Engaged customers supported by a thriving demand-response industry are at the heart of the European Commission’s Market Design Initiative vision. Yet, existing market arrangements are unlikely to deliver anything close to the full economic potential of demand-side resources needed to meet EU climate and energy policies in the most secure and cost-effective manner. The Market Design Initiative: Enabling Demand-Side Markets sets out a series of recommendations to enable customers to contribute to the cost-effective transformation of the power sector.

Ensuring that power markets and retail prices reveal the value of flexibility and drive innovation is central to unleashing demand-side flexibility. New market rules and regulations to ensure consumers can access this value through innovative new “smart” products and services are also needed.

“The European Commission’s upcoming Market Design Initiative is an opportunity to ensure that wholesale prices accurately reflect what is happening in the power system in real time,” commented the Regulatory Assistance Project’s (RAP) Mike Hogan, co-author of the paper. “This is crucial to the business case for a vibrant new information-technology-based European demand-response industry.”

While opening up the wholesale power markets to new market actors and demand participation is essential, the authors recommend additional immediate measures that can kick-start product and service innovation and ensure that consumers have the opportunity and the incentive to participate.

First, distribution system operators can use demand response to manage the network. “Distribution system operators must be regulated in a way that motivates them to make the best use of demand-side energy resources and existing assets, while safeguarding against abuse of monopoly power,” explains co-author Phil Baker of RAP. “Fair competition between market participants will be fundamental to getting demand response off the ground.”

Second, network tariffs should be designed to incentivise consumers to be energy efficient and responsive to market conditions. “Bidirectional time-varying network tariffs with minimal fixed charges will be very helpful in encouraging demand response,” explains co-author Phil Baker. “Poorly-designed demand charges should be avoided.”

Cultivating consumer trust from the outset will be critical, and the authors envisage several ways to achieve this. “Independent market monitors and high-quality, timely expert analysis can play an important role in assuring politicians, regulators, market actors, and consumers that the markets are competitive and doing what they are supposed to do,” said Hogan. Commenting on regulations for data protection and data security, Hogan added, “Individuals should retain control of access to their own data, and no group with a commercial interest at stake should be given a favoured position in managing that data.”

Finally, decarbonisation of the heat and transport sectors must be intimately linked with power sector decarbonisation. Electrification of heat and transport needs to progress in a cost-effective way by exploiting the capability of heat and electric vehicle loads to flex around the availability of variable renewable energy generation. “This has implications for how the power, buildings, heat, and transport sectors are regulated, and requires strong cross-sectoral coherence,” says Sarah Keay-Bright of RAP.

RAP, in collaboration with E3G and ClientEarth, produced The Market Design Initiative: Enabling Demand-Side Markets. Mike Hogan and Phil Baker of RAP co-authored the report with contributions from Sarah Keay-Bright of RAP, Simon Skillings of E3G, and Josh Roberts of ClientEarth. This collaborative project is part of the Energy Union Choices Initiative, supported by the European Climate Foundation.