Demand Response in the Future Swedish Electricity Market : A typology based on cost, volume and feasibility

University essay from Linköpings universitet/Industriell ekonomiLinköpings universitet/Tekniska högskolan

Abstract: The power balance of an electrical power system is crucial to the quality of the delivered electricity as well as the security of supply. In a scenario where Swedish nuclear power plants are being phased out and replaced by renewable energy sources new constraints are added to the power balance equation since the production of many renewable energy sources, such as wind and solar power, are intermittent by nature. This leads to a situation where the currently available regulating power might have difficulties to manage the increasing frequency fluctuations in the power grid. One possible solution to the problem is to build gas turbines for the purpose of peak power generation capacity. An alternative option would be to increase customer flexibility; that is Demand Response. This master thesis investigates how the market for Demand Respond can be designed and which potential Demand Response volumes different policy programs might release. This is done through a mixed approach. Firstly, a scientific review of previously documented Demand Response experiences compares and categorizes different Demand Response programs in a typology based on the parameters cost, volume and feasibility. Subsequently an interview series with different market agents, predominantly through interviews with the Swedish energy intensive industry, identifies the existing Demand Response potential in Sweden and offers the paradigm needed to transfer the results to a future hypothetical situation. The typology of Demand Response programs and estimation of the future industrial Demand Response potential in Sweden are the main new knowledge contributions of this master thesis. The scope however is limited to the Swedish market geographically and focuses on the time horizon 2020-2050. It is also assumed that only existing technologies are likely to be implemented on a large scale over the given time horizon. The results of this master thesis suggest that a Real Time Pricing model would realize the largest potential of Demand Response and to a relatively low cost. This solution however requires actions and further development of both the pricing model and in technology. Firstly, all market agents must have free access to real time price information, something that is lacking today. Secondly, a smart grid with hourly meters is required. If policymakers consider security of supply to be more important than a low system cost, Direct Control or a continuation of the Strategic Reserve is to be preferred according to the conclusions of this report. Previous studies have placed the existing potential for industrial Demand Response in Sweden between 600 and 900 MW. This report suggests that the available volume is in the upper region of the mentioned interval already today and has potential to rise significantly in the future as industries become more aware of the concept and the transmission grid is becoming more flexible. Another driving force for increased Demand Response volumes are the increased price fluctuations which are expected as a consequence of a greater share of renewable energy sources. For the future Demand Response potential, a cost perspective is introduced and a distinction between different response durations is made. More specifically the results indicate that the potential industrial Demand Response volume will be about 1,500 MW in 2030, given a response duration time of 4 h and a spot price on 2,000 SEK/MWh. If 1,500 MW of peak generation capacity could be avoided through active Demand Side Management, it would reduce the system cost with about 350 Million SEK annually. Consequently, there is a business case for Demand Response and the issue is likely to be subject to further investigation and discussion in the future. On the long term however industrial Demand Response must be compared with other flexibility options, e.g. as import/export or energy storages but also residential Demand Response, and is in such case likely to be outcompeted due to its relatively high variable cost of providing capacity. 

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