If the challenges of energy decarbonisation are to be met in a cost-effective, affordable, and reliable fashion, customers will need to increasingly engage with the electricity market. Likewise, as the share of intermittent renewable resources continues to grow, the need for flexibility in both market and balancing timescales will grow. This need for flexibility will occur at the same time that the amount of dispatchable generation capacity able to provide that flexibility will decline. This backdrop highlights the important role that customers, both large and small, will have in the energy market, as they will increasingly need to manage their consumption in response to market signals in order to help fill that gap. In the future, customers will therefore need to become increasingly active market participants, having a role in both balancing demand and supply, and in responding to local network needs in order to avoid or delay traditional but expensive network investment.

At the same time that the importance of demand response and consumer participation is increasing, there is a debate brewing on how to compensate suppliers. The debate focuses on the relationship between a customer offering demand or flexibility services to the market, possibly via a third party or “aggregator” who will “bundle up” the flexibility of many smaller customers to provide volumes of interest to the market, and the customer’s supplier. When a customer, or aggregator operating on his behalf, modifies consumption in order to offer energy to the market, suppliers claim that the customer or aggregator is effectively “selling-on” energy that has been purchased in advance by the supplier in anticipation of the customer’s consumption.  As the supplier cannot generally bill this customer for energy that is not directly consumed, the supplier appears to face a loss. This has resulted in demands for suppliers to be compensated for the energy that has been allegedly sold-on, with compensation being agreed either via negotiation between the supplier and the customer or his aggregator or determined via an administered arrangement.

This paper provides an alternative that would allow suppliers to remain financially whole while at the same time facilitating the development of customer demand flexibility and allowing customers to retain nearly all of the associated societal benefits. Namely, as the cost of delivering these societal benefits are generally dwarfed by the magnitude of the benefits themselves, suppliers could retain a small proportion of these benefits in order to recover any loss of revenue associated with energy sold-on but not billed. In fact, absent perfect retail market competition, it can be argued that suppliers are likely to retain more than sufficient revenues to cover any losses and that any calls for direct compensation should be dismissed on those grounds alone. In practice, the issue may become more about how to ensure the majority of cost savings brought about by demand response are passed through to customers, rather than about ensuring that suppliers remain financially whole.