may increase peak
loads. Some appliances may also cause voltage disturbance in the
local grid.
Energy efficiency may reduce both energy usage and peak load from
new and refurbished buildings. The energy consumption will be reduced
due to both more efficient appliances and a reduced need for heat in
better isolated and refurbished buildings. This development is illustrated in the left figure below.
For some changes on the demand side, there is a substantial risk that
the peak load increases even if the electricity consumption is reduced
(which means the load factor is reduced). This is illustrated on the right
figure below.
44
Demand response in the Nordic electricity market
Figure 11: Energy efficiency may increase or decrease the peak load
Reduced energy – increased peak power
Power usage
Power usage
Energy and power reduction
One way to reduce energy usage is to reduce storage of heat and thereby
reduce the heat loss. Reduced night temperatures in buildings will increase energy efficiency, but will increase the need for power to quickly
increase the temperature in the morning and thereby increase the peak
load. The same logic applies for tank less water heaters. If you remove
the water tank you remove the heat loss and thereby increase energy
efficiency – this is the argument for the EU ban for hot water tanks. But if
most showering occurs during the hours of peak load, the peak will increase if tank less water heaters are introduces in the Nordic market.
The power needed in a tank less water heater might be ten times higher
than one with tank (NVE, 2014). Hence the peak power from an electrically heated villa that removes the water tank might be doubled from
today’s level, even for villas with electrical heating. The potential for
demand response from a tank less water heater is also more difficult to
obtain, sine this require changing the time people shower.
Support schemes and incentives are established to limit the use of oil
burners. The question is what will replace them. High taxes on electricity
(in Denmark and Sweden) may reduce the likelihood of electric heating
to replacing oil burners, or it might be partly restricted by regulation
(for new buildings in Norway). Heat pumps and biofuel is thus more
likely to replace oil burners. Even though heat pumps are energy efficient, the use of heat pumps will increase power loads when replacing
oil burners. This is particularly important if air based heat pumps are
preferred. During the coldest days, the air based heat pumps will not be
efficient, and it is likely that additional (electrical) heat will be necessary.
Demand response in the Nordic electricity market
45
A broad introduction of products with a high power outlet may also
cause problems for the power system. Loading of electrical cars (EVs)
and induction cook tops are two examples. The power needed to load an
EV varies between different cars and charges, the range is 2–22 kW
(Grønn Bil, 2013). A transformation attached to the charger may reduce
the power outlet substantially. The number of EV is increasing rapidly in
Norway, but the growth is slow in Sweden, Finland and Denmark where
the economic incentives for buying EVs are weaker.
Large power loads with rapid load changes may also increase power disturbances in the distribution grids and thereby increase the need
for demand response or other means of correcting disturbances (SINTEF, 2012).
The changes in electricity consumption in buildings may lead to:
 Increased or decreased peak demand from building – and therefore
increase/ decrease the value of flexibility to reduce peak loads in the
local grid.
 Energy efficiency may increase cost of flexibility and thus limit the
competitiveness of building as a flexibility provider.
5.3.3
Will new services increase the price sensitivity in
households?
Technology and services enabling demand response from consumers is
still not commonly used in the Nordic market. We therefore first describe potential types of services in general before we include a short
description of services currently offered in the Nordic market.
Services may include information services, optimisation services (portfolio management) and physical management of loads (and generation):
 Information services: Service providers offer a wide range of
information services from ad-hoc advice on the phone to advanced
web-based solutions where customers follow the market
development and the development of their own portfolio. Market
monitoring may include automatic or manual warnings when prices
moves or when certain incidents happens or when e.g. switching to
another energy sources is profitable.
 Portfolio management services: Service providers may also offer wide
range of different portfolio optimization services. Customers may buy
and sell energy with the service provider, either online or on the
phone, the service provider may just provide advice to the customer
or the service provider may have a mandate to optimize the portfolio
on behalf of the client (e.g. manage the whole decision making
process of demand responses as shown in Figure 15). Services
tailored specifically towards demand response may involve collecting
46
Demand response in the Nordic electricity market
relevant external data like weather reports, evaluating portfolio
flexibility, calculate costs and activate bids and offers in the market. A
service provider may also provide a service driven by comfort levels
(e.g. maintaining 20 degrees indoor temperature) as opposed to
“selling electricity.”
 Physical power management: This service includes the physical
nomination of loads (and generation) in spot- and intraday markets
and the activation of demand response for selling flexibility in
balancing markets or minimizing imbalances for balance responsible
parties. Service providers may aggregate loads from several
customers in order to meet minimum volume requirements for
selling demand response in balancing markets.
We distinguish between individual services where the service provider
manage the position of one client and aggregator services where positions of several clients are aggregated and managed by the service provider as one position. A given client may want both individual services
for parts of the portfolio and in addition participate in an aggregated
service for other parts of the portfolio.
New technology and services to help customers save electricity are
being offered to Nordic consumers. Most products control consumption
based on expected energy demand (due to weather forecasts) and prices
(spot price and/or time-of-use grid tariffs). The Finnish energy companies, Fortum and Helsinki Energia, have e.g. introduced products that
optimize electricity used for heating water in heat storage tanks used for
space heating in single homes. The products are still new (introduced in
2014) and the market penetration is yet limited.
The Norwegian Lyse Energi has developed a similar product called
Smartly. Smartly includes automatic control of heating, lighting, intruder
and fire alarms. This product will be offered to customers as hourly metering is rolled out in Lyses grid area, but still only a limited share of
consumers have smart meters.
The service provider Ngenic has developed a cloud-based heating
control system for Swedish households. The technology intends to optimize the customer’s comfort and energy use based on sensor data,
weather forecast, building dynamics, energy prices, grid load and behavioral patterns.
There are also international players offering products that may be expanded to facilitate demand responses. Nest (a company recently bought
by Google) offers a “smart thermostat” that will learn from your living
patterns and adjust energy usage accordingly. The Nest thermometer can
also be used to curb power consumption during peak hours. This demand
Demand response in the Nordic electricity market
47
response service is currently offered only to customers of a handful of
utilities which cooperates with Google (wired.com). Apple announced
early June 2014 a new service called HomeKit that aim to facilitate home
automation. The service does not include any hardware but may work as a
communication hub and standard for home automation appliances. In the
same manner as iTunes store serve as a market place for apps developed
by others, HomeKit will provide a market place for home automation
hardware. The success of this service is therefore dependent on both user
acceptance and companies to develop home automation devices prepared
to use the HomeKit platform (techcrunch.com).
The main selling point for energy related home automation devices
may be the money saved, but also the aspect of environmental friendliness or the customer empowerment in itself. For all demand response
products currently offered in the Nordic markets, it is still early to predict how this market will develop and what influence it will have on
price sensitivity and demand flexibility in households.
5.4 Changes in infrastructure
5.4.1
High investments in the Nordic grid and
interconnectors
The Nordic countries plan considerable investments in both transmission and distribution. These investments will limit congestions, increase
trade between areas and reduce price differences across the Nordic region and thereby serve as an alternative to demand flexibility.
Transmission and interconnectors
The Nordic region is integrated internally and with adjacent regions
with interconnections as shown in Figure 12. Still do we experience bottlenecks in the transmission system and power prices may vary significantly both within and between countries. Each TSO decides on the bidding zone structure. The number of bidding zones in Norway may vary
over time (dynamic bidding zones), but today there are five bidding areas. Eastern and Western Denmark are two bidding areas and since November 2011 have Sweden been split in four bidding zones. Finland is
one bidding zone.
48
Demand response in the Nordic electricity market
Figure 12: Shares of congestion hours between neighboring price areas and
maximum transmission capacities in 2012
FIGURE 11
12
Source: THEMA Consulting Group
Source: NordReg (2013).
The Nordic TSOs are foreseeing significant grid investment for the next
decade, both as upgrades, new grid to connect renewables and interconnections within the Nordics and towards the rest of Europe. Table 7
shows estimated investments in transmission and interconnectors for
the four countries the next ten years.
According to the Swedish grid development plan (2013), the Swedish
government has the ambition to invest in order to eliminate bottlenecks
within the Nordics and towards Continental Europe.
Increased transmission capacity serves to limit price differences
across borders; it limits extreme peak prices and enables the sharing of
flexibility across the region. More capacity to Continental Europe may
increase the value of flexibility in the Nordic region as the markets south
of us has more intraday price volatility.
Demand response in the Nordic electricity market
49
Table 7: Planned investments in the Nordic transmission grid (incl. interconnectors)
Norway
Sweden
Denmark
Finland
6,1–8,5 billion EUR
6,1–7,2 billion EUR (2025)
2,7 billion EUR (2021)
1 billion EUR (2022)
Source: Statnett (2013), SVK (2013), Energinet.dk (2013) and Fingrid (2012).
Distribution grid
Several of the Nordic countries face major investments in the distribution grid. Estimates made by the Norwegian regulator NVE stipulates
investments of approx. 9 billion euros in the distribution grid within the
next decade. An impact assessment prepared for the Finnish Ministry of
Employment and the Economy (2012) estimates similar investments of
approx. 3.5 billion euros in Finland. According to Dong Energy in Denmark the implementation of smart technology and better measuring,
surveillance and control of the grid revealed that the capacity in the distribution grid was larger than anticipated. The larger capacity implied a
reduced need for further grid investments and/or flexibility from the
demand side. Large investments in the distribution grid the upcoming
years increase the grid capacity, and limit the value of demand reductions during peak load hours.
Smart meters are installed for all consumers in Sweden (daily measuring) and Finland (hourly measuring). Both Norway and Denmark have
decided to implement smart meters for all grid customers within 2020,
which imply that all Nordic grid customers will have smart meters in few
years. Smart meters provide distribution companies with more accurate
data on loads and flows. Better surveillance, measurement and control of
the grid may reveal more grid capacity (as in Denmark), enable more
efficient grid operations and consequently limit the demand for (and
value of) flexibility from consumers connected at the DSO level.
5.5 Developments in market solutions and regulation
The design of market solutions and regulations affect the amount of flexibility provided in the market, both in the energy markets and to the TSOs
in the balancing markets. The developments are along two dimensions:
1. Products and product structure. The way that individual products are
defined (ref section 3.3.1 and 3.3.2) determines to what extent
generators and consumers are able to bid their flexibility into the
market. The combined mix of products determines the overall level of
flexibility provided in the market.
2. Market integration. Integration of markets limit the need for flexible
resources since larger systems manage uncertainties and variations
more efficiently that smaller systems. Integration will allow for
50
Demand response in the Nordic electricity market
flexible resources to be more efficiently shared across borders in the
various market timeframes. The overall value of flexibility may be
reduced due to competition. Access to a larger market may however
provide sellers of flexibility with new business opportunities.
