March 25, 2024

The Impact of Demand Response on Energy Consumption and Economic Welfare


Centre for Net Zero


In 2022 and 2023, the Electricity System Operator of Great Britain introduced the first ever country-level Demand Flexibility Service (DFS), a program aimed at encouraging utilities and the general population to curtail energy demand during peak times. Octopus Energy implemented its version of the program called Saving Sessions. This initiative comprised 13 individual demand response sessions offered to 1.4 million customers, with incentives awarded to customers for reducing their energy consumption. We estimated the impact of this nationwide program on energy demand and economic welfare. Additionally, we conducted a natural field experiment involving different advance notice periods and incentives provided to customers for their participation in a Saving Session.

Key findings

Domestic consumers can provide meaningful demand side response
40% reduction from those who sign up and opt in to an event, and a 10% reduction associated with those customers simply invited to take part. Overall effects are comparable to a small power plant’s production – 1642 MWh demand reduction in total, over 14.5 hours – demonstrating the DFS can provide grid-scale flexibility.

② Overall, we see positive welfare benefits relative to the costs
Between £1.60 and £2.60 for every £1 spent, depending on benefits quantified, which indicates a positive impact relative to the costs involved, when considering environmental impacts and reducing the risk of lost load (e.g. blackouts). The DFS could increase its value when targeted at cases in which there is a high chance of lost load.

Notice period makes a difference
Customers still reduce demand with shorter notice than the typical ‘day-ahead’, but effects are about a quarter lower. Operators and providers should iterate design options for optimal participation, while maximising cost-effectiveness and flexibility provided.

④ We see meaningful demand response from all consumers, but those on smart tariffs and living in less deprived areas are slightly more likely to take part and reduce consumption somewhat more
While all consumers benefit from reduced system costs, this underscores the need to expand flexibility to a wider set of consumers and avoid groups being “locked out”. There was no relationship between demand reduction and a home’s energy efficiency or region of the UK.

⑤ Accurate baselining methodologies are key
Our analysis shows the importance of improving how National Grid ESO and flexibility providers measure customer flexibility. As we transition to a system characterised by high amounts of sustained intelligent demand, industry methodologies need greater accuracy. To this end, Centre for Net Zero is leading research to develop and standardise higher accuracy ‘baselining’ methodologies with other industry stakeholders.