By Jessica Stromback and Maria Moshnikova

As energy prices rise, grid structures age, and critical peaks become more frequent, calls to lower energy consumption throughout Europe increase in urgency. One effective method for decreasing energy usage among industry, commercial and household consumers is demand response programmes.

Often based on smart meters now slowly being mandated throughout Europe, demand response programmes refer to any programme which communicates with the end customer concerning price changes in the market and/or their own energy use and encourages them to reduce or shift their consumption (demand) of energy. The active participation of the end customers is their response to factors such as incentive pricing, new tariffs schemes, greater awareness and an increased sense of responsibility.

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Figure 1 - Potential of demand response in Europe. The moderate scenario reflects continuation of the present pace, the dynamic scenario is based on active support for demand response programmes

The theoretical potential of demand response within Europe is substantial. The European Commission’s (EC) objectives aim for a 20% reduction in energy consumption and CO2 emissions by 2020. The newest Europe-wide review, carried out by VaasaETT, Capgemini and Enerdata, estimates that if a concerted and united effort is made within Europe to push forward smart meter rollout and implement demand response programmes now, these alone could contribute to half of the EC’s 2020 energy savings target and quarter of the CO2 savings, along with Euros 50 billion in avoided investments (Figure 1)1. However, thanks partially to the splintered nature of the European market, confusion as to the merits of the programmes themselves, and a lack of unified regulatory support, progress is slowed and there is a real danger of lost potential.

Current challenges within the EU market
The European electricity market is currently facing serious regulatory and structural challenges, forcing it to rethink policies and review energy reduction methods.

Rise in consumption
During the past five years overall EU energy consumption has increased by an average 0.9% per year. Electricity consumption, however, has grown more steeply at an average of 1.5%2 per year and peak demand steeper still at 2%3 per year. According to demand forecasts4, electricity demand is predicted to continue to grow faster than average energy demand in the coming decades in almost all EU countries (an annual increase of about 0.2% in final energy demand vs an increase of about 1.5% in electricity for the EU-27 by 2020). If Europe continues to follow this present trend, not only will it fail to meet its own 2020 climate change objectives but electricity consumption will actually have risen 18%.

CO2 emissions
Electricity production also accounts for a sizeable portion of the CO2 emissions, about a quarter in the Kyoto protocol scheme and more than the half in the ETS scheme. Around 140 GW of new capacity was constructed between 2000 and 2005, the majority of which were CO2 emission intensive thermal plants. Currently CO2 emission certificates are relatively cheap and have little financial impact on the utilities. From 2013 to 2020, however, the electricity sector will have to auction 100% of its needed allowances, increasing costs for both the utilities and the end customer5.

Along with these current trends, EU member states have adopted, and are beginning to implement, energy policy objectives and measures likely to significantly impact business conditions within the industry. Strengthening energy efficiency, mitigating greenhouse gas emissions and promoting renewables will induce costs that the electricity industry and its customers will have to support, either through established cap and trade mechanisms (ETS, green or white certificates) or through feed-in tariffs and premiums for renewable electricity. Passing these costs directly on to the consumer will be increasingly difficult, due to a rise in competition within the market on one hand and attempts to protect vulnerable consumers on the other.

Security of resources
The political issues surrounding security of supply of resources is also a concern among policy makers as well as utilities. Europe remains dependent on Russia for a significant percentage of its electricity supplies as well as approximately 40% of its natural gas and 30% of crude oil supplies6. Recent tension within the region and disagreements over the balance of market share, have triggered national security concerns and questions about the wisdom of dependence. Securing supplies and reducing energy requirements is therefore a serious political concern.

EU market response
Due to this combination of factors, there are strong incentives to cut overall electricity consumption and peak demand on several levels, political, financial and environmental, rather than simply to increase production capabilities. To increase efficiency the EC has pushed for regulations that would lead to smart meter rollout – but only if the countries involved can justify the business case.

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Figure 2 – Status of smart meter rollout in EU-15 countries. The moderate scenario estimates what is most likely to take place, the dynamic accounts for the EU potential (Source: VaasaETT, Capgemini)

Currently the majority of Europe’s meters are read manually and most consumers’ electricity bills are estimated. However, this picture is quickly changing. Italy and Sweden have almost completed their smart meter rollouts, and many other European regulators, governments or utilities are either in the process of reviewing their policies or have already mandated smart meters. Germany, France, Finland and Ireland are only four examples of these. VaasaETT estimates that by 2020, 73% of EU-15 households will have installed smart meters, though this number may be even higher. The status of these countries and their plans for smart meter rollout at the time of research is outlined in Figure 2.

The spread and establishment throughout Europe of smart meters will facilitate a range of benefits to the utility companies in the form of better meter readings, more accurate billing, a protection against energy theft, etc. Yet smart metering on its own will not achieve the much needed energy reductions, CO2 reductions or peak load reductions. It is demand response that lends smart metering its social and environmental significance – but also where the most serious implementation challenges are faced.

Savings potential of individual countries
Due to the size, climate range and diverse electricity consumption patterns in Europe, each country has an individual level of potential savings. Currently the EC has formed objectives and regulations encouraging smart meter rollout, but not mandating it unless a positive business case is found. European countries are now required to review smart meters and take a stance on rollout. Most are currently in the midst of this review. Policy makers’ decisions about whether to force smart meter rollout or leave it up to the utilities, as well as how they approach the new regulatory issues involved (e.g. who owns the meter and data, standardisation and basic meter requirements, etc.), will have a great influence on whether rollout is a success in the first place and whether demand response programmes are a realistic possibility afterwards.

Some countries, for example Sweden and France, are beginning this process in a positive manner, while other countries (at least at the time of writing) were constructing policies that would in the long term obstruct the adoption of demand response and therefore make these energy savings difficult. Demand response scenarios are shown in Figure 3.