5.5.1
Developments in the day-ahead and intraday markets
Implicit auctions and market coupling is established as target model in
the European day-ahead market. This solution is replacing the explicit
auctions as the method for capacity allocation on European borders.
Further improvements of the methodology are discussed today. All these
developments will contribute to make flexibility more efficiently available in the day-ahead market, and thus also limiting the need for flexibility for balancing during operation:
 Bidding zone delimitation: Bidding zones may in the future to a larger
extent be defined by congestions in the power system as opposed to
national borders. This will provide more efficient price signals to
price sensitive generators and consumers in the day-ahead market
and improve the efficiency within the bidding zones and of the crossborder flows/trading.
 Flow-based capacity allocation: Flow-based solutions allocate
capacity by optimising total economic surplus within the physical
limits of the grid (traditionally capacity has been set by TSOs before
the optimisation is done). Flow-based allocation may provide for a
more efficient utilization of resources within bidding zones and
across borders.
 Close to real-time. Trading intraday (and possibly also day-ahead)
may in the future take place closer to the hour of operation. The two
physical markets may also at some stage merge. This may serve to
limit imbalances and the need for TSO-balancing.
 Time resolution. A shift from hourly resolution to 15-minute
resolution is discussed. This will make new flexibility visible in the
market place also limiting some of the operational challenges and
balancing needs that the TSOs experience today when hours shift.
February 4th 2014 market coupling was established in Northwest Europe,
known as the Price Coupling of Regions (PCR) and is now including the
Nordic region, the Baltic region, Germany, Austria, France, the Netherlands,
Belgium, Luxembourg, the UK, Switzerland, Spain, Portugal, Italy and the
Czech Republic. Flexibility provided in the day-ahead market is thus traded
across this combined region. This market is to be expanded to become a
platform for a common European day-ahead market. The Northwest European region is currently working to similarly create a common intraday
market, also to be expandable to become a European solution.
Demand response in the Nordic electricity market
51
Product development and geographic integration of the day-ahead
and intraday markets serves to attract more flexibility into the markets,
improving competition, reducing costs of managing fluctuations in demand and limiting the need for TSO balancing real-time.
5.5.2
Developments in markets for balancing
TSOs are also working along the same axis of product development and
cross border integration. The aim is to both limit the demand for balancing
resources and making more balancing resources available at a lower cost.
Statnett has identified three areas driving the demand for balancing
resources:
 Deviations between scheduled and actual generation and load.
 Unforeseen incidents.
 Inefficient market design features such as the hourly time-resolution.
We expect future developments that will address all the three areas that
will further limit the demand for balancing resources in the future for all
Nordic countries.
First, the deviation between schedule and actual generation/load is
reduced. Market players are becoming better at predicting generation
and load, due to better weather forecasts and opportunities to trade
closer to real-time.
Second, significant investments in the grid will improve security
margins limiting the risk of unforeseen events in the grid.
Finally, developments in the market design may both serve to limit the
demand for balancing resources and to provide for more cost efficient
balancing (se chapter 5.4.1). Further, in order to attract more balancing
resources at a lower cost the TSOs are likely to develop more tailor made
products, also accepting smaller volumes and purchasing more short-term
(daily/weekly auctions as opposed to quarterly/yearly).
The Nordic TSOs work to harmonize products across the region and
towards adjacent regions (ultimately across Europe) in order to facilitate competition, trade and cooperation. The Nordic market for tertiary
reserves (regulerkraft) is to be complemented with a new Nordic market
for Load Frequency Control (LFC). There are also bilateral projects and
agreements to exchange balancing resources, e.g. are Svenska Kraftnät
and Statnett in the process of establishing a pilot project for allocating
capacity on the Hasle-cut for exchange of FRR-A and Energinet.dk and
Statnett have agreed to allocate capacity on SK4 to exchange LFC.
52
Demand response in the Nordic electricity market
5.5.3
Developments of capacity markets
Several countries in Europe have implemented various forms of socalled capacity mechanisms, and more are to follow. Capacity mechanisms imply that generators and load receive a fixed payment – usually
per annum – in order to be available in the market. Some capacity mechanisms only remunerate generation capacity, but the trend is towards
more market based and market wide solutions that also include flexible
load. Thus far, however, capacity mechanisms are national in scope and
individually designed from country to country. Loads that participate in
the mechanism are obliged to limit their off-take from the grid to a certain maximum amount during times of stress in the system. Notification
times and the definition of stress varies from system to system.
The impact of capacity mechanism on the demand for and value of
flexibility is uncertain, due to two opposing effects:
 Capacity mechanisms tend to increase the total generation capacity
in the system, thus reducing the value of flexibility.
 Capacity remuneration for loads incentivize development of demand
response in order to participate in capacity mechanisms.
Capacity mechanisms are introduced for security of supply reasons, and
are typically linked to a concern that energy-only markets with increasing shares of intermittent and unpredictable renewable generation will
not be able to promote sufficient investments in controllable and flexible
generation capacity to cover demand in peak load. An important design
element in capacity mechanisms is the definition of the capacity adequacy level, i.e. to determine how much capacity the market needs. The capacity adequacy assessment will be based on forecasts of demand and
supply, taking uncertainty into account. Since the purpose of capacity
mechanisms is precautionary and can be seen as an insurance policy, it
is often argued that the capacity adequacy requirement will be set “too
high”. Moreover, most capacity mechanisms fail to, or only partly, take
contributions from cross-border capacity into account. With more flexible generation capacity in the system, capacity shortages will occur less
frequently and be less severe. Hence, price variations in the spot and
intraday markets will be muted.
On the other hand, demand side participation in capacity mechanisms
is encouraged and recommended by the EU guidelines on capacity mechanisms. This means that demand response can compete with flexible generation capacity for capacity remuneration. Generally, this should stimulate increased supply of demand response, particularly for larger loads,
such as industry, which may be able to reduce or move peak loads. Smaller
consumers, such as households and small industry, would probably not
find it profitable to participate in capacity mechanism. Hence, demand
response among these consumers is not likely not be enhanced by imple-
Demand response in the Nordic electricity market
53
mentation of capacity mechanisms. In the longer term, however, services
aggregating demand response among small consumers could develop.
5.5.4
Market solutions and regulations formalized in
European network codes
The market solutions discussed previously in this chapter are being defined in European regulation. The aim is to facilitate the harmonisation,
integration and efficiency of the European electricity market. The main
regulatory framework for this harmonization is the so-called 3rd Energy
Package (Regulation (EC) No 714/2009), consisting of one Directive and
a number of Regulations. The Directive required transposition in national legislation, while regulations are directly binding requirements for all
Member States.
Part of the package is to establish Network Codes as a set of direct
binding rules. Network Codes are drafted by ENTSO-E, with guidance
from the Agency for the Cooperation of Energy Regulators (ACER). Most
of the Network Codes are expected to be formally adopted by the end of
2014. The Network Codes are to a varying degree also covering the areas
of responsibility for DSOs. The Codes are often referring to the “relevant
network operator” being it a DSO or a TSO. The distribution of roles and
responsibilities between TSOs and DSOs is being discussed as part of the
process of developing Network Codes.
The Network Codes regulate markets, operations and connection:
 Market codes: These codes define the market solutions where
flexibility is priced and traded, including Network Codes for Capacity
Allocation and Congestion Management (day-ahead and intraday
markets), Electricity Balancing (balancing markets) and Forward
Capacity Allocation (forward markets).
 Operational codes: These codes define the minimum criteria and the
roles of the system operators (DSOs and TSOs) related to ensuring
system security and security of supply. There are four operational
codes; Load Frequency Control and Reserves, Operational Security,
Operational Planning and Scheduling and Emergency and
Restoration. When these Network Codes define minimum criteria for
system operation in Europe, they also affect the demand for
balancing reserves and thus also the value of flexibility.
 Connection codes: These codes regulate the connection of generation
and demand to the grid. There are three Connection codes;
Requirements for Generators, Demand Connection Code and HVDC
Connection Code. These Network Codes define the roles and the
relationship between TSOs and generators/consumers/ DSOs and set
the minimum criteria for connections. The requirements relate to the
size and impact of the units connected to the grid, whereas stricter
54
Demand response in the Nordic electricity market
requirements apply to units that have bigger impact on the network
and on cross-border power exchange.
The DSO level is both directly and indirectly affected by the Network
Codes. The Codes regulate how TSOs are to connect generation, consumption and DSOs to the national grid, but some codes also have direct
impact on the DSO by regulating system operations and the connection
of new generation and load on the distribution level. The Network Codes
defines a minimum level of requirements to all member states. The Nordic region where the power system already is quite efficient will therefore be less affected by regulations in the Network Codes than areas with
a less developed market system.
Demand response in the Nordic electricity market
55
6. How can demand flexibility
be efficient?
The need for flexibility in the power system can be met by resource on
the supply side, storage of power/heat, grid expansions and interactions
with other energy systems such as heating and gas, and by demand flexibility. The competitiveness of the demand side in delivering flexibility
depends on the cost of demand flexibility and the availability alternative
flexibility in the market. Whether the demand response has the characteristics of the flexibility demanded, is an additional question. Descriptions of the potential for consumer flexibility often lack the detailed
characteristics of this potential – and thereby cloud the technical potential to deliver flexibility services. Efficient participation of demand flexibility in the Nordic market requires efficient markets in general, including price signals facing the consumer to reflect the market price and
underlying cost drivers of electricity distribution.
Analysing the competitiveness of demand response is not within the
scope of this project, but in this chapter we will further explore the cost
components of demand flexibility and discuss possible measures to
promote demand flexibility.
6.1 Estimated potential for demand flexibility
6.1.1
The estimated Nordic potential
Gaia (2011) estimated the potential for demand flexibility in the Nordic
countries (Figure 14). Most of the flexibility is in Sweden and Norway,
there is some flexibility in Finland and very limited in Denmark.
The volumes identified are uncertain and there are economical, technical and practical barriers to realising these volumes. Increased energy
efficiency may further “threaten” to reduce the potential for demand
response by limiting the use of electric hot water tanks in buildings.
Figure 14 Potential for demand response in the Nordic countries (Gaia 2011)
8000
6000
7000
5000
6000
4000
5000
Norway
3000
Denmark
4000
2000
Sweden
3000
Finland
2000
1000
Denmark
Sweden
Finland
1000
0
0
Industry
Source: Gaia (2011).
Source: THEMA Consulting Group
6.1.2
Norway
Housholds min.
Housholds max.
Source: THEMA Consulting Group
15
Examples of potentials from different consumers
Several studies have estimated flexibility potentials from different types
of loads. Most studies focus on the technical potential, represented by
flexibility volumes. The characteristics of the flexibility for different
types of loads are usually not addressed and the value of flexibility in
different markets is thus to a limited degree understood.
