Spring is coming in the DSR

The DSR (Demand Side Response) is a method of reducing the demand for power during critical load of the power system. This financial mechanism offers remuneration to consumers who commit to temporarily reducing their power consumption upon the request of the transmission system operator. Due to that, the operator, i.e. PSE, is able to reduce peak power consumption and keep the power system balanced. The DSR has also additional functions. Firstly, it improves the flexibility of the power system. This is very important in view of the development of variable capacities of renewable energy sources, i.e. wind and sun. Secondly, the DSR is useful in the case of the failure of conventional power units.

Perspectives for 2018

On Friday, April 6, the deadline for submission of proposals in the tender procedure announced by PSE for the provision of services under the DSR expires. This is already the second edition of the most important tool for DSR development in Poland - both the guaranteed and the on-going program. Observers expect more proposals for more capacity volume and lower prices compared to the previous year. PSE is likely to acquire 500 MW in both the guaranteed ¹ and on-going ² programs, totalling 1000 MW. This amount is close to the economic potential of the DSR as estimated by the Energy Forum last year. ³

Growth expectations result from the fact that the tender procedure increased the maximum volume of a single product from 50 to 200 MW, which encourages aggregators to develop large proposals. Those who have invested for years in acquiring customers, such as Enspirion sp. z o.o. from the Energa S.A. capital group, may benefit from it.

The participants of the first edition of the DSR guaranteed program, owing to the balanced financial conditions obtained a year ago, are certainly encouraged to become more involved. In addition, new bidders will participate in the tender. We are dealing with a typical learning process by market participants. Competition is increasing and the expected readiness fee is likely to be lower. Therefore, PSE will be able to obtain more volume at a lower price. The size and economic efficiency of the DSR market in Poland will improve.

The 2017 program

In 2017, about 350 MW was acquired in the guaranteed program and a similar, although unverified, volume in the on-going program. The year 2017 was calm and there was no need to request the DSR. This gives time to improve this tool and also to increase the scope of the mechanism.

The guaranteed program has certain imperfections, due to which it was not possible to acquire 500 MW assumed by PSE in 2017. First of all, the proposals may be submitted by facilities connected to medium and high voltage. The entry threshold was set at a high level of 10 MW. The complicated algorithm calculating the base load also poses a lot of difficulties. It is difficult to predict exactly what load will be determined for the given reduction facility (plant obliged to reduce power consumption). This results from the application of the so-called “prediction error minimizing criterion.”

Krzysztof Müller from EnMS Polska Sp. z o.o. pointed to a number of features of the current DSR program that are unfavourable for the aggregators. The representatives of each reduction facility have to deal with a lot of bureaucracy. Each time one reduction facility is replaced by another, tests must be repeated for the entire portfolio of facilities of the given aggregator. On the other hand, Henryk Kaliś from the Forum Odbiorców Energii Elektrycznej i Gazu [Forum of Electricity and Gas Consumers] indicates that large enterprises that participate in the tender independently are not competitive towards aggregators. When stopping a production line, companies must not lower the price below the actual value of production losses.

Despite the objections raised, the participants of the first edition of the DSR program appreciate the efforts of PSE to mobilize the resources of the demand side. The guaranteed program has a number of advantages. It is financially balanced - the remuneration for readiness is in the range of PLN 50-100 thousand per MW/year. The effectiveness of the DSR has been confirmed and all reduction facilities have been successfully tested. The program specifies the maximum number of requests per quarter and the bidder may indicate the period of its availability. In some cases, the reduction facility may report its unavailability to PSE. All this allows the bidders to provide a good estimate of the risk associated with the provision of the DSR service.

DSR on the power market

The Capacity Market Act opens up new opportunities for the DSR. Demand side resources may submit proposals in auctions for power provision under the same conditions as generating resources. Winners of the individual auctions will be remunerated at the same price, but this will have to meet the same obligations.

From the point of view of the DSR bidder, the capacity market is more demanding than the guaranteed and the on-going PSE programs. It is not possible for the bidder to report unavailability. If it does not reduce the power upon the request of PSE, it will pay a fine. The frequency and number of requests for reduction is not specified as well. If the NPS is in a critical situation for a longer time, e.g., for several hours or a few days (failure of the largest power units in the system), then the declared level of power consumption should be maintained throughout this period. This may translate into unpredictable and very high losses due to the failure to complete production tasks. The challenge also covers the long time that will elapse between winning the auction and starting to provide services and receive remuneration. The period is 3-4 years. In additional auctions, this time will be reduced to a quarter of that time. In the case of the PSE guaranteed program, the same period is approx. 2 months.

The DSR on the capacity market also has a number of advantages. The entry threshold has been lowered to 2 MW. Proposals may be traded on the secondary market, where the minimum transaction value will be, under the Regulation, even lower, perhaps even 1 kW. This is likely to enable launching the DSR potential in the service sector and small manufacturing facilities. Additionally, bidders who have to incur significant investment expenditures will be able to apply for long-term contracts of up to 5 years. The stability of the instrument itself is also important, because the power market will operate within a perspective of a dozen years, while the PSE programs are offered on an annual basis.

Summary

2018 may be a breakthrough year for DSR in Poland. It will be possible for the bidders to simultaneously apply for contracts under the guaranteed DSR program and the capacity market. As many as three auctions will be finalized (with delivery for 2021, 2022, and 2023). Large power consumers and aggregators, aware of these business opportunities, are doing titanic work to gather as much power capacities as possible. Those who will be awarded contracts in 2018 have a chance for long-term business. Those who will lose or be late will have to make a great effort to be present next year. The good news for consumers is that the increase in the DSR volume will increase the reliability of the NPS operation at a cost lower than ever before.

At this stage, it is difficult to assess the on-going program. The analysis of the commitment of the reduction facilities reported to the on-going program will be possible only after the DSR has been requested during the critical load of the National Power System.

Author: dr Jan Rączka
Date of publication: 5 April 2018