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UTILITY Week 31st March 2017

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12 | 31ST MARCH - 6TH APRIL 2017 | UTILITY WEEK Policy & Regulation Event CGI working group meeting London, 7 March 2017 Three perspectives on demand-side flexibility Flexibility is strategically vital to all players in the power sector, a topic discussed at the CGI/Utility Week working group meeting this month. Ellen Bennett and the Utility Week team were there. F lexibility is top of the agenda in the power sector, as industry and policy- makers grapple with the implications of changing habits of generation, consumption and demand. Utility Week and CGI are now in the second year of a major programme of work examining the drivers of flexibility, and the challenges and opportunities it creates for companies that operate in the industry and consumers. The first piece of research, produced last year, underlined the importance of increased flexibility, with respondents calling for flex- ibility in the system to more than double by 2030. There was little doubt about the strate- gic significance of flexibility by 2030, which respondents rated 9.1 out of a possible 10. Flexibility takes three main forms – inter- connection, storage and demand-side flex- ibility, which encompasses demand-side response and demand-side storage. In the next stage of work, Utility Week and CGI are looking in greater depth at demand- side flexibility. The project began with a working group comprising three parties – aggregators, energy suppliers, and power networks – which took place in central Lon- don earlier this month. Their findings will form the basis of an in-depth piece of market research, but here we summarise the high- lights of their discussions. NETWORKS The question with demand-side flexibility (DSF) is not how big the market could become, but what is its optimum size? DSF may be presented as a relatively cheap, carbon-free way to achieve increasing electrification but it is not without risk, and the savings for network operators may not be that significant in the end. Weighing the risk of DSF against its cost and benefits is an algorithm that has yet to be developed, but that must be done with pressing urgency, according to network operators. Imperial College London has calculated that the benefits of DSF are worth £3-8 billion, and it will also prevent carbon dioxide emissions. But network operators say most of that financial benefit will be felt by suppliers. The unavoidable fact is that electricity networks must be replaced based on their condition, so although shiing demand may delay a reinforcement, the replacement of that network is inevitable at some point. DSF is not without costs either. For network operators there is a significant totex cost because of the manpower that is needed to run such schemes compared with those needed to oversee a reinforcement project. The real benefit of DSF for network opera- tors is that it buys them time and gives them options. The rise of the electric vehicle will place significant stress on electricity networks, but it is not known when and where this will hit DNOs particularly. DSF will let DNOs "wait and see"; meeting the predicted constraint with a temporary measure before any reinforcement takes place. Herein lies the limitation of DSF for network operators. If they could accurately predict when demand will increase in an area, it would always be cheaper to reinforce. But doing so will effectively remove the market for DSF in that area. There are many questions that remain unan- swered about how DSF will work in practice – and that increases the risk. For example, will DNOs or the system operator (SO) have pref- erential use of DSF measures? A contract with the SO may be more lucrative for aggregators, but DNOs have a smaller pool of resources to manage the locality. There is also a risk that aggregators will effectively be managing the local flow of energy unseen by the DNO. The greatest risk, say network operators, will be to reliability of supply. An automated system is far more likely to fail, and the likeli- hood of a lengthy power cut will increase. What is an acceptable level of reliability is a question for the government, because it may be aiming for one type of system but paying for another. The other important question is just how important a constant, reliable sup- ply of energy is to consumers? Is this even being asked? Consider the example of broadband: the smarter a society and system becomes, the "thicker" it must be. An increase in automa- tion and DSF will mean the electricity network will have to be reinforced to a greater extent than if it were dumb, which will wipe out any saving made by deferring network invest- ment. Network operators already believe that the system is reaching the limits of the modest investments which have been made in recent years. Which brings the discussion full circle – what is the optimum level of DSF?

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