Electricity Market Reform - Energy and Climate Change Contents

11  Demand side measures

253. Reducing demand for electricity is the most straightforward and cost effective way of meeting our climate change, security of supply and affordability objectives. Opportunities to achieve demand reductions through the EMR must not be missed.

What can demand side measures deliver?

254. The term "demand side measures" covers a range of technologies, which can bring different benefits to the electricity system. They fall into three main categories:

  • Demand reduction—this produces an absolute reduction in demand for electricity at all times.
  • Demand side response—this can be used to shift the time at which electricity is used to smooth out the peaks and troughs in energy usage and hence reduce the amount of back-up capacity required to meet demand at peak times. This flexibility could help with the problem of increased intermittency resulting from increased penetration of certain renewables such as wind and solar.
  • Distributed energy—although this is technically a form of electricity generation, it is sometimes considered to be a demand side measure because the generating capacity is connected directly to the distribution network rather than the transmission network, allowing surplus energy generated, for example by domestic photovoltaics, Combined Heat and Power or other means to be offset against the call on centralised generating capacity.

255. Table 2, below, sets out some examples of demand side technologies in each category, as suggested by evidence to this inquiry.

Table 2: Examples of demand side measures
Measure/ technology Description
Demand reduction Lighting and building management control Automated systems that can help reduce energy use, for example, by turning off lights when rooms are not occupied.
Efficient appliances More efficient appliances require less electricity overall.
Building insulation Reduces the amount of energy required for space heating. NB this will only have an impact on electricity usage in buildings that use electric heating. Most homes in the UK currently use gas central heating.
Demand side response Smart meters, grids and appliances Facilitate the introduction of time of use tariffs, which could encourage consumers to use electricity at times when overall demand on the system is low by varying price according to the overall level of demand. They could also encourage consumers to switch to sources of distributed energy (see below) at times when demand on the transmission network is high.

Facilitate opportunities for "dynamic demand" responses whereby smart appliances can automatically match their operation to times when overall demand is low.

Provide the opportunity for more actively managed distribution networks.

Provide an opportunity to aggregate demand side measures from a large number of small consumers, making these actions more "visible" to the System Operator.

Interruptible contracts Already used by some industrial consumers who agree to reduce their usage at certain times or when demand on the system is particularly high.
Electric vehicles Electric vehicles could potentially be used as a form of electricity storage as their batteries could be charged over night and then discharged back to the grid if the car is not used during the day time.
Distributed energy Microgeneration, including small-scale PV solar panels and small-scale wind farms. Electricity generated at the local level reduces the need for large-scale centralised energy generation. For example, Hamburg's "Lichtblik" project plans to construct an "energy swarm" of microgeneration capacity rather than two new power stations.
Combined Heat and Power District heating schemes have helped to provide system balancing in Denmark.

Sources: Ev w10 (CHPA), Ev 197 (ScottishPower), Ev w39 (Low Carbon Group), Ev 203 (Friends of the Earth), Ev w45 (IET), Ev 206 (Friends of the Earth)

256. While the aims and ambitions of the Green Deal are laudable, it will only help to encourage some forms of demand side measures (most obviously building insulation). We therefore perceive a role for the EMR in helping to bring forward some of the other forms of demand side measures outlined in table 2.

257. It is not clear how much consideration DECC has given to the scope for demand side measures to contribute towards the EMR objectives of decarbonisation, security of supply and affordability. Duncan Sinclair from Redpoint Energy told us that the modelling work they carried out for DECC (on which the EMR proposals are based) did include some types of demand side measures:

    We took DECC's views on demand going forward, taking into account the Green Deal. We also looked at an overall flattening of demand shape associated with, for example, heatpumps or with electric vehicles, assuming that there were some price signals to encourage consumers to flatten their demand. We took that into account and we also recognised the possibility that the demand side could play in providing additional capacity and helping with the security of supply issue [...]. The big uncertainty is smart metering, with the roll-out of smart meters. There's a lot of interest around what that could do in terms of changing consumer behaviour.[291]

258. There does not appear to be a consensus at this stage among stakeholders about the scope for demand side measures and we heard a range of different views throughout our inquiry. Those who were more optimistic included Swanbarton, the Combined Heat and Power Association, WWF, Juliet Davenport (Good Energy), Alan Simpson (Friends of the Earth), Doug Parr (Greenpeace) and Adrian Haworth (GE).[292] Nick Molho (WWF) told the Committee:

