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The Impact of Demand Response on Energy Consumption and Economic Welfare


Estimating the impact of last winter's Demand Flexibility Service (DFS) on energy demand and economic welfare, and measuring the impact of changing notification period and incentive level on demand reduction.

smart meter energy flexibility


Last Winter, National Grid ESO called upon UK households for the first time to reduce their energy consumption during peak periods and to provide resilience to the grid during times of supply scarcity. In a series of “flexibility events”, suppliers paid customers a small amount to reduce demand during set time windows. Centre for Net Zero has used this opportunity to perform large-scale statistical analyses of the behaviour of the 700,000 Octopus customers who participated in this ‘Demand Flexibility Service’ (DFS).

Key findings

1. 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 £1.05 and £2.6 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.

3. 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. 

Results of six flexibility events (17.00-18.00 or 17.30-18.30)

You can read the full working paper by clicking ‘read online’ on the right hand side of this page.

Centre for Net Zero will be conducting further in-depth analysis of the DFS in the UK this winter, as well as similar flexibility events in other markets internationally, to build our understanding of the role and design of such services in the energy system.