Norwegian households. The Norwegian research group SINTEF Energi
and a DSO did a study focused on daily demand response from households in Norway. They used smart meters with hourly metering, remote
load control, time of day tariff and a token provided to the customers
indicating peak hours. A demand response of 1 kWh/h (1 kW) for customers with electrical water heaters was observed. By aggregating this
response, the potential for demand response from 50 per cent of Norwegian households is estimated to 1000 MWh/h (corresponding to 4.2 per
cent of registered peak load demand in Norway).
Swedish heaters. The Elforsk project “Effektstyrning på användarsidan vid effektbristsituationer” (2006a) examined the possibility to
control the load of the electric heating and water heaters owned by
Swedish customers with home automation. The experiment showed an
average controllable load of 4–5 kW per house at 10–15 degrees below
zero. The results imply a technical potential for load control of electric
heating for up to two hours of a total of 1500 MW in Sweden.
Swedish medium-sized industry. Elforsk (2006b) analyses the conditions for load reductions measures by medium-sized electricity customers (ironworks and steelworks, foundries, the chemical industry, the
food industry, the heat treatment industry and the real estate industry).
The study estimates the total potential for these customers to lie between 300 and 340 MW. The real estate industry contributes with more
than 200 MW of the potential. The large potential in this industry is
caused by the low costs of the load reduction and that it is relatively easy
to postpone the start-up of ventilation systems with up to three hours.
The industrial companies may contribute with load reductions up to 130
MW. The potential depends on the state of the market as large parts of
58
Demand response in the Nordic electricity market
16
the load reductions have to take advantage of over-capacity utilization.
The duration og load reduction from the industry is one to two hours.
Swedish PII. The Swedish power system was at the beginning of 2000
characterized by having a tight capacity balance. In that regard Svenska
Kraftnät and Energimyndigheten established the project “Industribud”
with the purpose to trigger load reductions in the industrial sector on
market based conditions. The project included about 30 power intensive
industries, of which most of the companies had the possibility to reduce
their load with 5–50 MW a few hours. The total technical potential for
load reductions in the power intensive sector was estimated to 1600
MW. To achieve the full potential requires very high prices (up to 13 000
SEK/MWh) (SVK, 2002).
Danish service sector. EA Energianalyse (2011) estimates that about 5
TWh of the Danish electricity use in the industry, trading and service
sector may shift their electricity consumption up to 12 hours. However,
the industry requires very high prices to alter their consumption patterns. A majority of this flexibility is defined as load-shift flexibility. According to EA Energianalyse 50 percent of the electricity used for cooling and freezing processes in production companies might be flexible,
while as much as 70 percent of the electricity used for the same purposes in the trade and service sector might be flexible (supermarkets). Supermarkets are closed during nights and may use these hours for extra
cooling, which may reduce their demand for cooling during peak hours
in the morning. Ventilation is the second largest contributor to demand
flexibility at large electricity consumers. EA Energianalyse (2011) estimates that 15 percent of the electricity used for ventilation in the trade
and service sector might be flexible. Electricity used for ventilation in
industrial companies is expected to have a larger potential for flexibility
due to a less sensitive comfort level in this sector.
6.2 The costs side of flexibility
Relevant costs for enabling demand response from industry, large buildings and households are:
 Cost of consequences of demand response.
 Time and management cost.
 Costs of handling external data.
 Costs of technology and service providers.
The consumers have a decision making process where they consider the
costs listed above against potential revenues from selling flexibility in
the market. Figure 15 illustrates this decision making process.
Demand response in the Nordic electricity market
59
FIGURE 15
Figure 15: Decision making process for a provider of demand response
External data
Internal data
Cost of flexibility
Electricity usage
Measuring
Availabilty of
data
Consequences
of flexibility
Cost of
consequences
Market data
Prices and
tarifs
Availabilty of
data
Decision on
optimal
response
Enabling
actions/
technology
Demand
Response
Other relevant incentives
Data
Availabilty of
data
Evalutation
Both the
listed
costGroupelements and the decision process is further disSource:
THEMA Consulting
cussed in this chapter.
17
6.2.1
The cost of consequences of demand response
The consumers cost of demand response will vary significantly depending on the actual consequence of changes in electric loads. The costs of
shutting down electricity usage or to shift the consumption to a different
time has a cost to the consumer in terms of lost production of goods/
services or reduced comfort level. Hence the limited price sensitivity of
electricity consumption. The cost of lost services or production depends
on how consumers value these services and products.
Costs and consequences are summed up in Table 8.
Table 8: Costs of consequences of demand response
Type of flexibility
Type of load
Cost for industry
Cost in buildings
Shut down energy
usage
Processes that may be
interrupted
Value of goods not being
produced and possible
fees or loss of goodwill
for not delivering
Reduced comfort and
loss of productivity
Shift in type of energy
source
Loads supported by backup with alternative
energy source
Fixed cost of having an alternative fuel source (capital
costs, maintenance and operation).
Fuel cost
Shift in time of electricity usage
Loads with inertia
No cost if production and
quality are not reduced.
No cost if comfort and
productivity is not
affected.
Loads or processes with
storage or cache
Cost of keeping cache in
the production process.
Cost of installing
storage and loss of
stored energy.
Processes or appliances
with excess capacity
No loss if limits are not
broken
The cost of planning
and adjusting
The loss from replacing the use of electricity with another energy source
is simply the price difference between the alternative fuels, and the cost
60
Demand response in the Nordic electricity market
of providing for the backup energy source, since industrial output and
comfort level is unaffected.
If the time and frequency of interruption is limited according to the
actual inertia or cache/ storage, these loads may be interrupted without
any practical or noticeable consequences.
If there is a risk, even a small one, that interruption in electricity consumption may affect the total production or comfort, this risk itself may
have a significant cost even if the interruption does not happen since
consumers will have costs related to preparing for an outage.
6.2.2
Time and management costs
All changes in how and when energy is spent, both in the industry, service industry and buildings, require management attention and costs
related to manning, analysis and preparatory work. These costs are often underestimated when evaluating potentials for energy efficiency and
demand responses. Nevertheless, this cost may represent an important
barrier to realise the potential for demand flexibility, and could limit the
availability of otherwise economic viable flexibility.
The smaller the loads in question, the more critical is the impact of
cost of time and management on whether to unleash the economic potential of demand response. Small loads (buildings) must be handled in a
simple and standard way to reduce costs – or they will not be cost efficient compared to larger loads (industry) or generation.
6.2.3
Costs of external data
Demand response is triggered by price signals in the market and access
to external market data is a prerequisite for demand response. The following four requirements apply to the availability of external data:
1. On the right timeframe. The timeframe for input data (e.g. price
signals, consumption limits related grid tariffs or signals from system
operator) and output data (measured consumption) must
correspond to the time frame of demand response.
2. For the relevant players. Demand response may be activated by the
consumer or by third parties (e.g. suppliers, providers of energy
services, aggregators or a system operator). Activation may be done
manually or automatic.
3. On a standardized and user-friendly format. Cost efficient automatic
IT-solutions is in most cases critically important, in particular is this
the case for small loads.
4. In a safe and cost efficient way. Internet may be used for collecting
general data like spot prices and grid tariffs to be used by home
automation. However, it may not be either safe or efficient enough for
Demand response in the Nordic electricity market
61
service providers to send direct response signals to change loads in
buildings through internet. For such purposes, the communication
channel set up to collect measure data from smart meters will be a
better alternative (THEMA and Devoteam daVinci, 2012).
6.2.4
Cost of services and technology enabling demand
response
Service providers may bring additional volumes of flexibility to the market when they improve margins though economies of scale (limiting
costs) and better optimization of flexibility (enhancing revenues). The
cost of service providers are shared among the customers and will normally include:
 Technology. Investment and implementation of equipment for
exchange of information, optimization and execution of load changes
(included in-house communication). Energy management systems
and automation are relevant both to improve energy efficiency and to
enable demand response.
 Competence. Competence on e.g. power markets, market operation,
trading, risk management, regulatory issues and new technology.
 Administration. Costs of performing the services provided to the
customer.
Table 9 lists some products offered in the Nordic market and their prices.
Table 9: Costs of some demand response services focusing on small consumers
Country
Service provider
Product
Instalment cost
Fixed monthly cost
Finland
Helsingin Energia
Termo home
automatation
600 Euros
6 Euros
Finland
Fortum
Fortum Fiksu
124 Euros
15 Euros (first three years)
4,95 Euros (succeeding years)
Norway
Lyse Energi
Smartly heating
control
850 Euros*
4,75 Euros
Norway
Lyse Energi
Smartly light control
1000 Euros*
3,50
Sweden
Ngenic
Ngenic tune
550 Euros
333 Euros
0
5,50 Euros
*investment support may cover up to 35 percent of the instalment costs.
62
Demand response in the Nordic electricity market
6.3 Are the consumers faced with efficient price
signals?
A prerequisite for demand response is that consumers are faced with
efficient price signals. As described earlier, the consumer experience
price signals in the day-ahead and intraday markets, in grid tariffs and in
balancing markets. Measurement data and market data must also be
available to the consumer and/ or service providers in the right time
frame and the right format for the consumer to be able to respond to
price signals.
6.3.1
The total cost of electricity differs between countries
and the size of consumers
The Nordic electricity bill consists of the following components: power
price, grid connection/usage cost (grid tariff) and tax. Taxes and levies
that are not linked to tariffs or power price serves to limit the strength of
the price signal. Figure 16 below illustrates the composition of the electricity bill for households and large industry in the Nordic countries.
Figure 16: The total price of electricity for Nordic consumers
FIGURE 16
A kWh < consumption < 15 000 kWh
5000
FIGURE20
16000
B MWh < Consumption < 70 000 MWh
EUR/kWh
EUR/kWh
0,30
0,30
0,25
0,25
0,20
0,20
0,15
0,15
0,10
0,10
0,05
0,05
0,00
Denmark
Energy and supply
Finland
Sweden
Network costs
Source: THEMA Consulting Group
Norway
Taxes and levies
0,00
Denmark
Energy and supply
Finland
Sweden
Network costs
Norway
Taxes and levies
19
Source:18
THEMA Consulting Group
Source: Eurostat (2014).
As reflected in Figure 17, there are large price differences between the
two groups of customers. Network costs cause most of the difference.
Prices are relatively equal in the Nordics for small for large industry
while prices for households vary significantly, mainly due to different
levels of taxes and levies.
6.3.2
Price signals in the spot prices
The Nordic electricity suppliers offer a variety of supply contract. Fixed
price contracts, spot price contracts and default suppliers contracts are
the most common types of contracts used in the Nordic market:
Demand response in the Nordic electricity market
63
 Fixed price contracts, for example for one year, imply that the power
supplier cannot alter the price during the contract period, even if the
spot prices change.
 Variable price contracts implies that the electricity price changes
based on changes in the spot price level, but hourly price variations is
not reflected.