    On the demand side, we know from the UK Energy Research Centre's 2050 project last year that it is technically perfectly feasible to reduce energy demand in the home and transport sectors in the UK by 50%, compared with business-as-usual levels, by 2050.[293]

Adrian Haworth (GE) also thought there was a strong potential but emphasised the uncertainty around the extent to which smart technologies might be able to provide demand side responses:

    We think there is very big potential on the demand side but we can't quantify it yet, so it would be very difficult now to try to define where we will be in 20 or 30 years when we are really stepping out into the unknown at the moment.[294]

259. However, some witnesses were more pessimistic about the scope for demand side measures and in particular the extent to which they might be able to help balance out intermittency from renewables.[295] Mark Ripley (National Grid) told us:

    It's not clear to us, with the current range of services that are available, that demand side could provide[...] alternative capacity to offset the wind not blowing. If you think about the first two weeks of December last year, we had a big blanket of cold weather without much wind. At the moment, it's not clear how demand would be able to step into that gap.[296]

The Welsh Power Group also expressed doubt about the extent to which electricity consumers would wish to participate in a market for demand side measures:

    The government must be realistic about how much demand wants to participate. Large customers currently respond to the TRIAD system, where their consumption in the three winter peak half hours dictates their transmission charges. This is an extremely effective mechanism and should be maintained. However, more active customer participation was one of the NETA design criteria. The customers do not seem to want to participate in the type of market created. This may be overcome with changes in market design, but we suspect the problem of managing their primary production while participating in the market will be extremely difficult to overcome.[297]

260. The Government should undertake more thorough analysis of the role that demand side measures could play as part of the UK's electricity system in future. More thorough modelling and cost benefit analysis of the scope for demand side measures is required and the White Paper should clarify how such measures can cut demand and provide flexibility to the system.


261. Many witnesses perceived a stronger emphasis on support for new generating capacity than for demand reduction in the consultation proposals.[298] The Low Carbon Group and E3G suggested that energy efficiency should be given an equal weighting to generation in developing EMR proposals.[299] Environmental NGOs and the IET suggested that demand reduction should be a central objective of the reforms.[300] WWF told us:

    We are concerned that the EMR consultation paper is overwhelmingly focused on proposals that seek to incentivise investments in low-carbon generation and does not seek to address the equally important question of how the UK can substantially reduce its demand for energy. We believe that for the EMR to deliver an effective and cost-efficient package of measures to help decarbonise the power sector, proposals need to be put forward to both incentivise low-carbon generation (in particular renewables) and substantially reduce the UK's demand for energy.[301]

262. The Consultation Document states that the capacity mechanism could reward demand side measures (so-called "negawatts") as well as generation capacity. This principle was welcomed by witnesses to our inquiry. However, we heard some concerns that in spite of this principle, an unintended impact of a capacity mechanism could be to undermine demand side activities. National Grid and Simon Less (Policy Exchange) reported that by providing support for backup generation, a capacity mechanism could dampen price signals and hence reduce incentives for interconnection and demand side measures.[302]

263. It is important that a capacity mechanism does not close off the potential for innovation in demand side measures. We heard from several witnesses who felt that there was scope for much more innovation and development in this area.[303] Doug Parr (Greenpeace) emphasised the difference between demand reduction (which he equated to baseload generation) and demand-side response (which he equated to flexible generating capacity). He suggested that a capacity mechanism would need to be structured differently to reward these two different aspects.[304] He told us:

    There are two different parts that a capacity mechanism would need to account for, but I think it's important because at the moment there is no innovation in that space. […] I would say that is the key thing about the capacity mechanism: to be able to open up that innovation.[305]

264. There is a risk that a capacity mechanism that provides support for backup generation could undermine incentives for demand side measures. The White Paper should outline how this effect would be mitigated.

265. The White Paper must also specify for which demand side measures the capacity mechanism will be available and clarify whether it is intended to support demand reduction, demand-side flexibility, or both.


