LONDON (Reuters) - Britain is turning to a new way of making sure it doesn’t run out of power, one that could turn the energy market on its head: rather than paying utilities to produce more electricity, it is paying firms that guarantee to cut industrial demand.
So-called aggregator firms secure commitments from businesses across the country to reduce power usage; supermarkets can turn down refrigerators by a few degrees for a short period without any impact, for example, while water treatment plants can turn off pumps at certain times.
The aggregators then sell the megawatt reduction they secure to power network operator National Grid (NG.L), which is increasingly favouring this “demand-side response” (DSR) method to paying big utilities to ramp up power generation. Aggregators pass on the revenue to the businesses, taking a cut.
Aggregators, like Flexitricity, Kiwi Power or Open Energi, have gained traction in the past year after National Grid launched a promotional campaign to raise awareness among businesses about the commercial benefits of DSR and reducing energy usage.
They present a threat to the revenue of big power generation firms like Centrica (CNA.L), SSE (SSE.L) and EDF Energy (EDF.PA), who are being undercut by these newcomers and losing business in Britain’s 1-billion-pound electricity balancing market.
The challenge could grow rapidly in coming years; National Grid, which seeks to match supply and demand on a second-by-second basis, wants to see 30-50 percent of capacity in the electricity-balancing market coming from DSR by 2020, compared with just 4 percent now.
How the rise of aggregators plays out in Britain could offer a guide for other European countries, and will be closely watched by power companies and regulators across the continent.
Britain and France are the most advanced countries in using DSR, and have a regulatory framework in place. Other countries like Germany are still shaping rules on how to deal with reducing power demand, which can cut the use of fossil fuel power stations and help cut carbon dioxide emissions.
“DSR is a really exciting area,” National Grid Chief Executive John Pettigrew told Reuters. “It allows us to balance the system much more economically, which benefits customers.”
Utilities, already under pressure from weak electricity prices, are being forced to respond by pushing into the DSR business themselves.
Ronan O’Regan, director in the energy strategy team at advisory PwC, said growing renewable energy output and tighter supply margins due to closing coal and gas plants would increase the need for balancing services.
“The potential growth in demand-side response in the balancing services market is likely to be significant over the coming years,” he said.
Large factories and offices consume around two-thirds of Britain’s electricity. Demand aggregators sign contracts with National Grid to reduce electricity demand from clusters of business and industrial customers.
“We can link up gigawatts and gigawatts of capacity from air conditioners, heaters, refrigerators across tens of thousands of sites,” said Yoav Zingher, CEO and founder of Kiwi Power.
Businesses signed by such firms earn revenue from National Grid contracts, passed on by their aggregators who take a cut, while also saving money by cutting consumption at the most expensive times.
“National Grid doesn’t want to deal with thousands of small DSR providers, that’s where we come in,” said its business development director David Hill.
The aggregators that Reuters spoke to declined to disclose the size of the cut they took because the figures are commercially sensitive.
Open Energi, a six-year old company, said its clients receive most of the revenue generated from National Grid contracts. It promises them returns of 5-10 percent of their annual energy bill through the National Grid revenue.
Its client United Utilities said it expects to make 5 million pounds in revenue from DSR by 2020 by reducing power usage, including by turning off pumps at its treatment works.
Utilities, which own most of Britain’s power plants, acknowledge the power market is changing and are responding to the new reality.
RWE’s (RWEG.DE) npower, one of Britain’s “big six” electricity providers, said it was developing its own in-house capability to offer automated DSR products and services to customers. “DSR is a key growth market within the UK energy market,” said Michael Byrne, head of marketing for npower’s business solutions unit.
Britain’s biggest energy supplier, Centrica, has brought demand-reducing products to the household energy market and said it wants to expand further in this area.
SSE, another one of the big six, has struck a deal with Kiwi Power to offers some of its commercial customers DSR services through the aggregator.
Editing by Pravin Char