 Spot price contracts charge the customers the Elspot price plus a
fixed mark-up.
 Customers who do not actively choose a power contract are on socalled default suppliers contracts. There are two default suppliers’
contracts; one provides an assurance that consumer has access to a
retailer with price protection 2 for consumers. The second only
provides an assurance that the consumer can purchase electricity
from a predetermined supplier (NordReg, 2013b).
Contract type affects the customers’ incentives to be flexible. The price
signals to the consumer will only be influenced by the spot price if the
hourly price is reflected in the contract between the supplier and the
consumer. In that regard, both spot contracts and hourly prices are preconditions for the customers having incentives to shift consumption
between hours. Fixed price and variable contract offer no incentives for
the customers to shift demand between hours. Variable contracts may
provide an incentive to respond to more long-term price differences. If
the power balance lifts power prices up on a permanent basis, this will
be reflected in the price in a variable contract, providing an incentive for
consumers to consume less. Fixed price contracts “hide” most of the
price signal, which imply that the customers have close to zero incentives to react to the underlying spot price.
Figure 17 illustrates the price differences in the retail market between the four countries. Norway and Sweden, where a substantial part
of the consumers are on spot contracts, have the retail prices varying
throughout the year while consumers in Finland and Denmark where
large parts of consumers are on default suppliers contracts, (NordReg,
2013b) experience more flat prices throughout the year.
──────────────────────────
Denmark has opted for the first model. For this supply product the Danish Energy Regulator Authority
(DERA) regulates the price to ensure that the mark-up on these products is not higher than the mark-up on
corresponding products in the free market. In Finland the prices for the customers under obligation to
supply contract are not regulated as such, but the prices have to be reasonable.
2
64
Demand response in the Nordic electricity market
Figure 17: Retail prices in the Nordic countries in 2012 (excluded VAT, taxes and
gridFIGURE
tariffs) 17
Source: NordReg (2014).
Source: THEMA Consulting Group
6.3.3
20
Cost of imbalances
As described earlier, BRPs are faced with the cost of the imbalances they
cause. The spot price is set to balance bids (supply) and offers (demand)
in the day-ahead market. Flexibility of consumers is reflected in price
sensitive bids. However, demand response may also imply that consumers adjust their load intraday and after the spot price is set, potentially
limiting load to levels below what was anticipated day-ahead. The possibility to limit consumption intraday may lead to imbalances for the power supplier being a Balance Responsible Party (BRP). Only large consumers participating in the day-ahead market have balance responsibility. The retail companies nominate volumes in the day-ahead market
and have balancing responsibility on behalf of their customers being
households, large buildings and SMEs. Thus, large consumers and retail
companies may want to balance their portfolio in the intra-day market
in order to limit imbalances.
The retail companies bundle the cost of balancing into the margin
they charge their customers. Thus, small consumers are not individually
exposed to the cost of imbalances. The cost is implicit in the retail electricity price and there is no price incentive to the individual consumer.
As a consequence, if there is a large total volume of demand response
from non-BRP based on the day-ahead price, this may in theory have
effect on the intra-day price, and thereby creating a situation of overreactions in the intra-day price for the hours with high day-ahead prices.
Such development may create unpredictability in the hourly prices and
reduce the markets understanding and reliability in the price formation.
This effect is described in SWECO (2011) and Elforsk (2013). We do
however expect this intraday flexibility to develop somewhat over time
and that the BRP will be able to observe, learn and adjust their bidding
Demand response in the Nordic electricity market
65
strategies in the day-ahead market accordingly. Thus, we see the negative consequences for price formation in the intra-day market described
by SWECO and Elforsk in reality to be limited (see however chapter 5.4.5
for a discussion of the cost of imbalances for the retailer caused by demand response).
6.4 Possible measures to more efficiently use
demand flexibility
As a general rule in economic efficient markets, measures should only be
implemented to correct market failures having a negative impact on the
efficiency in the market. There are three main types of measures:
 Economic: This includes subsidies, taxes and levies.
 Regulatory: Regulation of markets and the energy sector in general,
but also general imposes and standard.
 Information: This includes information campaigns and education.
The more efficient the overall regulation of the Nordic power market is,
the more likely it is that demand flexibility will be utilised in an efficient
way. Therefore, some measures that are considered to increase efficiency
will promote demand flexibility which is cost-efficient, but in some way is
hindered to take part of different markets. Measures that more specifically
affect demand flexibility should be limited to remove obstacles for the
demand side to take part in the markets where flexibility has a value.
6.4.1
Measures for efficient pricing of flexibility
Efficient pricing of demand flexibility entails the following:
 Value: The true willingness to pay for flexibility is visible in the
market.
 Cost: The true cost of demand flexibility is visible in the market.
 Competition: Demand flexibility is exposed to competition from other
flexibility providers (power generation, storages and alternatives in
heat and gas).
Thus, demand flexibility is in particular attractive when the value of
flexibility is high and the cost of demand flexibility is low compared to
the cost of alternative sources of flexibility. We also observe that efficient use of demand flexibility requires efficient markets in general.
Thus, we do not specifically consider market solutions tailored to promote demand response. Demand response has to compete with flexibility provided by others.
66
Demand response in the Nordic electricity market
In the following we discuss measures that promote efficient pricing
of flexibility in three market timeframes. These measures are not necessarily designed to promote flexibility in demand – some measures may
limit the overall need for flexibility while other measures may create
opportunities to import flexibility from adjacent areas. Thus, the overall
aim is efficiency, and demand response can contribute to the extent it is
more efficient than alternative providers.
1. Energy trading (the planning phase):
a) Market solutions that efficiently reflects the physics of the
power system, making consumers exposed to the real cost of
power consumed and generators and grid compensated for the
value of what they deliver. Some specific measures (described in
4.5.1) include more efficient bidding zone delimitation, flowbased market coupling and market gate closure closer to realtime and thereby significantly limit the demand for balancing
resources, as indicated in Figure 13.
b) Standardized products promoting liquidity, efficient competition
and an ability to “show” flexibility in the market. Three specific
measures includes to integrate markets by adding more member
states and regions to the NWE market coupling, be open to add
variants promoting flexibility such as block-bids and flexible
one-hour bids and to consider having a shorter time-resolution
(e.g. replacing one hour with 15 minutes).
2. Real-time balancing (the operational phase):
a) Standardize target models and integrate markets across borders
and regions to provide market players with access to larger
markets and more efficient competition.
b) Consider developing a product that allows for more flexibility on
key elements of products in the market, such as accepting
smaller bids, various durations, various recovery times and
various response times. In this context, products could to some
degree be tailored to attract demand response, but demand will
still have to compete with other providers of flexibility. The
providers bid their flexibility into the market and compete on
both volume and price. The TSOs could provide transparency on
what resources they purchase and on their estimates for future
demand for flexibility. This could serve to develop a market for
short-term flexibility where demand could compete with other
providers in the market.
3. Forward reservation/capacity markets. In addition to the short-term
prices for flexible resources in the spot/intraday and balancing
phase, forward reservation/capacity markets may be considered in
order to ensure capacity adequacy:
Demand response in the Nordic electricity market
67
a) Reservation for energy trading. In the market for energy trading,
consumers buy electricity from generators. Long-term
reservation entails that TSOs intervene in the market to ensure
security of supply, including to reserve flexibility, in defined
future periods by providing an additional payment to selected
market participants who are obliged to bid flexible capacity into
the energy markets (defined energy volumes). Including
demand in such mechanisms would promote demand side
flexibility from large loads. Large industry already contribute in
the Norwegian Energy options and as strategic reserves in
Sweden. To the extent that capacity mechanisms unduly
increase generation capacity, however, they reduce the value of
demand side flexibility.
b) Reservation for real-time balancing. TSOs are the sole buyer in
these markets, and they are hence not intervening in a market
place in the same way as with reservation for energy trading.
The payment is in this case also providing an additional
incentive for making flexible resources available.
FIGURE
13 for balancing resources is reduced when time resolution is
Figure
13: Demand
reduced
Quarterly resolution
Hourly resolution
MW
Demand for
balancing
resources is
reduced when
time resolution is
reduced
MW
Sum of load and
exchange
Scheduled balance
Imbalances
Hour 1
Hour 2
TIME
Q1 Q2 Q3 Q4
Hour 1
Q1 Q2 Q3 Q4
TIME
Hour 2
Capacity markets should meet defined criteria (target model), be stand13
ardized and integrated across borders and regions to provide market
players with access to larger markets and to ensure efficient competition. The various market timeframes should also be considered as a
whole, as they are all linked to each other. An efficient energy market
may limit imbalances and thus also the need for real-time balancing.
Efficient markets for energy trading and real-time balancing may also
improve price formation and limit the need for capacity markets. Maintaining an efficient energy market is thus of fundamental importance as
68
Demand response in the Nordic electricity market
it both promotes short-term balance and limits the need for market intervention in the form of capacity mechanism.
The ideal solution is that all flexibility is visible in efficient energy
markets, limiting the need for TSO balancing in real-time. Figure 18 illustrates an optimal development, combining the measures to make markets more efficient and integrate them across borders and regions. First,
national market solutions are replaced by Nordic market solutions (also
interregional and European) promoting competition and access to larger
markets for the providers of flexibility. Second, an efficient market for
energy trading reduces the need for forward reservation and for realtime balancing. Such a development will increase liquidity and competition in markets for energy trading contributing to an overall efficiency in
the use of resources employed in the power system, including the use of
demand flexibility.
Figure 18: Combining measures, creating cross-national markets, directing
volumes towards the energy market (spot) and improving the efficiency of the
energy
market
FIGURE
18
FORWARD RESERVATION
Nordic
market
solutions:
TSOs buying reserves in
order to balance the power
system
1. DK-NO reservation for LFC
1. Elspot
1. Flexible hourly bids
2. Four hour block-bids
2. Elbas
1.
2.
3.
4.
2
3
Norway:
1
Nordic market for tertiary reserves
Nordic market for LFC
…
…
2
1.
Efficient markets – ensure room for trading/
managing flexibility in Elspot / Elbas
2.
Direct volumes towards energy trading, promoting
efficient competition and liquidity
3.
Solutions to be more Nordic and less national,
sharing resources across borders
Sweden:
6.4.2
REAL-TIME BALANCING
Market players trading
physical power between each
other
Denmark:
Finland:
ENERGY TRADING
TSOs reserving capacity in
order to ensure security of
supply
Source: THEMA Consulting Group
Regulation of the grid tariff
3
21
Grid tariffs are part of the price signal to end-users. The structure of current grid tariff models applied in the Nordic markets is outlined in section
3.3.3. The question is whether current tariff models stimulate or mitigate
demand flexibility, how tariffs should be designed and to what extent a
new design would stimulate demand flexibility in an efficient manner.
