Authors: Jacopo Torriti, Kate Pangbourne.

Introduction

Demand side flexibility will play a critical role in the transition to a net-zero emissions future. By empowering consumers to adjust their electricity consumption in response to low-carbon energy generation periods, demand side flexibility offers a pathway to balance renewable energy supply and demand, thereby reducing energy costs and enhancing grid stability. The opportunities are many. Indeed, there has been proliferation of individual successes of some demand-side flexibility initiatives. For instance, the National Grid ESO Demand Flexibility Service engaged 1.6 million households and businesses in the winter 0f 2023, resulting in a collective reduction of 3,300MWh of electricity. Other examples include Ofgem’s Market-wide Half-Hourly Settlement, which will increase significantly the number of flexible tariffs offered by electricity retailers with the potential to reduce peak demand by 6% and the flexibility services offered by distribution networks amount to almost 4GWh. However, amid the spotlight on individual successes, the governance dimensions of demand side flexibility have often been overlooked.  

A new policy perspective paper in Energy Policy aims to fill this gap by leveraging the principles of “good governance” to examine governance aspects of demand side flexibility in the UK. Through this exploration, the paper seeks to identify key areas for development and propose actionable policy recommendations to strengthen governance mechanisms in this crucial domain. 

Demand Side Flexibility Governance

Against the backdrop of the “good governance” principles, the article examines the governance landscape of demand side flexibility in the UK.

Click on the image to download an accessible PowerPoint version, allowing you to zoom in for better readability. The figure is explained in more detail in the blog content below.

Policy Coordination

Effective policy coordination is essential for expanding coordinated planning across network boundaries. This involves establishing processes and requirements, such as those outlined in the Distribution System Operator (DSO) Incentive Governance Document. By delineating procedures and standards for evaluating performance, including reporting obligations and incentive mechanisms, policy coordination ensures a cohesive approach to demand side flexibility. Moreover, broad participation and shared leadership foster inclusivity and collaboration among stakeholders, enabling diverse voices and perspectives to inform decision-making processes. Additionally, the evolution of roles, such as the potential role of Local Authorities as enablers of demand side flexibility, highlights the need for strategic approaches to navigate complexity and overcome existing barriers.

Performance Management

Effective performance management is crucial for enabling market participants to respond efficiently to signals reflecting available energy and network resources. This requires detailed data for forecasting and planning, as well as robust administration and management of flexibility spending. Improvements in data availability and visibility enhance understanding of system dynamics and facilitate the adoption of new approaches to forecasting and planning. Centralised administration of spending ensures accountability and facilitates informed decision-making regarding the design, build, and operation of flexibility infrastructure.

Market Transformation

Transformation of energy markets is necessary to provide detailed information about the system, thereby facilitating system operations and planning. Reforms such as Market-wide Half-Hourly Settlement enable the diffusion of Time of Use Tariffs and introduce mechanisms to attract additional demand during periods of over-supply/low prices. Introduction of Regional Energy Strategic Planners enhances accountability and coordination for strategic planning at sub-national levels. Frameworks for market access for Distributed Energy Resources and aggregators, along with strategic investment support mechanisms, incentivize investment in critical energy infrastructure and services. Digital governance considerations are essential for the design, development, and operation of flexibility digital infrastructure.

Fiscal management

Effective fiscal management is essential for ensuring that major investment decisions align with system requirements and contribute to flexibility provisions. Addressing gaps such as the missing market for low carbon flexibility requires reforms to value flexibility accurately, considering factors such as location, capability, and carbon intensity. The investment in low-carbon technologies through public spending can positively influence investment plans and drive growth in flexible technologies.

Behavioural and organisational change

Efficient responses to flexibility signals require behavioural and organisational change among system users. Accessibility of signals to Distributed Energy Resources and demand-side resources, along with efficient local flexibility optimization, enables responsive actions to meet system needs. Signals reflecting the cost of connecting at different locations inform developers and investors about the relative costs and benefits, facilitating efficient investment decisions within the grid.

Conclusion

Demand side flexibility is indispensable in achieving net-zero targets and ensuring energy security in the face of evolving energy landscapes. The absence of flexibility governance is responsible for issues like inadequate incentives and fragmented coordination among various initiatives. It is not surprising that bodies currently governing demand-side flexibility are not currently aligned, given the different goals for demand-side flexibility and the development of different flexibility services happening at the same time or on similar schedules, along with the necessary delivery methods. Additionally, there is uncertainty about how much change governance mechanisms will encourage, what types of changes, and where. The journey towards net zero requires a collaborative effort, with governance serving as the cornerstone of success. However, there is a risk that too many stakeholders, each setting different goals and measures, could complicate the process, akin to having too many cooks spoiling the broth. The various stakeholders need to be able to agree some shared objectives and work under clear governance structures. For instance, a common framework on accessible information around the existing and future potential flexibility capacity of buildings would be a great starting point. Some uniformity, such as building-level  Demand Flexibility Certificates, might be valuable for multiple stakeholders and support a variety of use cases, including network planning, flexibility procurement, and managing network load.