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EE901 Electricity Markets and Power System Economics

Assignment: Defining requirements for Smart Meters to enable


demand side participation

Assignment ID: 21

Submitted by: NADEEM KHOKHAR


MSc EPEwB
Registration No: 201084446
Introduction

This brief report is produced to meet the coursework requirement of ‘Electricity

markets and System Economics’ (EE901) as a part of MSc EPEwB. Topic

assigned is “Defining requirements for Smart Meters to enable demand side

participation”. Purpose of this report is not to explain in detail functionalities and

idiosyncrasies attached with smart meters and demand side participation.

Because it was asked to produce a report for a Managing Director of an energy

regulator (OFGEM in this case), the report was tailored to suit this requirement,

Terms have been defined to the extent suitable to meet the topic requirements.

Further, this report has been produced keeping in view UK power system

scenario. Smart meters referred are electric not gas meters.


Background for development of Smart Grid in UK

In March 2007 United Kingdom signed ‘European Union Renewable Energy

Directive’ which implicates harnessing energy to the tune of at least 15% from

renewable energy sources by year 2020 for UK. This move was drived by the

threat of heavy import and volatile prices of fuel(oil), environmental and climate

change issues and to meet the energy needs in a sustainable way. Therefore, the

future power system scenario could be quite different and complex in comparison

to what we have today. This means exploitation of a lot of distributed energy

resources(distributed generation, storage and demand side participation). In

today’s power system, for the most part, power flows from huge power houses to

the load centers in unidirectional way. In future, because of distributed energy

resources, most of which coming from renewables, the energy flow may not remain

unidirectional. To maintain/enhance security of supply, future grid must be capable

and smart enough to cope with the customer requirements. And in case, heating

and transport is also electrified (which there are very good chances of happening),

energy demand could go higher, requiring more control and accuracy. This is

where smart grid creeps in. Study shows that smart grid has the potential to

provide all the functionalities which the power system demands to address climate

change issues, handling/exploiting DER, optimizing the use of power system.

Demand side participation will play a vital goal to match the generation and

demand. Based on the study and assumption of Energy Networks Strategy Group,

smart grid will bring net benefits to society and therefore, further work for

development of smart grid has already been started[1]. Auspices for the
development of smart grid like the UK Government’s low carbon strategy, Ofgem’s

Low Carbon Network Fund and RPI-X@20 project are already in place.

Smart Grid and Demand Side Participation

Electricity is a peculiar commodity in terms of its inelasticity with reference to

supply and demand. This inelasticity makes power systems complex as supply

and demand has to be matched second by second to ensure security of supply.

This requires the system to be designed for peak load no matter how small peak

duration could be. Not only developing such huge infrastructure is costly, but the

same may remain idle/under-utilised during off peak times reflecting poor

efficiency and wastage of resources. Further, in the event of balancing, system

operator may have to bring such power plants online which in addition to being

costly may have very high carbon emissions. Smart grid offers the solution in

terms of giving a chance to create a new balancing mechanism, wherein demand

could be matched with generation or more specifically, with green generation.

Matching of load with generation defines demand side participation. Smart grid

can do this by involving demand side participation for the load to be reduced or

increased to match available green generation through the use of smart meters

employing extensive Information and communication technologies.

How Smart Meters will Enable Demand Side Participation:

Demand side participation refers to controlling load i.e allowing it to increase

when sufficient green energy is available, or to reduce it when the intermittency

of green energy reduces availability of power. It may be termed as load control

which in past has never been achieved substantially. Consumers will be


incentivized or penalized(high bill) to ensure desired involvement based on the

Time Of Use(TOU) and Critical Peaking Price tariffs (CPP). Information and

Communication Technologies will extensively be used to empower both

consumer and operator and initiating consumer appliance load switching. Smart

meters will be at the heart of this because of their two way communication with

consumers and energy suppliers. Consumers will have absolute knowledge of

how much energy is being used at what cost at that particular time

communicated by smart meters. Current potential for discretionary load in Great

Britain is estimated as between 9 GW and 17 GW, which is quite high[3]. Hence

the consumer will have a role to play for the sake of environment, his own

savings and in the largest interest of nation and the world.

Smart Meter Roll Out and Office of the Gas and Electricity Markets(OFGEM):

Government of United Kingdom has announced its program to roll out smart

meters in every home by the end of 2020 to achieve important milestone towards

the ultimate goal to create Smart Grid as announced by Electricity Networks

Research Group route map[2]. Since the future picture of smart grid is becoming

clearer, OFGEM in its role to protect consumers’ interest will have a far reaching

and diverse role to play. Given that smart meters will provide unparalleled

demand side participation, which has never been achieved before, development

of proper regulatory framework is extremely important. In addition to Ofgem’s

‘Low Carbon Network Fund’ to facilitate and incentivize flow of stakeholders on

the track which leads to smart grid, there may be a lot to do. Currently, as the

smart meters are being installed as pilot and trial projects, it is the best time to
set the pitch for extensive consumer interaction, feedback and involvement.