In general, efficient prices reflect the underlying costs of consumption of the good. Hence, grid tariffs should reflect the cost of transporting
electric power, i.e. transmission and distribution. Above, we have seen
that end-users in the Nordic markets to varying degrees are exposed to
prices that reflect variations in marginal grid costs.
Demand response in the Nordic electricity market
69
The cost structure in the electricity grid is characterized by high investment costs and decreasing unit costs. Doubling of the capacity of the
grid implies less than a doubling of the cost. Moreover, the grid is not
developed by increments, but in “leaps”, both for technical and economic
reasons. In addition, the grid has public good characteristics: When the
capacity is sufficient, increased consumption by one user does not (or
only to a small degree) increase the cost of other users, and if the capacity is not sufficient, all consumers are affected.
Capacity outages are costly to society and electricity supply is considered a critical infrastructure for safety, welfare and health in modern society. Thus, the grid should be able to supply electricity in (almost) all foreseeable situations. The implication is that the grid is dimensioned in order
to be able to supply electricity to all customers in peak load situations and
even if (any) one grid component trips (so called n-1 principle).3 The implication is that in most situations, there is spare capacity in the grids.
In grid operations, the only cost that varies with load is losses. The
cost of losses is the percentage of losses per kWh multiplied with the
energy price. The percentage of energy losses increase when the grid is
operated closer to its capacity, which usually coincides with periods
with high load and correspondingly high wholesale electricity prices.
Moreover, losses vary between different nodes, according to the balance
between supply and demand in each node.
Grid tariffs that vary with energy losses in the grid provide a stronger
price signal to consumers than fixed energy tariffs (flat charge per kWh).
In order to incentivize flexibility in consumption, prices should vary with
time of use, reflecting the variation in grid costs at different times, and
with location. Energy tariffs that do vary with losses typically strengthen
the price signals from the wholesale market as grid costs increase when
load is high, as do wholesale electricity prices. Average energy tariffs
hence mutes the price signals from the wholesale market, thus reducing
the value of end-user flexibility.
Some grid customers are interruptible connections in exchange for a
lower tariff. These customers usually have an alternative energy source.
Having the opportunity to cut supply to some end-users may contribute
to achieving the n-1 criterion, and postpone grid investments. Supplies
to interruptible customers are cut when it is necessary in order to balance the grid. The opportunity for customers to become interruptible
may however provide incentives for increased flexibility, which make
end-users better equipped to respond to peak prices.
Some argue that introduction of capacity pricing would reduce investment costs in the grid and increase end-user flexibility. Capacity
──────────────────────────
3 The n-1 criteria is a common criterion in grid planning. In some areas, as around bid cities, the grid is
planned with n-2 or even n-3 capacity.
70
Demand response in the Nordic electricity market
tariffs may be designed in different ways, but are difficult to set in a precise way and without adversely affecting the utilization of the grid. General capacity pricing may reduce the utilization of the grid even when
capacity is not scarce.
In cases where it is clear that the combined willingness to pay for capacity expansion among the relevant end-users does not exceed the total
costs, critical peak pricing may be a relevant option. Critical peak pricing
implies that capacity tariffs applies only in critical peak hours, and
should incentivize grid customers to reduce load in such hours.
Variable tariffs are not sufficient to cover grid costs. In order to cover
total costs, grid customers pay various fixed grid charges. These may be
differentiated by type of customer, by consumption or by load. Generally, however, residual tariffs should be neutral and not affect consumer
behaviour. Tariffs affecting consumer behaviour beyond the effect of
optimal energy tariffs and well-designed critical peak pricing, represent
a welfare loss and should be avoided.
To conclude, Energy tariffs according to marginal losses, interruptible
contracts and capacity pricing may incentivize increased end-user flexibility. Such grid tariffs should however not be implemented with the
purpose of increasing demand flexibility, but only to the extent that they
reflect underlying grid costs.
6.4.3
Regulation of the DSOs
The overall economic regulation of the DSOs are relevant in discussing
efficient utilisation of demand flexibility as an alternative to grid investments to handle peak loads. The economic regulation of DSOs in the
Nordic countries is generally based on revenue caps. The strength of
incentives in the regulation varies between the Nordic countries, but in
general, DSOs have clear incentives to invest and operate in the most
cost effective manner, including stimulating demand flexibility when this
is the most cost efficient solution. How to determine when demand response and peak shaving is a better solution than increased grid capacity
is however a bit more complicated than simple cost calculations and
must be regarded in a broader perspective.
The DSO must also take security of supply and power quality into account when evaluating how grid constraints can be handled in a cost
efficient way. For demand response to be an alternative to grid investments, the DSO must secure that the demand response is predictable
and that the response pattern will remain stable for a sufficiently long
time. There have been examples of consumers in Norway that have chosen interruptible connections in exchange for a lower tariff in periods
when disconnections have been rare. However, when the frequency of
disconnections increases, consumers switch to a grid tariffs with guaranteed connection. Grid investments may take years to plan and build,
Demand response in the Nordic electricity market
71
therefore peak shaving must be secured over longer periods of time to
be a safe alternative to investments.
It is possible to design economic regulation mechanisms for DSOs that
provide stronger incentives to develop (or at least evaluate) consumer
flexibility as an alternative to grid investments. However, the lessons
learned from both theory and practice shows that it is difficult to design
economic regulatory mechanisms that reward utility companies explicitly
to reduce grid investments (by choosing other solution than increased
grid capacity and / or underinvestment in grid) without negative economic consequences. This is partly due to the complexities we have pointed
out above, and partly because the value of demand flexibility and other
options will vary depending on the actual situation and is therefore difficult to include in the overall economic regulatory mechanisms.
The Nordic governments may consider strengthening the incentives
for efficiency in the grid regulations, but this should not be done without
evaluating the effects on security of supply and the power quality, what
incentives it will give for the grid companies to invest and taking into
account the economics of scale in grid investments.
6.4.4
Design of supply contracts
Different energy contracts will give different incentives for demand flexibility. The first aim for governments should be to make sure regulations
do not hinder the retailer’s possibility to develop and offer electricity
contracts that promote demand response, and to remove any obstacles
for the consumer to choose such contracts. The roll-out of smart meters
also to small consumers is one step in this direction (most large consumer in the Nordic has had smart meters for quite a time already).
There is ongoing work to develop a common Nordic end-user market
for electricity. Such development will reduce the barriers for electricity
retailers to enter more than one Nordic market. In the common Nordic
market it has been suggested a supplier centric model which means that
the retailer will be the customers main contact point for both the retailer
and the grid company. Grid tariffs and electricity will also be invoiced
together.
If, how and when the governments should interfere in which contracts retailer are allowed to offer is discussed in the following.
Measures focusing directly on contracts may include:
 Information: public information campaigns to increase the consumers
understanding of which contracts that are necessary to get economic
benefits from the customers demand response.
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Demand response in the Nordic electricity market
 Regulation of information about the contracts: Provide services that
compare different contracts and offers from suppliers and regulate
which information the supplier must give the consumer about the
contract.
 Regulation of contract types: standardise supplier contracts that may
provide demand response or limit the number/ types of contracts
suppliers may offer to their customers.
The energy market is complex and may be confusing to the end-users.
Due to Ofgem (2011) and Waddam & Wilson (2007) the small consumers have limits to their ability to take rational decisions in the electricity
market. For some users it is difficult to understand how the choice of
contracts for electricity supply will impact their cost of electricity. There
may also be different types of physiological barriers to change contracts
of electricity and such barriers are strengthened by the complexity of the
electricity market (THEMA, 2013c).
Hence, there is an asymmetry of information between the customers
and the suppliers of electricity. Contracts for demand response may increase the complexity for the end user. This complexity may be exploited
by the suppliers by offering contracts that are more beneficial for them
than it is for the customer. Standardisation of contracts and regulation of
what information the supplier must provide to the consumer may reduce the asymmetry between suppliers and their customers. At the same
time, a strict regulation of contracts and contract types may reduce the
innovation in this part of the sector and also the customer’s freedom of
choice. Innovation in the end-user market may be very important as
there are big changes happening in the electricity sector. Unless there
are indications of severe exploitation of end-users in the electricity sector based on asymmetry of information between the suppliers and their
end-users, this is not the right time to impose a strict regulation on
products. Providing general information to the customers, on the other
hand, will help the customers taking good choices of contracts.
6.4.5
Demand response and the risk of the retailer
Demand response could be initiated by a stand-alone service/ technology provider, an aggregator or as an integrated role of the electricity supplier. Two aspects are important when discussing the role of the commercial player initiating the demand response from electricity consumers – which market they may participate in and if they have balance
responsibility or not.
Service providers or aggregators that are not BRPs will not have to
face costs of imbalances demand response may cause. Whether this is a
problem or not, depends on the volumes of demand response and how
predictable the demand response is. If the retailer/ BRP can predict new
Demand response in the Nordic electricity market
73
responses from the customer or a portfolio of customers, based on previous responses, they will take this response patterns into account when
placing volume bids in the day-ahead market. For the response to be
predictable, the response must be based on day-ahead hourly prices
alone, grid tariffs alone or in combination with other (more or less) predictable data, like weather forecasts. This type of demand response from
customers in a portfolio will be reflected in the price formation, but in an
indirect way. How well this price sensitivity is reflected in the price formation will depend on the retailers / balancing responsible ability to
“learn” from previous responses.
For larger volumes responding to markets or price signals that are
not known to the balancing responsible, it will be impossible to predict
future demand responses based on previous responses. This will be the
case for demand responses based on system services or loads being shut
down by grid companies due error states or limiting capacity in the local
grid, which may occur unrelated to any data or information the retailer/
balancing responsible may have. If large loads are shifted in time or shut
down in ways that are unpredictable, the retailer will face imbalances
and the cost related to them, while the economic benefits will end up at a
different company. The benefiting companies may be the grid company,
the system operator, the aggregator or service provider and/or the consumer itself.
If an aggregator that handles a large portfolio of loads is not a BRP,
costs of imbalances caused by the aggregator must be covered by the
customers BRP – or by the system as a whole. To avoid the aggregator
causing costs that must be covered by others there are two options: the
aggregator must serves as a BRP for the volumes they handle or the aggregator/ consumer must have the duty to inform the BRP/ retailer
about the agreed terms of load changes between the consumer and the
aggregator. In the first option, the aggregator need to take balancing
costs into consideration when deciding on load changes. In the second
option, the BRP may include costs or risk of imbalances in the contractual terms with the consumer.
Nevertheless, the retailer/ BRP will have stronger incentives to provide their customers with services and technology to exploit demand
flexibility than other service providers. The reason for this is that it will
give retailers a clear knowledge of the consumers’ price sensitivity and
to place more correct price sensitive volume bids in the day-ahead market and to reduce their own costs of imbalances. If the retailers also act
as service providers for demand response, it gives the retailers the possibility to face the customers with the price incentives in the intra-day
market, since only BRPs may trade in this market. Hence, if the retailers
provide services for demand response from their customers, the total
value of demand response may increase and thereby the incentives to
the customers.
