Demand-Side Management Methods to Address Network Shortages 28 November 2014, EPG Annual Strategy Summit David Haverbeke, Partner at Fieldfisher Brussels, Energy and Utilities Practice

Outline Context What is Demand-Side Management? Policy Measures at EU level Case Study at national level Conclusion and Prospective Comments

Gen TSO DSO Sup C ARP DRA Public Authorities Balancing Balancing ARP DRSA Demand-Response DRA Public Authorities NRA Minister Administration

Context Current Key Challenges (ENTSO-E, Market Design Policy paper, 15 September 2014): Effectiveness of price signals to stimulate appropriate investments and performance Network Balancing prices should be reflective of full system costs Operational issues Market design needs to address capacity adequacy and flexibility needs Even where capacity is not an issue, integration of increasing variable RES production requires flexibility from both generation sources and demand side Hedging products implemented on a national level should be amendable to enable cross-border trading and progressive regional harmonisation Demand-Side Management should participate as much as possible including as hedging products (capacity markets, flexibility markets, system service products) to ensure effective investment signals

Context Specifically for Demand-Side Reponse (ENTSO-E, Policy Paper, 15 September 2014) roles and responsibilities TSO and DSO Defining efficient data handling procedure Ensuring security of supply with DSR Consistent ground-rules at EU level Increasing attention from the industry (e.g. Eurelectric insisting i.a. on the cross- border perspective in the development of capacity and flexibility markets)

What is Demand-Side Management ? Classically defined as: “the modification of consumer demand for energy through various methods such as financial incentives and education” Demand Response “is a process to manage consumer consumption (demand) of electricity in response to supply conditions.“ Specific pooling/collection of consumption (behaviour) as a part of optimisation of consumption generally for a group of consumers Demand-Side Management relates to optimisation of consumption typically for one consumer. Usually, the goal of demand side management is to encourage the consumer to use less energy during peak hours, or to move the time of energy use to off-peak times such as nighttime and weekends. Peak demand management does not necessarily decrease total energy consumption, but reduces the need for investments in energy networks and/or plants for meeting peak demands. An example is the use of energy storage units to store energy during off-peak hours and discharge them during peak hours. No binding definitions EU Regulations, at this stage more of a “regulatory concept“ - At level of EU Member States, the “concept” is gradually being implemented.

What is Demand-Side Management? Demand Response Aggregator Aggregator = Collector Source: Entelios AG, 2012

Policy Measures at EU level Directive 2009/72: “Member States shall ensure the implementation of intelligent metering systems that shall assist the active participation of consumers in the electricity supply market.” Demand Response has played a significant role in EU thinking on Smart Metering Energy Efficiency Directive 2012/17 of 25 October 2012 Cons.“(44) Demand response is an important instrument for improving energy efficiency, since it significantly increases the opportunities for consumers or third parties nominated by them to take action on consumption and billing information and thus provides a mechanism to reduce or shift consumption, resulting in energy savings in both final consumption and, through the more optimal use of networks and generation assets, in energy generation, transmission and distribution.” - Cons.“(45) Demand response can be based on final customers’ responses to price signals or on building automation. Conditions for, and access to, demand response should be improved, including for small final consumers. Taking into account the continuing deployment of smart grids, Member States should therefore ensure that national energy regulatory authorities are able to ensure that network tariffs and regulations incentivise improvements in energy efficiency and support dynamic pricing for demand response measures by final customers. Market integration and equal market entry opportunities for demand-side resources (supply and consumer loads) alongside generation should be pursued. In addition, Member States should ensure that national energy regulatory authorities take an integrated approach encompassing potential savings in the energy supply and the end-use sectors.”

Policy Measures at EU level Energy Efficiency Directive Article 15: “4. […]. Member States shall ensure that network operators are incentivised to improve efficiency in infrastructure design and operation, and, within the framework of Directive 2009/72/EC, that tariffs allow suppliers to improve consumer participation in system efficiency, including demand response, depending on national circumstances.” (…) “8. Member States shall ensure that national energy regulatory authorities encourage demand side resources, such as demand response, to participate alongside supply in wholesale and retail markets.“ Stronger demand response in distribution networks. Reconsider the role of DSOs (unbundling) and consider the role of third parties (such as aggregators and energy services) Transparent and easily understandable rules and standards. Further EC reflection: 2013 (Action Plan for Europe) and lobby ongoing: Eurelectric: strong link with smart meters/grids, domestic use: Eurelectric Task Force on Smart Grids ESMIG: “Both the European Union and the Member States have included Demand Response capabilities in their deliberations on Smart Metering - And that is good!”

