Explicit demand response, where aggregators enable small commercial and domestic consumers to participate directly in the wholesale market by flexing their demand, is a vital resource in the transition to a sustainable electricity system. However, barriers to the successful development of this vital resource exist in many Member States, including the need for aggregators to obtain permission from the customer’s supplier and to compensate the supplier for lost income. The level of compensation is normally a matter for negotiation between aggregator and supplier, although France has an administered arrangement that removes the need for negotiation. In some Member States (e.g., Great Britain), no compensation is required.

Article 17 of the proposed Electricity Directive harmonises the situation across Europe, ending the requirement for an aggregator to obtain permission to operate on the consumer’s demand or to compensate the consumer’s supplier (other than in some imbalance-related “exceptional circumstances”). In its current form, Article 17 removes a significant barrier to the development of explicit demand response and the enhanced customer market participation and flexibility so necessary to a cost-effective transition to a low carbon electricity system.

However, incumbent suppliers continue to seek compensation from aggregators, maintaining that energy the incumbents buy up front is transferred to aggregators free of charge who then profit by selling it on, leaving suppliers unable to bill customers for unused energy. This is in fact not the case. Although it is true that suppliers cannot bill for unused energy, in providing downward demand response aggregators simply reduce the amount of energy consumed and, therefore, generated. Energy is not sold on; it is neither consumed nor generated.

This policy brief explains the process by which aggregators offer demand flexibility to the market—both the physical reality and the market transaction. The brief also recommends an alternative to aggregator-to-supplier compensation, and describes the essentials of a similar debate held in the United States and how that debate concluded.