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Figure 3 – Demand response savings in EU-15 countries in 2020. The moderate scenario reflects continuation of current trends, the dynamic scenario reflects well implemented demand response

Barriers to demand response within Europe
Many barriers, not least the rollout of smart metering, currently inhibit the development and successful mass market implementation of demand response in Europe. In the longer term, however, these barriers should be seen more as challenges that can be overcome to create opportunities through committed partnerships between utilities and regulators, supported by knowledge of the prerequisites and dynamics of effective demand response.

The dramatic potential of demand response must be balanced against the reality that for the individual utilities involved there may be no evident financial gains to be made without changes in the regulatory framework of the market. There are still the regulatory issues of who owns the meter, who owns the information it generates, and how a utility is supposed to make up for the lost profits when it encourages its customers to lower usage. As in all large markets with many players and conflicting interests, movement is slow.

Within Europe research resources are sometimes wasted and progress is slowed by a lack of communication and unity. Standards of measurement for relative success or failure of pilot studies are lacking, as are effective dissemination methods and comparisons of results. This leads to a situation in which research groups are often unaware of what is taking place in their own market, let alone throughout the continent. Resources are wasted as research is widely repeated and the lack of unity adds to unnecessary suspicions about the effectiveness of demand response.

Demand response presents European utilities with a new challenge; never before have they been required to communicate with, convince and mobilise their consumers, as they will in order to achieve successful demand response programmes. Research has shown that the overwhelming majority of European customers know little or nothing about the electricity market and finds it uninteresting. Important market penetration determinants will include the commercialisation and marketing skills of the utility companies as well as their perseverance and commitment to the successful adoption and implementation of demand response. Partnership with other industries, in particular the telecom industry and other affinity partnerships, are therefore expected to play a vital role in demand response penetration.

Programme costs
The attractiveness and relevance of demand response on a national level depends on a variety of interrelated, but potentially paradoxical variables. For instance, countries with high and rising prices and a high share of disposable income connected to energy costs may see demand response as a means of self-empowering customers to save on energy costs, but only if smart metering and demand response is simultaneously not seen as an unnecessary cost, and less favourable than savings made from retail market liberalisation or regulation. This is one area in which the lack of standardised methodology and neglect of EU-wide, or even countrywide, dissemination of research results has a particularly damaging influence. It makes it difficult for regulators and utilities to collect and compare findings and rely on their information.

Countries that experience high critical peaks may on the one hand have a greater desire for peak reduction, but only if their (effectively) integrated utilities are not the ones gaining most from those peaks. Even the notion that competitive retail markets will push for demand response, while relevant, depends on the retailers owning or controlling the meters, which is rarely the case in Europe. In any case, such retailers may be too tied down by competition to risk time and PR uncertainty on a new and expensive technology.

Positive cost/benefit requirements
Until now the projected costs associated with the implementation of demand response have typically exceeded expected ROI. The average usage of a European household in roughly half of its American counterpart and therefore demand response costs must reflect this. In-house displays can be too expensive. Upgrades are required for metering, billing/CIS, data transfer/communication and other supporting infrastructure. Utilities do not even know how to get customers to adopt such initiatives, let alone fully participate in them, and then there is the issue of pricing: how to do it and what risks would that incur, political and financial. The outcome is unclear and the costs high. No one is prepared to pay for it or take the risk without a clear regulatory mandate and support.

The future appears brighter, however. The latest demand response concepts include customer feedback that negate the need for in-house displays, instead innovatively using existing infrastructure such as mobile phones, televisions and computers. Metering, communication and home automation control costs can be kept to a minimum through concepts that bypass the meter as far as possible, using ambient, localised, low cost communication mediums, low cost home automation widgets, or simple smart metering technology as opposed to expensive smart meters or add-ons that communicate to and from the utility to control the home and provide in-home feedback.

The cost/benefit challenge is equally dependent upon the effectiveness of demand response initiatives. Understanding what makes customers adopt and respond to demand response, education, feedback, pricing and automation opportunities, also holds the key to the ROI. Herein lies the need for an understanding of the customer.

Conclusion
It is difficult to state whether smart metering and demand response programmes should be forced on a national level or simply enabled and encouraged. What has been demonstrated is that utilities will successfully engage in smart meter rollout when this is mandated and they are given regulatory support. In both Sweden and Italy for example, smart meter rollout is now completed for tens of millions of consumers. However, even in these countries the main focus of attention has been on more frequent and accurate meter readings and the prevention of energy theft, rather than the potential the technology holds for demand response programmes and energy savings. If this trend continues throughout Europe, this neglect could potentially cost the continent billions in CO2 emissions, wasted Euros, and wasted electricity.

Californian electricity companies are currently engaged in a $5 billion statewide smart meter rollout with demand response capabilities7, while within a few years different forms of demand response should be available to several million American consumers nationwide. Similar measures are being taken in Australia. Despite the many challenges facing successful demand response, the European electricity market is well equipped and advanced and it will be up to the national regulators, policy makers and utilities, to go beyond mere ideals and attend to the down and dirty of making them happen.

  1. Demand Response; A decisive breakthrough for Europe” VaasaETT, Capgemini, Enerdata. 2008
  2. Both figures for the 2001-2006 period, in EU-27, Enerdata
  3. Figure for the 2002-2005 period, in UCTE region, from Capgemini European Energy Markets Observatory
  4. Enerdata
  5. “Demand Response; A decisive breakthrough for Europe” VaasaETT, Capgemini, Enerdata. 2008.
  6. Siemens P&G
  7. Energy, “Consumers: A Little Knowledge; If consumers know how much electricity they’re using, they don’t use as much”. Rebecca Smith. June 30, 2008.