Because, demand side participation could only be achieved by active consumers,

there is a pressing need to develop short term regulations which ensure

consumers are involved by all stakeholders, especially energy suppliers and

retailers. Smart meter by itself will fail to invoke demand side participation unless

it is coupled with a willing customer. Good beginning can promise better results.

All forms of interactions, in the form of public seminars, lectures, webinars and

the detailed descriptions of incentives will be a great start and is highly

recommended. More the education, more the involvement, participation and

demand side response. There is a need to introduce more packages like

‘package of measures’ to be introduced by Ofgem in spring 2011 for the

involvement and safeguard of consumers [4].

It has already been made clear by the government that energy suppliers will be

responsible for procuring and installing smart meters. In the best interest of

system security and continued investment from private sector as a normal

business, there is a need to provide commercial regulations to devise a

mechanism as to how such a huge investment could be recovered. It is

suggested to partly utilize Ofgem’s Low Carbon Network Fund to this effect only

in the beginning until the roll out is at reasonable stage when smart meters’

financial benefits are realized. Further, schemes such as energy (clean) cash-

back schemes could be introduced where people and businesses will be paid

when they use low carbon sources to generate electricity.


Proposing a New Regulatory and Commercial Framework:

As discussed above, smart metering is expected to enable innovation in energy

demand management (smart grids and smart appliances) and energy supply

(new tariffs). Introducing smart metering will require a major change to industry

processes and practices. Hence a new regulatory regime is suggested to be

created where there is certainty on what needs to happen in the shorter term,

while providing flexibility for market development and innovation in the longer

term[5]. Such regime will be very much in line with the introduction and ongoing

operation of smart metering.

Following characteristics of the new regulatory regime are suggested:

1- Should facilitate the introduction of a new central communications

provider.

2- Enable industry change by the introducing a new code.

3- Provide a basis for development of smart grids, as well as growth in

energy management services, by the establishment of two-way

communication links between smart meters and authorized

parties(operator etc).

4- Facilitate delivery of optimized set of benefits in line with the updated

impact assessments.
Regulatory and Commercial Frameworks Provisions for New Business and

Revenue Models to Enable Demand Side Participation:

For a number of decades consumers are used to use energy with very little

reference to its cost (time of use tariff). Followed by consumers’ education, to

revolutionize the energy scenario such that it is carbon free, economical, and is

yet adequately secure, both incentives and penalties(high bill) will have to be

enforced. The entire regulatory framework will need to be developed based on

motivation, reward and penalty. It will obviously be wise to put more stress on the

motivation and benefits aspects.

For the businesses, innovative ways like renewable obligation certificates(ROCs)

will pave the way for renewable energy development and will train the future

energy suppliers/retailers in their choice of business and revenue models.

Energy Efficiency could further be achieved by developing regulations in favor of

energy efficient electrical devices. Consumers could be motivated to purchase

such devices which are more efficient. Smart meters with the functionality to

automatically switching the loads according to the availability of generation will

provide the grid the relief and the operator the time to bring more renewable

generation online(if available).

It will also be very important to provide flexibility in the commercial and regulatory

arrangements to allow for future developmental objectives of smart grid. High

priority may be given to innovation in the formulation of the framework.


Conclusion:

In view of huge challenges and ambitious objectives, UK may need to deliver a

mixture of trial projects, industry change and regulatory and commercial

developments between 2010 and 2015 as envisaged in the ENSG’s vision. This

could be supported by Ofgem’s Low Carbon Network Fund with other funding

opportunities available e.g. European Union SET funding etc. and off course

investment from private sector. To realize the dream, it will be necessary for all

stakeholders to work together to achieve such unparalleled innovative, capital

intensive and technological challenge: Smart Grid. Demand side participation will

simply emerge as a natural byproduct as more and more smart meters are

installed and we move towards the goal with the right regulatory framework in

order.
References:

[1] Electricity Networks Strategy Group(ENSG), A Smart Grid Vision, November 2009
[2] Electricity Networks Strategy Group(ENSG), Smart Grid Routemap, Feb 2010
[3] IHS Global Insight Demand side market participation report for DECC. See
http://www.decc.gov.uk/en/content/cms/consultations/electricsecure/electricsecure.aspx
[4] Smarter grids: The opportunity by Department of Energy and Climate Change Dec 2009
[5] Smart Metering Implementation Programme: Regulatory and Commercial Framework
dated: 27 July 2010
[6] The New Electricity Trading Arrangements. Ofgem/DTI Conclusions Document. October
1999
[7] GB-wide smart meter roll out for the domestic sector. Department of Energy and Climate
Change. 27.07.2010
[8] Smart Metering Implementation Programme: Prospectus. OFGEM. 27 July 2010

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