Demand side management and the Energy Bill – better late than never?

We’re on the very last lap of the Energy Bill in the House of  Commons  – this week it will be bundled up in all its now sprawling complexity, and sent off to the House of Lords to see whether they return it more or less intact back to the Commons for final assent. And, as reported in Business Green last week, at the very last moment, the Government has rushed some demand side reduction amendments onto the order paper for that final discussion. Not before time, one would have thought. There have been general noises of good intentions coming out of DECC on the need for the Bill to reflect the requirement to reduce demand as well as secure the ability to meet whatever demand arises on the energy networks, but until late last week no solid policy measures had been forthcoming. I put down some amendments at the Committee stage of the Bill to try and move those good intentions forward, and received some warm words in return, but now here the new measures actually are.

What seems to have happened is that, when the Bill was first published, no-one gave any thought to how to go about supporting or rewarding the verifiable and permanent reduction in industry or domestic supply. Some furious paddling below the surface over the last few months has at least resulted in the outline of how a scheme would work, which is reflected in the amendments.

In truth, there are big questions to resolve. If you provide, say, a Feed In Tariff type of payment for reducing your domestic or commercial demand, how can that be verified? And more importantly, how can one be sure that any reduction is not transitory while the support lasts, and doesn’t drift up again in the long term? Should support perhaps be concentrated on quantifiable ‘things’ that can be put in place without further verification, but which we know will reduce demand – like voltage optimisation programmes, replacement LED lighting, or super- efficient circulation pumps? If this were done, how do you avoid paying people for improvements they may well have undertaken anyway? And , if you do go down a path of reward, what heading do you provide it under? If it becomes part of the ‘Contracts for Difference’ that will be replacing  the Renewable Obligations (and which is ‘capped’ in total by Treasury) won’t any payments simply eat into what might be there to assist renewables coming to market? Might you just be exchanging one advance in clean energy for another retreat?

Moreover, wouldn’t more progress in demand side reduction be made if we regulated for reduction rather than rewarded it when it happens?  Could, for example, new building regulations which placed an emissions standard on new boilers produce dramatic demand reduction and efficiency results through the adoption of mini CHP boilers in the same way that condensing boilers swept the market after the last revisions?

And then there is the question of the Department’s allocation method of choice – auctioning. How would the fragile flower of demand side reduction fare against far more developed capacity proposals from those who aim to supply exponentially but at least with some security? Limited experience of auctioning elsewhere in the world seems to show that demand side reduction bids usually fare very badly, and are easily ‘squeezed out’.

So it is worth looking at the extent to which the Department has resolved some or all of these problems before concluding that at last the Energy Bill will balance concerns about supply and demand in its pages.  Two cheers, I think go to the decision to place any reward scheme under the ‘capacity market’ head. This heading in the bill is not ‘capped’ and will provide for a grand ‘auction’ of capacity, on present reckoning in 2014 or so.  It looks as if the Department will look to rewarding permanent reduction by auction bid perhaps through aggregators undertaking to run such schemes and pass payments on. Two cheers for that too, but a big question mark must remain against whether any of this will really happen. Will there be, by 2014, sufficiently robust plans developed which will enable anyone to get anything out of a general ‘capacity auction?  And, of course, there is the small matter of the design of capacity markets themselves. It will be up to Government to decide whether  forward projections of the tightness of capacity against demand really do warrant an auction. If it is felt that a new plant coming on stream or a suitable extension in plant life will maintain a decent capacity margin over that period, then there simply won’t be an auction – and on present arrangements, any demand side reduction support goes down the plughole with it.

So I imagine all eyes could be on very undeveloped proposals in the amendments to have some kind of ‘pilot auction’ restricted only to demand side measures preceding any general auction. Energy minister Greg Barker, I see from the Business Green report, thinks this  process will  then ‘unleash energy efficiency into the capacity market’. Optimistic, I think, and highly dependent on whether the initial ‘pilot’ auction is a reasonably generously funded , all-encompassing exercise which does put a rocket under Demand Side Response, or is, as too many ‘pilots’ turn out to be,  localised, underfunded and incomplete.

Personally I think the establishment of a permanent standalone auction market for demand side response which is not tied to other capacity auction arrangements is a sine qua non for making the new provisions work.  That isn’t  by any definition a ‘pilot’.  There is clearly still quite a long way to go in getting these matters right and with the late arrival of any measures at all, we’re clearly running out of time to do so.

This article was first published in Business Green. 

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