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Demand response in the Nordic electricity market
6.4.6
Taxes and levies
Taxes and levies may enhance or mute price signals. The main taxes on
electricity usages are VAT and electricity levies. Both VAT and levies are
substantially lower for the industry than for small electricity users. The
electricity levy represents a large share of the total cost of electricity in
to small consumers particularly in Denmark and Sweden.
The VAT is a percentage of the electricity price. Thus, VAT enhances
price signals from both grid tariffs and electricity prices and strengthens
incentives for demand response. Levies, on the other hand, are fixed fees
per kWh of electricity used and thereby limit the price signal. It is uncertain to what extent taxes and levies actually limit the efficiency of demand response.
Levies are imposed with other purposes than promoting demand response. The structure of the levy should thus reflect the reasoning of the
levy and not how it affects the volumes of demand response to price
signals. One should however try to limit the possible negative effect that
taxes and levies may have on the efficiency of price signals, e.g. may a
measures to reduce taxes or levies in high price periods reduce the efficiency of the price formation.
6.4.7
Measures to reduce costs of handling data
In section 5.2.3 we describe requirements related to data management
as a prerequisite for efficiency in demand response. Cost efficiency is in
particular important for smaller consumers and smaller loads that require a high degree of standardization and solutions to be automatic.
Easy access to data and efficient IT infrastructure will promote innovation in services and technology that may attract more flexibility to the
market. Common Nordic solutions could further improve efficiency
through more competition and opportunities to exchange flexibility between areas.
All the Nordic consumers will have smart meters by 2020 making data available real-time to consumers and possibly third parties such as a
service provider or system operators (if technology allows and if consumers approve). A national or Nordic data hub may be an efficient way
to facilitate this development. Regulations on the accessibility of other
data could help limit the cost of demand response, including easy and
standardised access to relevant market prices (e.g. spot prices, intraday
prices and possibly prices in balancing and forward markets). Such access to information could improve the ability of service providers and
home automation systems to provide demand response. Detailed requirements for such a standard data format should be made in consultation with service providers. Cost efficient data handling must be considered when the supplier centric model is implemented and should be
Demand response in the Nordic electricity market
75
included in assessments of functionality in national data hubs or other
ways of handling measurement data from smart meters.
To further reduce the cost of data handling, the Nordic Governments
could also demand that grid companies and suppliers provide information on their pricing in a predefined and standard format.
The communication channel set up to download measurement data
from the smart meters to the grid companies’ data systems, may increase safety and reduce the costs of sending demand response signals
to consumers. This is in particular important to aggregators, BRPs and
other service providers that want to send direct signals to a large number of small loads. Bandwidth limitations may restrict the amount of
data and/or the frequency of the communication.
In order to ensure neutrality and competition service providers
should as a minimum have access to the communication channels when
it is not used by utilities for other purposes than downloading measurement data from consumers.
Figure 19: Illustration of possible data streams to enable demand response
Relevant data:
Availability of market prices on a
standard and useful format for
distribution (forward, spot, intraday)
Availability of tarifs and
contracted electricity prices on
a standard format
Consumer electricity use data
(Smart Meter)
6.4.8
DSO
Metering data
3rd parties:
Service
providers
Central data
hub or other
data sharing
point
Local communication
Aggregator
Automation
technologi
(user)
Nordic standards
Nordic governments may impose the use of new standards to promote
efficiency and demand response. Standards may be relevant e.g. for electric equipment connected to grid (limit voltage disturbances, promote
demand response) and for technical equipment like EV chargers, heat
pumps, etc (limit voltage disturbances due to fast load changes).
Standards for equipment that may cause voltage disturbances may
reduce grid problems (and therefore, the need for demand response).
Details in such technical standards must be further assessed to evaluate
both the need and the detailed requirements necessary. Standards may
also be considered to ensure that loads and equipment (for instance heat
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Demand response in the Nordic electricity market
pumps) that may provide flexibility are able to efficiently manage frequently shifting loads.
In general, the Nordic countries should follow international standards, and provide common standards in the Nordic market when no
European or international standards are available.
6.4.9
R&D
In chapter 4 we described developments and uncertainties. The future
value of flexibility is uncertain due to uncertainty about how the changes
in the power system may influence the need for flexibility. In our opinion, getting a better understanding of how the cost and value of demand
flexibility will develop is crucial and should be focused in research.
Efficient markets and regulation will be essential to optimise the economics of the power system. Research on how to set up efficient market
solutions can be done without knowing how the value of flexibility develops. In particular, research to improve the understanding of what
actually drives the cost of investments and operation of DSOs and TSOs
would be useful. Without such understanding, reflecting the underlying
cost and cost drivers of the grid in the grid tariffs will be impossible.
Research on the technical potential for demand response is less important as long as one do not know how the price signals (the demand
for flexibility) will develop. On the other hand, we think it is very relevant to evaluate consumers’ price sensitivity towards the price signals
given today. For instance, there are price signals in grid tariffs in (some
areas) in all the Nordic countries. It should be possible to assess actual
responses to actual price signals in today’s market – especially for larger
consumers. Smart meters have been in place for large customers and
large buildings in all the Nordic countries, and by 2020 even small consumers will have Smart Meters installed. Studies of measure data may
itself provide a lot more knowledge on electricity demand and usage,
and also provide new insights on the potential price sensitivity of the
consumers. In addition, differences between different types of consumers may be revealed.
On the technology side, we assume that the technology for demand response already exists. For small consumers, the costs may be a problem.
R&D may help bring costs down. Moreover, demonstration of technology
may foster innovation and reduced costs of technology in this field.
Demand response in the Nordic electricity market
77
7. Input to a nordic strategy for
demand response
A strategy for demand response has to consider developments and uncertainties discussed in chapter 4 and possible measures discussed in chapter
5. We observe that efficient use of demand flexibility requires efficient
markets in general. Thus, market solutions should not be tailored to promote demand response especially as we argue that the future value of
demand flexibility actually is uncertain. Regulation and markets should
ensure utilization of the most cost efficient resources at all times, be it on
the demand or the supply side. Increased granularity of time resolution in
the spot markets and bidding closer to the operational hour could make
more flexibility available to the market, and also reduce the need for balancing. More efficient allocation of grid capacity and redefinition of bidding zones could cater for more efficient spot price formation as well. Balancing markets can be improved by increased integration among the Nordic countries and harmonized product definitions across borders. Reduced
bidding sizes (from 10 to 5 MW is now tested), the duration of load adjustments, response times, and intervals between disconnections are (nonexhaustive) examples of product characteristic that should be assessed.
Grid tariffs may incentivize increased end-user flexibility. Such grid tariffs
should however not be implemented in order to increase flexibility, but in
order to reflect underlying grid costs more efficiently.
The purpose of this project is to give input to the Nordic governments on
a strategy on demand flexibility for the period up to 2025. In conclusion
we give some input on how to develop strategies and recommend some
measures to promote demand flexibility in a cost efficient way.
7.1 Developing strategy under uncertainty
A strategy for demand response has to consider developments and uncertainties discussed in chapter 4 and possible measures discussed in
chapter 5. Figure 20 illustrates possible future scenarios for the competitiveness of demands response. Demand response is obviously attractive
in a scenario where the value of flexibility is high and the cost of demand
flexibility is low compared to the cost of alternative sources of flexibility.
Figure 20: Different scenarios for the future competitiveness of demand response
FIGURE 20
Value of flexibility in the power system
HIGH
High value of
flexibility - other
sources are
better
High value of
flexibility demand is the
best source
HIGH
LOW
Low value of
flexibility - other
sources are
better
Cost of demand
flexibilty relativly
to other sources
Low value of
flexibility demand is the
best source
LOW
Source: THEMA Consulting Group
To develop a clear strategy is challenging when the future development
is uncertain. In general, there are four overall alternatives for making a
strategy under uncertainty:
1. Develop a strategy for what is considered to be the most likely
development.
2. Develop strategies that will prove to be efficient in all scenarios.
3. Postpone strategic decisions:
a) Wait and see, but follow the development closely.
b) Aim to reduce the uncertainty by increasing knowledge.
4. Develop low cost (and low risk) strategic options to prepare for one
or more scenarios.
Alternative one is a gamble, it entails picking one of the scenarios in
Figure 20 and develop a strategy fit this scenario. If the scenario proves
right, you win. If the future development is according to one of the other
three scenarios your strategy will fail to address the future situation. We
have argued that the future value of demand flexibility is uncertain – a
strategy based on picking one possible future is therefore risky.
It is off course attractive to develop a robust strategy that works in all
possible scenarios – if this is a realistic approach (alternative two).
However, a combination of alternative two, three and four is also attractive catering for unforeseen developments not taken into consideration
in all scenarios.
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Demand response in the Nordic electricity market
23
7.2 Overall recommendations for all Nordic countries
As stated in chapter 4, the long term value of flexibility and the competitiveness of demand as a provider of flexibility is not clearly understood,
both due to uncertainty in the development of power consumption and
the impact of new market solutions and new technology. This uncertainty should be addressed by pursuing three overall strategic objectives:
promote efficient market solutions, increase the knowledge and understanding on the factors affecting the value of (demand) flexibility, and
reduce the cost of demand response from small consumers by making
relevant data easily available for consumers and third parties as a low
cost, low risk measure.
7.2.1
Efficient market solutions
We observe that efficient use of demand flexibility requires efficient
markets in general. Thus, market solutions should not be tailored to
promote demand response. Regulation and markets should ensure utilization of the most cost efficient resources at all times, be it on the demand or the supply side. Some overall guidelines to promote efficient
use of demand flexibility in power markets are:
 The cost of using flexibility in the day-ahead and intraday markets is
in general less than applying it for balancing purposes in the realtime markets. Thus, limiting real-time imbalances by having an
efficient day-ahead and intraday market is an attractive measure.
 All prices in the various market timeframes should reflect the real
underlying cost (spot prices, intraday prices, balancing costs, grid
tariffs and system services).
 Prices should be set in competitive markets and market solutions
should be harmonised across borders and regions allowing for
efficient cross border competition and sharing of resources.
 Avoid making interventions in the markets that may have adverse
effects.
The Nordic power market has become increasingly integrated over the
last 20 years, resulting in one of the world’s most efficient power markets. The Nordic market is integrated in European solutions for dayahead and intraday markets as defined in European regulation (ENTSOE Grid Codes). The balancing market and retail market will however to a
greater extent be developed regionally. Nordic Governments and regulators will thus have a role in developing and integrating balancing markets and retail markets in the region. Nordic governments and regulators may also contribute in the European process of developing target
solutions for all market timeframes and sharing the Nordic experience
Demand response in the Nordic electricity market
81
as a frontrunner in the development of market solutions and of integrating markets across borders.
