The Impact of Demand Side Management on the Wholesale Prices of the British Electricity Market

Ms Sara  Lupo,  University of Edinburgh

Dr Aristides E. Kiprakis, University of Edinburgh

In its attempt to modernise the electricity grid the United Kingdom faces a lot of obstacles trying to accommodate for the needs of smarter and greener technologies that were not included in the energy picture when the original transmission and distribution (T&D) system was designed. The smart grid brings along a lot of additions, such as renewables, electricity storage, and demand side management (DSM) that will in long term provide a more resilient and independent power system. Currently, however, these technologies and their effect on wholesale electricity prices are yet to be fully examined. These technologies have potentially a very significant impact on electricity demand and this paper aims to assess the effect of DSM on future demand fluctuations and their impact on the wholesale prices of the British electricity market. There are three types of DSM, which are energy efficiency, dynamic demand, and demand response.

The latter’s main goal is demand reduction in addition to helping with the integration of renewable energy; it is the main focus on this paper. We look at different penetrations of future energy technologies to assess how these can best reduce demand spikes and prevent large price jumps while providing electricity security to all consumers. In this paper, we examine what effect the reduction of peak demand due to the implementation of DSM measures has on wholesale electricity prices in the United Kingdom by performing a sensitivity analysis and comparing the resulting prices to one another to determine what portfolio has the overall most desired benefit, based among other things on the level of consumer engagement in peak demand reduction. Using a cost-minimisation energy market model created based on National Grid’s 2015 UK Future Energy Scenarios, [1], we examine what the changes in demand resulting from the integration of various DSM technologies do to the wholesale energy prices of the United Kingdom.

According to British Gas, [2], the wholesale cost of energy makes up 42% of the consumers’ bill, which is a good incentive for consumers to be aware of the fluctuations in electricity prices. In the short term, some customers have the ability to reduce or reschedule their demand in response to the electricity prices. For example, if prices are high, some industrial consumers may forego production if it is not profitable at that price level, [3]. Substantial benefits will accrue if the demand of even a relatively small number of consumers becomes price responsive with the most obvious benefit of this increased overall demand elasticity being an immediate and substantial reduction in the number and magnitude of price spikes, [4].

A successful implementation of DSM and energy storage could represent a massive benefit towards a larger, more predictable, and more secure rollout of intermittent generation in the UK. Furthermore, better projections of net demand that would signal a need for greater operating capacity would allow for an improved coordination of renewables and conventional generation, which could potentially result in finally witnessing the installation of carbon capture and storage (CCS) technologies for the times of peak demand in the UK.

[1]        National Grid, “UK Future Energy Scenarios,” 2015.

[2]        British Gas, “What makes up an energy bill?” [Online]. Available: http://www.britishgas.co.uk/the-source/our-world-of-energy/energy-explained/whats-in-a-bill.

[3]        D. S. Kirschen, G. Strbac, P. Cumperayot, and D. P. De Mendes, “Factoring the elasticity of demand in electricity prices,” IEEE Trans. Power Syst., vol. 15, no. 2, pp. 612–617, 2000.

[4]        D. S. Kirschen, “Demand-side view of electricity markets,” IEEE Trans. Power Syst., vol. 18, no. 2, pp. 520–527, 2003.