Demand side reduction: the story so far…

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Pressed to include measures to permanently reduce demand in the already sprawling Energy Bill, action-man Minister for Climate Change, Greg Barker, swings into gear. Pow! He promises agog MPs on the committee that there will be amendments to the Bill in the lords. Blam! New clauses are added that require the government to run a ‘demand side reduction’ pilot under the existing capacity payment arrangements. Zap! A £20 million pilot fund is set up with the aim of dispensing its largesse on schemes in 2014.

Just one hurdle remains: how do you actually decide on what schemes really are demand side reduction, will permanently save energy, and hence might be encouraged through the new fund? Action minister is not fazed. Turning to his civil servants he tells them: ‘make it so’.

 Now read on…

Various civil servants sit round the table, each willing the other to come up with the solution to the conundrum. What did the minister mean by ‘make it so?’ A senior member of the gathering breaks the silence. ‘Why don’t we ask the people who have been telling us that we need this stuff in the Bill what on earth they were on about? Then we can work out what to do’.

 

And so, in October a mighty conclave is convened. It has a working paper to go with it. People from the energy saving community are summoned to opine on the working paper, which helpfully has in it one or two starting principles such as ‘ savings to be relevant to peak periods e.g. winter weekday afternoons’.

The conclave is stunned. Who is able to think up a scheme that works and qualifies under this mystical injunction? It seems like no-one can.  Economy-7 type measures? No that’s at night. Dynamic demand measures? Well, not really just during winter afternoon peak hours. The meeting breaks up in confusion, but agrees to reconvene later, helpfully supplied with a note of what has gone on and a sample bulletin scribed by DECC officials.

 At last! A helpful example of a solution to the puzzle appears in the sample bulletin for the second meeting at the end of November. ‘People might think of schemes like replacing all the existing street lights with LED bulbs. That would be the sort of plan that would qualify’.

And with that the scheme is under way.  Except…

A small boy passing by observes, ‘but surely…er…street lights don’t generally come on during peak hours in the afternoon. So how will that help?’ But it is too late. He is just a small boy after all.

So the grand plan gets under way, with much nodding of heads; they have really ‘made it so’, just as the minister had ordered. And still no-one has any idea what kind of scheme would be judged to qualify.

The end

 

 

 

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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. 

That Levieson Report (levies on Demand Side Reduction finance, that is)

By way of a postscript on my blog piece on renewables and the levy control mechanism, the consultative document on Energy Demand Reduction comes tumbling out.  That there is a consultative document , and that it proposes some interesting and viable options for embedding real demand side reduction into energy policy for the future is a real plus, and we can hope that the preferred option is incorporated into the Energy Bill at the earliest possible opportunity.

Our thoughts on what might be the best option could, however be concentrated by  factors outside consideration of ….er…what is the best option.

And why might that be you ask?  Well, you need read no further than the executive summary at the beginning of the report (and here, a large cartoon warning klaxon goes off…) . Yes, it’s that levy control mechanism again. ‘Levy funding for any market-wide financial mechanisms would need to come from the Levy Control framework and support for these electricity demand reduction measures would need to be traded off against support for other measures.’

What does that all mean? To put it simply, ANY of the suite of market-based options  (premium payments, obligations etc) will have to draw their financing from the already agreed ‘Levy Cap’ pool up to 2020, which eagle eyed readers will have spotted (below) is capped at £7.6 billion in 2020, but represents, in real terms, only about £670 billion per year for ‘new entrants’.  So this already rather shrunken pool will have perhaps £100 million drained from it per year to underpin demand side reduction measures as well, which makes the already very dodgy-looking assumptions about the extent to which new renewables can be funded within the levy cap criterion seem even more fanciful.

Reliable sources tell me that DECC was unaware of, or unprepared for the move to insist on this (presumably by Treasury) when they negotiated the ‘triumph’ of the levy cap arrangements up to 2020 in return for throwing away any target for energy decarbonisation by 2030 (and we can see why that was when the ‘Dash for Gas’ strategy is announced tomorrow (Wednesday).

Anyway, back to the best option.  As a coda in the last paragraph of the summary, the scribes from below DECC, as it were, have inserted an interesting line:  they say ‘If an EDR measure is included within the capacity mechanism, it will be subject to the cost control arrangements for it when they are finalised’.

So there’s our guidance then. Go for an Energy Demand Reduction option that places it within the capacity mechanism provisions of the Energy Bill (which, coincidently, is what I suggested as a mechanism in a piece I wrote on Demand side Reduction recently  here) and then we might well avoid an outcome that underwrites demand side reduction by starving support for renewables in the process.  Might. Unless Treasury gets hold of that as well.