Demand meeting supply: how the system operator asked households to help keep the lights on

16 Nov 2023

By Andrew Schein

As Winter approaches, National Grid is undertaking its usual preparations to ensure the lights stay on. While a big part of the job is to ensure supply can keep up, demand-side response (DSR) is gaining prominence. This isn’t new – Economy 7 has been offering cheaper off-peak electricity overnight since 1978. But DSR is shaking off its narrowly-drawn definition of paying large-scale industrial and commercial consumers to turn down, and tapping into the potential of millions of households and businesses.

Last Winter, the Electricity System Operator’s (ESO) Demand Flexibility Service (DFS) tested the use of consumer flexibility as a contingency resource for periods of peak demand and scarce supply. It has announced the scheme will run again this Winter.

What did we learn from the first Demand Flexibility Service?

Centre for Net Zero undertook in-depth analysis of the behaviour of over a million Octopus Energy customers, including the 700,000 who took part in the DFS. It shows the scheme’s remarkable impact and draws some key insights for its future design.

1. Domestic consumers can provide meaningful DSR A 40% reduction from those who opted in to an event, with overall effects comparable to a small power plant – 1642 MWh demand reduction in total, over 14.5 hours. The analysis suggests official DFS figures slightly overestimate effects by about 13%, showing the importance of improving how we measure flexibility to fairly reward households.

2. Notice period makes a difference Customers still reduce demand with shorter notice than the typical ‘day-ahead’, but effects are about a quarter lower from day-of notice. Operators and providers should iterate design for optimal participation, while maximising cost-effectiveness and flexibility provided.

3. All consumers can participate and offer meaningful response, but we saw slightly larger effects from those on smart tariffs and living in less deprived areas 10% of those who signed up from the start lived in very high deprivation postcodes, compared to 29% in very low deprivation postcodes. While all consumers see benefits to the system, this underscores the need to expand flexibility to a wider set of consumers.

4. Welfare analysis suggests positive benefits relative to the costs Between £1.05 and £2.6 benefits for every £1 spent, when considering environmental impacts and reducing the risk of lost load (e.g. blackouts). The DFS could increase its value when targeted at cases in which there is a high chance of lost load.

What does the future hold?

The DFS can grow with greater consumer engagement and smart meter penetration. It offers a cost-effective replacement for coal contingency today and reduces our reliance on gas to manage peak demands in future. It should be targeted at times and locations where there is a high risk of loss load, and also look to reduce curtailment.

However, it remains a blunt tool in the context of weak price signals in the market. We need to fundamentally rethink how suppliers and customers are incentivised to shift demand when and where supply is scarce or plentiful. Work is underway to introduce market-wide half hourly settlement and sharper locational price signals. But the challenge is significant and urgent if we are to transition to a low-cost grid powered by intermittent renewables – over 40% of electricity generation today comes from renewables, set to increase to around three-quarters of generation by 2035.

DSR needs to evolve beyond a static tool shifting demand out of predefined periods, to a dynamic system optimising demand close to real-time, enabled by technology. Schemes like the DFS show that consumers themselves have a big and exciting role to play.

This blog is by Andrew Schein, Director of Trials and Analysis at Centre for Net Zero. The blog is based on the paper: The Impact of Demand Response on Energy Consumption and Economic Welfare.