Post: From windfall to working capital: why demand response is a year-round cost strategy

From windfall to working capital: why demand response is a year-round cost strategy

In the past, demand response for industrial and commercial businesses was simple. A grid operator calls an event, you turn down your load for an hour or two, and a payment arrives at the end of the month. It was easy to frame this as found money, a revenue stream that cost little more than a bit of operational flexibility on the rare occasions it was needed. That framing is now out of date and the market conditions that made event-based demand response attractive are changing.

Ancillary service revenues are compressing, network charge reforms have reshaped the incentive landscape, and the businesses achieving the most meaningful financial outcomes are those that have stopped thinking about it as occasional income and started treating it as a permanent tool for reducing their cost base.

What made event-based demand response so appealing

In GB, industrial sites with half-hourly metering could earn meaningful sums by avoiding consumption during the three winter Triad periods, which determined a large slice of a site’s transmission network use of system (TNUoS) charges. Timing flexibility around those few hours a year could save tens of thousands of pounds in avoided network costs. Meanwhile, frequency response services rewarded businesses that could respond to grid signals within seconds, and the Capacity Market offered annual availability payments simply for committing to be on call.

In Australia, the equivalent was the frequency control ancillary services (FCAS) market. Industrial sites with controllable loads could earn significant revenues by providing fast-acting frequency stabilisation during grid disturbances.

In both countries, revenue flowed mostly from infrequent events or from availability commitments rather than from continuous engagement. Businesses could participate somewhat passively, responding when called upon and otherwise operating as normal.

Why that model is losing its edge

In GB, the biggest structural change came through Ofgem’s targeted charging review. From April 2023, TNUoS charges shifted to a fixed, capacity-based banding system. Triad avoidance ceased to be meaningful for most sites. For businesses whose demand response programmes were substantially built around Triad management, this was a material hit to projected returns.

In Australia, industrial and commercial sites relied on FCAS as a high-value revenue source. But the market has been saturated by the arrival of battery storage. FCAS revenue has decreased significantly driven by increased competition with more providers and assets entering the market. With the pipeline of utility-scale storage projects set to come online over the next decade, this is not a temporary trend.

The result is that businesses that structured their flexibility business cases around event revenue or ancillary service income can no longer guarantee that income arrives.

The shift towards structural cost reduction

The opportunity that is growing is using intelligence about how and when energy is consumed to reduce the cost of that energy, continuously and systematically, rather than waiting for an event to trigger a payment.

In GB, this means taking a more active approach to the wholesale market and the full stack of value available to flexible loads. With the implementation of P415, a wider range of participants are now able to optimise flexibility across the entire value stack of services in both energy and ancillary markets. P415 provides an opportunity for consumers to access the day-ahead and intra-day wholesale market without the need for trades to go through the supplier, creating an incremental revenue stream and increasing revenue opportunity.

For I&C businesses with sufficient metering and control infrastructure, this opens the door to shifting consumption systematically away from periods when wholesale prices are elevated and towards periods when prices are lower, delivering measurable savings that accrue across every trading day rather than a handful of events per winter.

Alongside wholesale market access, the Balancing Mechanism is becoming more accessible to demand-side participants. The Balancing Mechanism allows NESO to procure real-time balancing services by instructing assets to increase or decrease demand or generation, and it is becoming more accessible to flexible consumers through virtual lead parties. For industrial sites with predictable and controllable loads, integration into this market can deliver value, independent of whether a major grid stress event ever occurs.

In Australia, the evolution is towards what GridBeyond and others are calling process optimisation: the use of digital twins and solver-based optimisation to identify real operational flexibility within industrial processes, shift loads intelligently across the day in response to wholesale price signals, and reduce exposure to the high-priced intervals that remain a feature of the National Electricity Market (NEM).

While average wholesale prices have softened across several regions, the market remains highly volatile, with significant spreads between low-price intervals driven by excess solar generation during the middle of the day and high-price intervals during evening peaks. Against the decline in FCAS revenues, demand-side response and process optimisation can allow businesses to identify real flexibility opportunities, enable more informed decision-making in optimising energy, and create a more efficient and cost-effective energy strategy.

Energy management as a strategic control layer

What makes this shift more than a tactical adjustment is that it requires a different kind of infrastructure. Event-based demand response could be managed with simple monitoring and manual override procedures. A site manager received an alert, instructed the team to reduce load, and logged the response. Continuous cost optimisation requires real-time visibility of consumption at asset level, integration with market price signals, and the ability to make automated decisions about load shifting without disrupting production or operations.

This is where energy management systems have moved from a nice-to-have, to an operational necessity for any I&C business. The EMS becomes the mechanism through which market signals are translated into operational decisions, and through which the cumulative value of thousands of small adjustments is captured over the course of a year. Instead of reporting occasional demand response event revenues as a line item alongside commodity costs, energy managers can present a continuous picture of how flexibility is being used to reduce the effective cost of every megawatt-hour the business consumes.

The businesses that will adapt fastest

The transition from event income to structural cost reduction requires deliberate investment in data infrastructure, control systems, and the analytical capability to translate market signals into operational decisions. It also requires a willingness to revisit what flexibility actually means for a given site, rather than assuming that the assets enrolled in a legacy demand response programme represent the full picture of what is controllable.

Industrial sites across GB and Australia that have taken this step are finding that the range of flexible assets is broader than initially assumed. HVAC systems, compressed air, refrigeration plant, water treatment processes, materials handling equipment and on-site generation all represent load that can be modulated without material impact on output, provided the right monitoring and control architecture is in place.

The shift also creates a more resilient energy strategy. Businesses that depend on event revenues are exposed to market rule changes, competitor saturation, and seasonal variation in how often events are called. Businesses that have embedded flexibility as a cost management tool retain that value regardless of what happens to ancillary service prices or network charge structures. When the next reform lands, as it will in both GB and Australia, the business with continuous optimisation already in place is insulated from the disruption.

The core message for industrial and commercial energy users is not that demand response has lost its value. It is that the form of value has changed. The businesses best positioned for the next decade of energy costs will be those that are starting to treat their flexibility as a permanent feature of how they manage their energy bill.