Executive Perspectives: UK Capacity Market

May 17, 2017


An interview with Anne-Soizic Ranchere, U.K. Director for Energy Pool, and Louise Wallis, Business Development Manager for Schneider Electric Energy & Sustainability Services.

U.K. businesses discover the value of flexibility

The Capacity Market (CM) is the U.K. government’s policy for ensuring security of electricity supply. It offers payments to organisations that can export generated energy to the grid, as well as payment for demand response providers for being able to reduce electricity load, at key times, when the grid is under strain. Following the latest 2016 CM auction, almost 2 gigawatts of fixed capacity requirement will be fulfilled by distributed flexible technology (namely battery storage and demand side response) — a trend that is nurtured by the rising activity of businesses marketing their energy flexibility and earning money with their on-site energy assets.

Anne, Louise, there is growing interest in the Capacity Market and demand-side response. Do you have an explanation for this?


Awareness of demand response has risen in recent years, strengthened by a growing concern on sustainability and implementation of energy saving plans. When meeting customers today, we often see well-informed, highly motivated staff, often coming with their own technical concepts and ideas to leverage the flexibility of their energy assets. We have also seen a constant level of communication in business networks and in the media.


I think the most relevant trigger is money. Businesses understand more and more that they can generate lucrative new revenue streams and, consequently, start to market their energy more flexibly.

If revenue is the driver, can you explain how businesses earn money in the Capacity Market? How attractive is participation?


The market takes the form of an annual auction for potential future delivered capacity. Organisations bid into the auction at the price they are willing to turn down their electricity demand. This can be in the form of switching to backup, using on-site generation or reducing load during periods of peak demand. Current prices per megawatt and per year range between £7,000 and £22,000 depending on the fixed future period.


It is also worth noting that CM revenue is only one part of demand response available to businesses. In the U.K., commercial and industrial sites can participate in various programs, including CM, TRIAD, STOR and FREQUENCY reserve — implementing a combination of these opportunities can create attractive revenue streams.

sustainable development, business man analyzes infographic

Do you have an example that provides more detail?


At the beginning of the year, we started working with a large company producing building materials. They have 11 flexible energy assets, including large fans and pumps from a gravel treatment plant, and three diesel generators. We calculated a maximum potential of £130,000 that could be earned from the different mechanisms.


Within our feasibility studies, we take into account the combination of existing energy assets, market opportunities and investments in technical upgrades, e.g. the grid connection of existing stand-by generators, to work out payback. Most business cases can be realised within the first year and just limited CAPEX is required to sign up for the CM.

“National Grid has committed to 30-50 percent of grid balancing

requirements being met through demand response by 2020.”

We have learned that existing generators are a proper asset, but you also include demand response from production processes. How can you avoid conflicts with production quality?


You are right, there is a wide range of potential onsite assets, including chillers, air conditioning units, fans, pumps, combined heat and power plants and diesel generators that can be considered. Also, large industrial production assets like kiln furniture, electroplating, crushers and others are worth considering. We work very close with operational teams to understand the flexibility of these processes and take into account their constraints in the definition of the service level. We run operational test to validate the working process and the client always remains the final decision maker on the activation of the flexibility.


You have to keep in mind that the CM provides an insurance against U.K. blackouts by ensuring a sufficient and reliable capacity in periods of imbalance — but these incidents are rare — only around 10 activation’s are triggered a year, which is usually manageable for those actively engaged in the process.


…and this is also a reason behind why our customers can sell their flexibility within the different mechanisms; they have to be prepared in case of activation. However, for the majority of the year, they just operate their business as usual.

It sounds like businesses should start demand response immediately. Any warning notices, however?


It is important to remember the pre-engineering requirements. More than 70 percent of existing stand-by generation is not connected to the grid. This is an engineering and organisation challenge as we need permission from the grid operator to make connections. Such projects will need a minimum of three months preparation to be ready to go on the market. All projects need suitable smart metering technology installed, together with control equipment and strategies to reduce load or start generation.


The next deadline for CM pre-qualification is August 2017 for the October auction. We have to be extremely fast when preparing projects for this market round. However, there are other market mechanisms throughout the year and the appetite for flexibility will grow. National Grid has committed to 30-50 percent of grid balancing requirements being met through demand response by 2020 so any time is a good time to start benefiting.


Another red flag is critical size. Even though we are aggregating capacities from different clients for the auction, a minimum size is necessary to offset the client’s and our efforts. A minimum of about 700 kilowatts of flexible capacity from the different energy assets onsite is required to create a profitable project for all participants.

financial stock price

What are your recommendations for interested clients?


Like in many other cases, data is key to understanding your options. We should not forget that there is a huge untapped potential for energy efficiency and savings in most businesses. We recommend developing energy efficiency, sustainability and demand response under one comprehensive energy strategy — based on a clean, meaningful set of energy data. Of course, we are able to develop this together with interested clients.


We have tools ready to run a quick check on potential demand-side response opportunities. In our initial technical meeting we are usually able to outline the business case and necessary preparations. For those organisations that believe they meet minimum requirement, I would encourage them to contact us to develop the next steps to a successful demand-side response project together

CapMarket_TakeawaysSchneider Electric and Energy Pool – a strong collaboration

As a global specialist in energy management with operations in more than 100 countries, Schneider Electric offers integrated solutions across multiple market segments. The company's Energy & Sustainability Services divisions addresses client's diverse energy and sustainability management needs with tailored services and solutions. Our energy experts provide integrated solutions globally, including a team of more than 2,000 energy professionals managing and optimising 350,000 sites of more than 6,000 clients around the globe. 

At the end of 2010, Schneider Electric signed up to a strategic, financial and technological partnership with Energy Pool, Europe’s leading demand response operator. The group offers technological aggregation and optimisation solutions to enhance their capability to manage their energy consumption at peak times and avoid overloading the grid.

Together, Schneider Electric and Energy Pool offer services to industrial users with an increasingly diverse range of profiles.

For more information, visit www.schneider-electric.com/ess or contact us.


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