266. Although both DECC and the Treasury's Consultation Documents focus on the role that carbon price support could have in influencing investment decisions, a high carbon price could also help to encourage greater energy efficiency. Simon Less (Policy Exchange) suggested: "the key thing to drive demand reduction is to price carbon properly, by pricing the environmental externality".[306]

267. However, the Chancellor announced in the Budget that the carbon price support would be introduced at £16 per tonne of CO2 in 2013, rising to £30 per tonne in 2020 (in 2009 prices).[307] This is unlikely to be high enough to encourage significant increases in demand reduction.


268. Some of our witnesses felt that if it was possible to set contracts for demand reduction (citing the PJM market in the USA as an example), then it might be possible to make demand side measures eligible for long-term contracts under a FIT scheme.[308] The Low Carbon Group, Simon Skillings (E3G) and Rachel Cary (Green Alliance) all called for demand side measures to be eligible for both FITs and a capacity mechanism.[309] Simon Skillings told us:

    We would expect demand reduction and distributed generation to be potentially cheaper alternatives to low-carbon generation. It seems to me, therefore, that the demand side should have a fair crack at the FIT side, as well as the capacity payments side, of the equation.[310]

However, others were not sure how this would work in practice. Simon Less (Policy Exchange) said:

    On the CfD proposal, I find it hard to get my head around how the Government would go and contract with demand that then does not happen. They are contracting for something not to happen in the future—for that demand not to materialise.[311]

269. Professor Helm has proposed using a combined instrument that would reward both decarbonisation and capacity. This would take the form of long-term capacity auctions. In principle, both low-carbon generation and demand side measures would be able to bid into the auction.[312] He told the Committee:

    The auction could have demand-side bids, so you can bid in to reduce capacity of demand by so much in so many years' time, and that brings a long-term contract into the energy efficiency side of the market, which has been sadly lacking to date.[313]

270. The proposed Contract for Difference mechanism should be expanded to include rewards for guaranteed demand side measures. The White Paper should examine this possibility.


271. Demand side measures do not receive sufficient consideration in the Electricity Market Reform proposals. Demand reduction is the cheapest way to meet decarbonisation, security of supply and affordability objectives. The White Paper must explain the expected impact of the reform package on the three different types of demand side measures: demand reduction, demand side response and decentralised energy.

291   Q 293 Back

292   Ev w4 (Swanbarton), Ev w10 (CHPA), Ev 162 (WWF-UK), Q 152 [Ms Davenport], Q 204 [Mr Simpson], Q 205 [Dr Parr], Q 238 [Mr Haworth] Back

293   Jim Skea, Paul Ekins and Mark Winskel [Eds], Energy 2050 - Making the Transition to a Secure Low-Carbon Energy System, [Earthscan 2010], Q 205 [Mr Molho] Back

294   Q 238 [Mr Haworth] Back

295   Q 269 [Mr Chapman] Back

296   Q 267 [Mr Ripley] Back

297   Ev w26 (Welsh Power Group) Back

298   Ev w10 (CHPA), Ev 162 (WWF-UK), Ev 195 (Greenpeace), Ev 203 (Friends of the Earth), Ev 218 (RSPB) Back

299   Ev w39 (Low Carbon Group), Ev 151 (E3G) Back

300   Ev w45 (IET), Ev 162 (WWF-UK), Ev 195 (Greenpeace), Ev 203 (Friends of the Earth) , Ev 218 (RSPB) Back

301   Ev 162 (WWF) Back

302   Ev 187 (National Grid), Q 101[Mr Less] Back

303   Q 238 [Ms Sorensen; Mr Haworth; Ms MacNaughton], Q 209 [Dr Parr]  Back

304   Q 209 [Dr Parr] Back

305   Q 209 [Dr Parr] Back

306   Q 102 [Mr Less] Back

307   HM Treasury, Budget 2011, March 2011 Back

308   PJM is a Regional Transmission Organisation [RTO] covering a large part of the eastern USA. Back

309   Ev w39 (Low Carbon Group), Q 102 [Mr Skillings; Ms Cary] Back

310   Q 102 [Mr Skillings] Back

311   Q 102 [Mr Less] Back

312   Helm D, Market reform: rationale, options and implementation, October 2010, www.dieterhelm.co.uk  Back

313   Q 68 Back

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© Parliamentary copyright 2011
Prepared 16 May 2011