Post: Lack of technical expertise will force consolidation in the UK’s demand side response industry

Lack of technical expertise will force consolidation in the UK’s demand side response industry

Reducing the amount of electricity used at peak times of the day provides intensive energy users with opportunities to reduce operational costs and generate new, long-term, recurring revenue streams whilst supporting the UK’s green goals through renewable energy.

However, not all DSR services are the same. Many aggregators, whose early business models relied on reserve balancing schemes with slower response times, are finding that profitable margins no longer exist. Older, reserve balancing schemes are based on post-fault notifications rather than real-time grid frequency events and may require assets to be turned off for up to two hours. Revenues are now considerably lower for these outdated schemes. In fact, you might say that the market for traditional reserve balancing services, such as such as short-term operating reserve (STOR), is dead.

Ensuring sufficient generation and/or demand is held in automatic readiness to maintain ±1% of the nominal 50Hz system frequency is the responsibility of the UK’s network operator, National Grid. To assist in this second-by-second balancing act, technically advanced DSR services are needed to respond in real time to continuous fluctuations in grid system frequency. An open market created by the grid operator allows aggregators to bid for DSR capacity. The challenge is for customers to select those aggregators with the experience and capability of delivering these services.

Consolidation of the market is inevitable. Aggregators offering multiple, diverse revenue streams delivered by services such as smart tariffing, grid revenue schemes and asset optimisation, will win through. Those companies that entered the DSR market at an early stage and spent considerable amounts of money on employing sales teams, rather than investing in technical R&D, will struggle to deliver the faster (more profitable) services that network operators now require. If customers are thorough in their due diligence, they will discover that many DSR companies – probably up to half – are simply marketing shells that do not have the capacity or experience to continue doing business in this rapidly changing market. Some are already disappearing as investors start to lose patience and money.

Those left standing will be the companies with strong, future-proof technology platforms that allow industries to participate in existing and future DSR schemes. Giving customers the flexibility to switch to more technically-advanced DSR programmes, such as dynamic and non-dynamic frequency response services, will allow DSR companies to grow, instill confidence in the market, and remove barriers to uptake. Some aggregators are already benefitting from higher financial returns offered by the next generation of DSR services, such as firm frequency response (FFR) and enhanced frequency response (EFR) which rely upon battery energy storage systems (BESS) to deliver faster, more frequent responses to automated signals from the grid.

The energy landscape is fundamentally changing. Grid operators are seeking innovative and cost-effective ways to maintain the balance between electric load and generation. DSR services provide an alternative to investing huge sums of money into new grid infrastructure and building new carbon-intensive power stations. A handful of forward-looking companies have made huge technical advances towards the development of flexible platforms that provide faster, more dynamic DSR services. While balancing the grid may involve managing a wide range of increasingly complex variables, choosing the right DSR aggregator to provide dynamic frequency response services will become simpler as the sector consolidates over the next few years.

Michael Phelan is the CEO and co-founder of Endeco Technologies.