Demanding a response: Europe's DR policies need change

The US is way ahead of Europe on demand response. So much so that while the two big US demand response companies, EnerNOC and Comverge, are being forced to look elsewhere for business as their home market nears saturation point, here in Europe, demand response is only just beginning to get off the ground.

Demand response is a process that can help maintain the supply-demand balance of energy on the grid — a service mostly provided today by costly, carbon-emitting peak power stations. Rather than powering up standby power plants to provide the extra power during peak times, demand response can help provide some of this power from the customer side (the “demand” side) instead. It means using less energy and producing less carbon, saving money and helping to balance the increasing amount of variable renewable energy on the grid.

The potential for demand response in Europe in terms of its peak clipping capabilities is thought to be comparable to the US. Currently, clipping capabilities are roughly estimated to be in the 5- to 11-percent range, depending on the profile of commercial/industrial and residential resources available in each market.

This represents a huge opportunity for Europe’s demand response players and investors. These companies are not multimillion-market-cap public entities like their US counterparts, but small and venture-backed. There are only a handful of players including Kiwi Power and Flexitricity, both in the UK, Cybergrid in Austria and Entelios in Germany.

So is the threat of invading Americans an issue for them? It’s not for Oliver Stahl, the CEO of Entelios, one of the first companies to offer demand response programs in Europe. He has a bigger problem: regulation.

Entelios is currently focused on the German commercial and industrial sector offering demand response services to utilities and grid operators. Stahl says in terms of potential megawatts (MW) under management, the sector represents — technically — around 8,000 MW. That’s equivalent to eight nuclear power stations.

He says an additional 15,000 MW is available in the residential sector, although this will be much harder to access.

The extra capacity these markets can offer will be even more important to Germany now that it has announced it will close all of its nuclear power stations by 2022 and aims for 80-percent renewable energy by 2050.

Stahl is at the forefront of the DR policy agenda in Europe and is one of founding members of the Smart Energy Demand Coalition (SEDC), a group of 45 utilities and energy-related companies campaigning for regulatory change. Together they represent over 150 million end-use consumers.

Obviously the European Commission is committed to implementing energy efficiency measures. Its proposed new Energy Efficiency Directive aims to help the EU achieve its 20/20/20 objective: a 20-percent cut in emissions of greenhouse gases, compared with 1990 levels; a 20-percent increase in the share of renewables in the energy mix; and a 20-percent cut in energy consumption … all by 2020.

Stahl has his own goal: 20 percent of Europe’s commercial and industrial sector participating in DR programs in some capacity by 2020. And he hopes the SEDC’s campaign will clear the path and open up the market.

“I can make revenues now,” he told me at our recent energy efficiency-focused investment conference in London, “but we can only realize the full potential of all energy reduction assets if we have a better regulatory framework.”

Stahl wants a European-wide action plan on demand response comparable to the Federal Energy Regulatory Commission’s “National Action Plan on Demand Response” in the US.

Currently in Europe, policy is written assuming that capacity is provided only by the generators and, consequently, tenders are written for them only, essentially blocking demand-side resources from participating. The SEDC wants policymakers to recognize the demand side as a valuable resource that is able to participate in the balancing and/or capacity markets.

Currently, 20 out of 27 EU member states have residual historic regulation along these lines inhibiting the development of demand response across the commercial and industrial and residential sectors, according to the SEDC.

And although progress is being made — particularly in the UK, Ireland and France — local DR companies are still struggling to scale up.

US-based EnerNOC has been deploying an aggressive acquisition strategy to gain access to new markets. It hasn’t bought up any European firms yet, but the company is now operating in the UK.

Stahl says competitors help to build a market, and he has a couple of key advantages anyway: knowing EU-specific policies and the regulatory frameworks, industry networks, and an ICT technology that’s capable of controlling loads in a fully automated manner. In the US, DR is still quite often a manual process managed by phone.

As one of Entelios’ investors, Albert Fischer from Dutch VC Yellow&Blue, said, “Europe is already working to higher energy efficiency standards than many other regions, so we expect the best European technologies to attract wider attention as they mature.”

So, even though the DR market in Europe has some catching up to do, the technology does not.

Editor’s note: This was a guest commentary by Tom Whitehouse, chairman of the London Environmental Investment Forum.