The plans for a common retail market, common balancing settlement
and the increased focus on common balancing markets are examples of
initiatives taken by Nordic Governments and regulators to improve the
Nordic market design further. This work should continue. In sections
6.3.1 and 6.3.2, we identify possible improvements in market design.
7.2.2
Understanding the cost and value of demand
flexibility
Increased efficiency in the Nordic market design could be the only
measure to promote flexibility in the Nordic market. But, there is a risk
that some improvements in the market design are not possible to implement during the next 10 years and/or that such improvements will
not fully address future challenges, for instance in the balancing markets. Thus other measures may prove necessary to efficiently maintain
security and quality of supply. Regulators and policymaker have to deal
with the uncertainties related to the future demand for flexibility and
the competitiveness of consumers as providers of flexibility (as illustrated in figure 18). Most of the research on demand flexibility focusses on
how to promote demand response, whereas the relevant question is really what the cost and value of demand response will be. The starting point
for research in this field should therefore be:
 Increase the understanding of how the planned changes in
generation, consumption, grid investments, market solutions and
new technology influence the future demand for flexibility in the
Nordic power system.
 Increase the understanding of the characteristics of flexibility, its
future value and the volumes needed.
 Assess potentials for supply of flexibility, differentiated based on the
relevant characteristics identified above.
 Assess under which market and regulatory conditions the technical
potentials are relevant.
 Identify market failures that may prevent demand flexibility.
The engagement of small consumers in the power market has so far been
very limited. The lack of hourly measurement and smart meters may be
one reason for this. The Nordic regulators should therefore seize the opportunity learn from the experience of the first movers in the field, i.e.:
 Finland: Monitor and evaluate the impact of the full roll-out of smart
meters with hourly metering:
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Demand response in the Nordic electricity market
a) Monitoring: Interesting indicators include changes in energy
contracts (from fixed/time of use to hourly pricing), responses
to price signals, the uptake of new products (like Fortum Fiksu
and Helens Termo), entry of new service providers, and changes
in consumption patterns.
b) Evaluation: How changes in consumer patterns affect the power
system (spot prices, peak load in grid, and the demand for
balancing services).
 Norway: Evaluate the effects of combined hourly measurement and
hourly pricing on consumer behaviour in areas where the grid
companies have installed smart meters at an early stage and where
most consumers have spot price contracts.
 All Nordic countries: Most large buildings have installed smart
meters for several years and have been able to exploit and explore
the potential benefits of engaging in the power market. Assessment
on how these consumers have responded to price signals in spot
prices and/or grid tariffs could provide useful information on what to
expect from smaller consumers.
7.2.3
Making relevant data easily available for consumers
and third parties
Demand response from small electricity loads requires the transaction
cost to be low. The cost of demand flexibility in buildings can be reduced
by imposing standard formats on data/information, required for small
consumers who respond to spot prices and grid tariffs. The service providers, enabling demand response, should also get access to the measured data collected from smart meters. The Nordic regulators should:
 Define useful data formats for grid tariffs, energy contracts, forward
prices and day-ahead prices. Service providers of demand response
(and energy efficiency) should be invited to give input on how
different formats will influence the cost of data handling.
 Define efficient ways of making prices available for the consumers
and third parties, included safe authorisation. In countries with
national data hubs for electricity measure data, the hub may be a part
of the solution. If no national hub is set up, other ways of
communication have to be defined.
 Define for which services and how the two-way communication
channel between the smart meter and DSO should be made available
for third parties, and require DSOs to give third parties access
accordingly.
Demand response in the Nordic electricity market
83
 Require DSOs, suppliers and Nord Pool Spot to provide their data on
standard formats and make prices available to consumers and third
parties.
It is likely that the most efficient approach is coordinated implementation across the Nordic region. All differences between national markets
will to some extent act as market barriers to cross-border competition
for service providers and for the penetration of new technology.
7.3 Recommendations per market area
In this section, we summarize our recommendations on measures to efficiently promote demand flexibility in the Nordic power system. We distinguish between measures promoting demand flexibility in the spot market,
in the provision of system services and in order to reduce grid costs.
7.3.1
The spot price formation
Nordic spot price formation is already market based and highly efficient
compared to most other power markets. Further development is however still desirable:
 Assess the costs and benefits of changes in the Nordic spot market
design, in particular, how changes in the market design will influence
the demand (and cost) of balancing services. Potential changes to
assess:
a) shorter time resolution (from hourly to 15 minutes)
b) market closure closer to the operating hour
c) more accurate capacity allocation of grid
d) bidding zones defined by physical constraints and by national
borders
e) consider new products that promote flexibility (in addition to
e.g. flexible one-hour bids)
 Develop a road map for implementation of changes in the Nordic spot
market design and possibly in the North West Europe spot market
design.
Price formation should reflect the price sensitivity on the demand side,
including the price sensitivity of small consumers. Retailers will indirectly include the price response of small consumers in their bids – provided
that retailers can predict the demand response. However, TSOs and
DSOs may aggregate and activate consumer flexibility or use it to reduce
peak loads in a manner that is unpredictable for the consumers’ retailer.
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Demand response in the Nordic electricity market
If that is the case, such service providers should be required to be balance responsible parties:
 Aggregators, and other market service providers enabling demand
response on other than day-ahead spot prices, should be balance
responsible parties.
 Such regulation will be most effective if implemented in a coordinated
manner in the Nordic region in line with the implementation of a
common balancing settlement in Finland (2015), and Sweden and
Norway (2016).
7.3.2
Balancing markets
All measures to increase efficient settlement of the spot prices, as described above, serve to limit the imbalances occurring after gate closure,
and may thus reduce the need for balancing resources. If changes in the
market design in the spot markets are decided, the implications on the
demand for balancing markets should be evaluated. Making the energy
market work as efficiently as possible is thus crucial for balancing markets as well.
The Nordic regulators should however consider the following
measures specifically aimed at improving the balancing markets:
 Assess how products should be designed to increase the participation
of generators and consumers (the bid size, duration, recovery time
and response time).
 Assess the costs and benefits of extending the mandatory implementtation of autonomous operation to facilitate system frequency control
for consumers both at TSO and DSO level.
 Define a target model for balancing markets and implement common
Nordic balancing markets.
 Work closely together with TSOs to assess and implement improved
market design for balancing. If a Nordic cooperation is not established, the national regulator and TSO should continue this work on a
national level.
7.3.3
Peak load in local grids
The economic regulation of DSOs in the Nordic countries is generally
based on income caps. This implies that DSOs have incentives to stimulate demand flexibility when this is the most cost efficient solution.
Peak load in the local grid is only a challenge if the capacity in the local grid is scarce. Both the roll-out of smart meters and increasing implementation of Smart Grid elements in the local grids will provide better information on existing loads related to the capacity in the grid.
Demand response in the Nordic electricity market
85
Grid tariffs according to marginal losses, interruptible contracts and
capacity pricing may incentivize increased end-user flexibility. Such grid
tariffs should however not be implemented in order to increase flexibility, but in order to reflect underlying grid costs more efficiently. However, improved grid tariff structures could stimulate increased consumer
flexibility. National regulators should therefore:
 Assess the underlying cost drivers for grid investments and
operation.
 Impose grid tariffs that reflect the underlying costs.
A potential cost driver in local grids may be appliances that cause voltage disturbances. Thus, national regulators should:
 Assess the implication different electrical appliances has on voltage
disturbances.
 Evaluate the cost benefit of imposing technical standards on
electrical appliances (for instance heat pumps, charges of EVs,
tankless water heaters etc) to avoid negative impact on the quality of
power in local grids.
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Demand response in the Nordic electricity market
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förbrukningsmönster och minska sin elförbrukning idag och i framtiden. Stockholm:
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Demand response in the Nordic electricity market
9. Sammendrag
Denne rapporten er utarbeidet på opdrag fra Elmarkedsgruppen (Nordisk ministerråd) og gir innspill til hvordan forbrukerfleksibilitet kan
fremmes på en effektiv måte i de nordiske landene.
Rapporten er del av de nordiske statsministrenes initiativ for
grønn vekst: ”Norden – ledende i grønn vekst”. Les mer i nettmagasinet
”Green Growth the Nordic Way” på www.nordicway.org eller på
www.norden.org/greengrowth
Kraftsystemet er etablert for å møte forbrukernes behov. I kraftforsyningen må det til enhver tid være balanse mellom produksjon og forbruk.
Den løpende balansen mellom forbruk og produksjon har primært vært
sikret ved at kraftproduksjon har tilpasset seg forbruk (produksjonsfleksibilitet). For at forbrukerfleksibilitet skal utnyttes, må forbrukssiden ha
en viss prissensitivitet. I dagens situasjon er det i all hovedsak kraftintensiv industri som tilpasser forbruket ved høye kraftpriser og som tilbyr sin
fleksibilitet i markedet, men også kombinasjonen av olje- og elkjeler har
bidratt med fleksibilitet i alle de nordiske landene.
Kraftsystemet er nå i betydelig omstilling. Mer fornybar energi fases
inn, markedene blir integrert på tvers av land og regioner og ny teknologi skaper nye muligheter for å utnytte ressursene i kraftsystemet. De
senere år har det vokst frem forventninger om at smarte løsninger i
kraftsystemet (f.eks. AMS i private hjem) vil gi en betydelig økning i forbrukerfleksibiliteten og at kraftsystemet er avhengig av denne fleksibiliteten for å klare fornybaromstillingen.
Vi tror det er gode grunner til å nyansere, og kanskje dempe, forventningene til forbrukerfleksibilitetens rolle i fremtiden. Forbrukerfleksibilitet er ikke et mål i seg selv. Fleksibilitet er et middel for å effektivt balansere kraftsystemet, herunder håndtere forbrukstopper, uforutsette
avvik i produksjon/forbruk og utfall/hendelser i kraftsystemet. Forbrukerfleksibiliteten er attraktiv i den grad den er konkurransedyktig i forhold til annen type fleksibilitet.
Vi anser to forhold som særlig viktige i arbeidet med å utvikle en
nordisk strategi for forbukerfleksibilitet:
 Etterspørsel etter fleksibilitet: Særlige tiltak for å fremme
forbrukerfleksibilitet bør ikke igangsettes uten en dypere forståelse
av den framtidig etterspørseln etter fleksibilitet og for hvordan
denne etterspørselen best kan dekkes.
 Markedet: En nordisk strategi for forbrukerfleksibilitet bør sikre
effektiv utnyttelse av fleksibiliteten i kraftsystemet generelt –
uavhengig av om fleksibiliteten kommer fra forbruk, produksjon,
lagring eller ved forsterkinger av kraftnettet.