Policy Measures at EU level Characteristics: reduction or shift of consumption Benefits for Customers, Network Operators, Producers (and even Suppliers) Philosophy: from "Generation follows Demand" to "Demand adapts to Generation“  negawatt = greenest electricity = energy efficiency Link with Smart Grid/ meters: a roll-out of smart meters as a first step or prerequisite to demand response (Eurelectric)? NO! Electricity // but also gas, water,… DR Players: Entelios, EnerNOC, Viridity Energy, Honeywell, Siemens, BuildingIQ, Powerit Solutions, Enbala

Policy Measures at EU level Non-discrimination between: TSO vs. DRA's (as like in switching); Tariffs and DRA's; Types of Clients: 1 Client (too little), 1 type of (domestic) clients: too costly vs benefits; Types of Clients: continuous consumption vs. peak / off-peak consumption Demand response as a "resource" vs other "resources" (wind, biomass, …) Variable and complex prices and benefits vs. striving for uniform pricing and transparency Market behaviour: effects of more volatile or variable retail pricing regimes and consumption patterns expected from DR programs // unpredictability? => set barriers, regulation // Difference in interests of market players: e.g. TSO/supplier

Policy Measures at EU level Government intervention (subsidies (also for smart meters (necessary)), fiscal encouragement) vs. market functioning Adaptations in law: Quid technical regulations? Data protection / privacy? Together with smart grid regulation or stand-alone? Legal unbundling? Legal unbundling may also be required to ensure that the beneficiaries of peak loads are not able to block DR Quality standards for DR Aggregators? Licence by regulators?

Case Study Source: Entelios AG, 2012

Case Study Usual methodology for identifying commercial SDR potential Identification of flexible processes Processes and loads Boundary conditions Impact Identification of flexible power Size and availability Reponse time and portfolio effect Maximise value of flexible power in light of SR and balancing Integrate flexible power (communication, automatisation and monitoring) Industrial Processes with DR potential are cooling, heating and pumping in energy- intensive industries or for on site back-up generation flexibility

Case Study: Belgium Some facts and figures about the Belgian electricity market Nuclear phase out act 2003 Since 2007, signals of structural electricity generation undercapacity Government decisions 2012: towards a mix of RES and flexible gas-fired baseload generation Launch in 2013 of call for tender for new capacity (700-900 MW) Launch in 2014 of strategic capacity reserve (1250 MW) including Strategic Demand Reserve (SDR)

General text slide Case Study: Belgium Central to SDR enforcement: balancing responsibility of Access Responsible Party (ARP) Regulatory basis: Grid Codes of Elia and/or DSO’s Network zone balance is first line responsibility of TSO but per access point contractual balancing commitments of ARP Situation today: tariff for individual imbalance with distinction between positive and negative quarter-hourly imbalance Amendments to ARP contract to new functioning rules SGR and SDR

Case Study: Belgium Regulatory Basis for Strategic Demand Reserve Law of 26 March 2014 Ministerial decree 3 April 2014 CREG decision of 5 June 2014 Elia Functioning Rules and Contract for SDR SDR Bidding Instructions Impact on market functioning (e.g. on power exchange Belpex – relation with announced ‘super-fine’ of 4.500 EUR/MWh for ARP in imbalance) Next step: start of SDR operations first winter period 1 November 2014 (until 31 March 2015)

General text slide Case Study: Belgium Relationship between SDR and ARP – specific case of so-called “disconnection plan” of Elia Ministerial decree of 3 June 2005: more actual than ever procedure for protection against unexpected event vs. procedure in case of announced scarcity Benchmarking tool in case of intervention of Elia Are the incidents caused by Force Majeure? Could the network operator do something else or did it have to do so? Is the damage in causal link with a fault of the network operator? Impact different on generators (CIPU contracts) and ARP’s (distinct between intermediaries, suppliers and consumers)

Conclusion and Prospective Remarks Demand-side management has been allegedly ineffective because it has resulted in higher utility costs for consumers and less profit for utilities One of the main goals of demand side management is to be able to charge the consumer based on the true price of the utilities at that time If consumers could be charged less for using electricity during off-peak hours, and more during peak hours, supply and demand would theoretically encourage the consumer to use less electricity during peak hours, thus achieving the main goal of demand side management An issue of DSM is privacy: The consumers have to provide information about their usage of electricity to their electricity company

Conclusion and Prospective Remarks Many uncertainties remain for SDR, both markettechnical as regulatory, with necessity for: Clear signals from regulators and network oparators Increased vigilance from market participants Check of existing contracts (both regulated and non-regulated) in light of the changed market circumstances and SDR potential Monitoring of: regulatory and contract amendments (consultation periodes) expected policy changes both at EU (new Commission) and national (new Governments) levels As a market participant, adoption of SDR strategy taylor-made to the existing and expected requirements and opportunities

Q&A

Blank David Haverbeke +32 2 742 70 13 David.Haverbeke@fieldfisher.com