I det følgende drøfter vi de to forholdene nevnt ovenfor mer inngående.
9.1 Forstå etterspørselen etter fleksibilitet bedre
Mange peker på at en økende andel uregulerbar kraftproduksjon og flere
utenlandsforbindelser vil øke behovet for fleksibilitet i kraftsystemet og
at dette behovet må dekkes av forbrukerfleksibilitet. Spesifikke tiltak
mot forbrukssiden vil normalt være mindre effektivt enn generelle tiltak,
f.eks gjennom markeder, og bør derfor kun benyttes dersom det er særskilte årsaker til det. Vi kan ikke se at behovet for forbrukerfleksibilitet
er tilstrekkelig dokumentert, og mener at spesifikke tiltak for å fremme
forbrukerfleksibilitet, særlig fra små forbrukere, ikke bør settes i verk
uten en bedre forståelse av hvilke problemer som skal løses ved en aktivisering av forbrukerne.
Det er tre forhold som må dokumenteres bedre for å forsvare spesifikke tiltakt for å fremme forbrukerfleksibilitet:
 Hvordan vil endringene i kraftproduksjon, forbruk, nettstruktur,
teknologi og regulering vil påvirke behovet for fleksibilitet i
kraftsystemet? Økt andel uregulerbar kraftproduksjon, flere
utenlandsforbindelser og redusert forbruk i kraftintensiv industri vil
bidra til økt prisvolatilitet og etterspørsel etter fleksibilitet. Men
samtidig vil økt nettkapasitet og økt markedsintegrasjon i det
nordiske kraftsystemet bidra til at dagens fleksibilitet kan utnyttes
bedre og over større områder. Det er dermed ikke gitt hvordan
etterspørselen etter fleksibilitet vil utvikle seg samlet sett og for ulike
områder i Norden.
 Hvordan vil etterspurte egenskaper ved fleksibilitet utvikle seg?
Egenskaper ved fleksibilitet hovedsakelig relatert til ulike
tidsaspekter som varighet, responstid og nødvendig innetid før lasten
igjen kan kobles ut.
 Hvilke deler av kraftsystemet har fleksibilitet med de etterspurte
egenskapene? Alternative måter å dekke behovet for fleksibilitet er økt
utnyttelse av fleksibilitet i kraftproduksjon (inkludert uregulerbar
produksjon), energilagring og import (styrking av kraftnettet). Det er
ikke gitt at forbrukersiden kan bidra med fleksibilitet av en slik
varighet og pålitelighet som etterspørres eller at forbruk er den mest
kostnadseffektive leverandøren av slik fleksibilitet.
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Demand response in the Nordic electricity market
Behovene for fleksibilitet kan videre variere mellom land og mellom
ulike områder innenfor hvert land. Sammensetningen av produksjon og
forbruk i området og nettkapasiteten til områdene rundt vil påvirke
både behovet for fleksibilitet, etterspurte egenskaper og hvem som er
den beste leverandøren av fleksibilitet.
Fleksibilitet fra forbrukerene, og da særlig mindre forbrukere, vil være
krevende å aktivere med lave kraftpriser og få pristopper som følge av en
sterk kraftbalanse de neste 10 årene. Det å kunne øke forbruk i perioder
med svært lave priser kan imidlertid være en driver for de forbrukerne
som har muligheter til det, for eksempel fjernvarmeleverandører.
9.2 Utnytte billig fleksibilitet før dyr fleksibilitet
gjennom effektive markeder
Markedsmekanismen brukes for å sikre effektiv utnyttelse av fleksibilitet i kraftsystemet. Nordpool Spot driver den nordiske markedsplassen
for handel med kraft. Det nordiske markedet er nå koblet til andre europeiske markeder (markedskobling) med løsninger som sikrer effektiv
utnyttelse av produksjon, forbruk og infrastruktur på tvers av land og
regioner. Etter at spotmarkedet stenger håndterer TSOene ubalansene
ved handel i balansemarkedet. I balansemarkedet kjøper TSOene ulike
typene fleksibilitetsprodukter som de bruker for å sikre stabil kraftforsyning i driftstimen. Det vil normalt være rimeligere å avklare tilgangen på fleksibilitet i det åpne markedet før driftstimen enn å benytte
balansetjenester i driftstimen.
Noen aktuelle tiltak for å realisere fleksibilitet på en effektiv måte i
dagens markeder kan være:
 Spotmarkedet. En finere tidsoppløsning i spotmarkedene (15 minutter
fremfor en time) og budgivning nærmere driftstimen (evt. også
markedsklarering flere ganger i døgnet fremfor en gang) vil bidra til
både gjøre produksjonsplanene mer treffsikre og gjøre mer kortsiktig
fleksibilitet tilgjengelig i spotmarkedet og derved redusere behovet for
balansering. En mer effektiv allokering av nettkapasitet og en
definering av budområdene slik at de bedre reflekterer fysiske
flaskehalser (og ikke landegrenser) vil kunne ha en tilsvarende positiv
effekt. Disse tiltakene kan gjøre betydelig mer fleksibilitet tilgjengelig i
markedet. Tiltakene kan i utgangspunktet synes enkle og billige, men
det kan ta tid å implentere dem siden markedsløsningene kobler
mange land og regioner og siden partene som eier løsningene i
fellesskap må bli enige. Likevel er det grunn til å anta at effektive
løsninger over tid vil vinne frem og bli etablert.
Demand response in the Nordic electricity market
91
 Balansemarkedet. Tilsvarende er det grunn til å anta at markedsløsningene (innkjøpsordningene) i TSOenes balansemarkeder også
effektiviseres. I de senere år er det flere eksempler på at mye ny
produksjonsfleksibilitet blir synliggjort når TSOene endrer
produktspesifikasjonene og aksepterer lavere bud (f.eks. bud ned
mot 5 MW fremfor 10 MW), når de kjøper reserver daglig/ukentlig
fremfor månedlig/kvartalsvis og når de akepterer ulik responstid og
varighet på budene. Disse tiltakene kan man i større grad
gjennomføre nasjonalt og/eller på nordisk nivå da det ennå ikke er
etablert europeiske løsninger.
 Balanseansvar til aggregatorer. For å sikre like konkurransevilkår og
effektive utnyttelse av fleksibilitet er det viktig at aktører som
aggregerer opp mange forbrukeres fleksibilitet også har balanseansvar.
I tillegg er nettariffer en viktig del av markedsløsningen og gir effektive
incentiver til fleksibilitet i produksjon og forbruk dersom de reflekterer
nettkostnadene (drift og investering) i kraftnettet.
Vi har pekt på at det ikke bør rettes spesifikke tiltak for å fremme
forbrukerfleksibilitet uten at behovet er grundigere dokumentert. Imidlertid kan man iverksette tiltak som har en lav kostnad, og som på sikt
kan vise seg å ha stor betydning dersom behovet for forbrukerfleksibilitet øker på lengre sikt. Vi foreslår ett slikt tiltak:
 Standardisering av datahåndtering til små forbrukere. For at små
forbrukere skal kunne reagere på prissignaler, er det avgjørende med
automatisering. Et krav om standardisering av all relevant pris- og
markedsinformasjon vil bidra til at tredjeparter kan tilby teknologi
og tjenester for automatisk prisrespons fra små forbrukere.
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Demand response in the Nordic electricity market
10. Attachment 1:
List of interviewees
Interviewee
Title
Company
Country
Karin Widegren
Secretary director
Samordningsrådet för
smarta elnät
Organization
Sweden
Meeting
Karima Björk
Committee Secretary,
Electricity markets
Samordningsrådet för
smarta elnät
Organization
Sweden
Meeting
Zarah Andersen
Market design analyst
Svenska Kraftnät
TSO
Sweden
Meeting
Bo Olsson
Strategy and regulatory
manager
Vattenfall
DSO
Sweden
Meeting
Peter Söderström
Smart Grids Program
Manager
Vattenfall distribution
Nordic
DSO
Sweden
Meeting
Magnus Thorstensson
Senior economist
Svensk Energi
Organization
Sweden
Meeting
Magnus Lindén
Project manager
Sweco Energuide
Consultancy
Sweden
Phone
Bernt A. Bremdal
Special advisor R&D
NCE Smart Energy
Markets
Organization
Norway
Phone
Ellen Kristine Strøm
Juliussen
Advisor-Market design
Statnett
TSO
Norway
Meeting
Erik Alexander Jansson
Engineer (M.S.)
Statnett
TSO
Norway
Meeting
Eilert Henriksen
CEO
Fredrikstad
EnergiNett AS,
DSO
Norway
Meeting
Kay Normann Sjursen
Head of industrial Power
Portfolio and Projects
Norsk Hydro
Industry
Norway
Meeting
Jukka Toivonen
Head of Electricity Sales
and Marketing
Fortum
Retailer
Finland
Meeting
Sami Sailo
Unit manager, Electricity
solutions
Helsingin Energia
DSO/Retailer
Finland
Meeting
Markku Hyvärinen,
Head of Development
Helsingin Energia
DSO/Retailer
Finland
Meeting
Jan Segerstam
Development Director
Empower Oy
Organization
Finland
Meeting
Fredrik Lasén
Solutions Advisor
There Corporations
Service provider
Finland
Meeting
Jonne Jäppinen
Development Manager
Fingrid
TSO
Finland
Phone
Peder Dybdahl Cajar
Head of future grid
development & strategy
Dong Energy
DSO
Denmark
Meeting
Sune Thorvildsen
Senior Advisor
The Confederation of
Danish Industry
Organization
Denmark
Meeting
Göran Wilke
CEO
IC-Meter
Service provider
Denmark
Meeting
Ulrik Stougaard Kiil
Market developer
Energinet.dk
TSO
Denmark
Phone
Demand response in the Nordic electricity market
TemaNord 2014:553
Ved Stranden 18
DK-1061 Copenhagen K
www.norden.org
Demand response in the
Nordic electricity market
Input to strategy on demand flexibility
Consumer flexibility is often mentioned as a solution that
can contribute to improved price formation in spot markets,
increase supply of system services and potentially reduce
local grid investments and operation costs. This report
provides input to a Nordic strategy on how to address the
potential need for consumer flexibility in a cost-efficient
manner. The main recommendation is to focus on increased
market efficiency in general, and not to promote specific
measures on the demand side unless market failures are
identified. However, it is recommended that standard data
formats on price signals to small consumers should be
further assessed.
The report is part of the Nordic Prime Ministers’ overall
green growth initiative: “The Nordic Region – leading
in green growth” – read more in the web magazine
“Green Growth the Nordic Way” at www.nordicway.org
or at www.norden.org/greengrowth
TemaNord 2014:553
ISBN 978-92-893-3771-7
ISBN 978-92-893-3773-1 (EPUB)
ISSN 0908-6692
TN2014553 omslag.indd 1
09-09-2014 12:15:52
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