- Demand-side management (i.e. encouraging people not to use energy when the systems are stressed) will be an important tool to maintain system stability in a world where energy is less dispatchable. There is little historic data on which to base assumptions about the cost of demand shedding. But a few simple economic basics suggest a model:
- The minimum cost must be more than people are paying for their electricity, or they would not be using the electricity.
- Willingness to curtail demand will be marginal. We may find a few users willing to curtail at the minimum cost, but as the scale of curtailment grows, people’s willingness to pay not to be curtailed (i.e. to pay for power, which equates to the opportunity cost of curtailment) will increase.
- This applies both to the scale and the frequency, i.e. each extra GW of curtailment in each period will be more expensive than the previous, and also each time someone has to curtail, it will be a bit more expensive to them than the last. Consider a manufacturing business asked to limit its electricity usage for one hour in the year. At a price, the cost is probably not too significant (depending on circumstance). Now consider if that business is asked to curtail for a week. It would at least be difficult and could be enough to put them out of business. They might accept a reasonable offer for the first, but would want a very high offer for the second.
- Our model assumes that the minimum cost of demand shedding is £200/MWh. Each additional GW that has to curtail in a period is 10% more expensive than the last. And each time a GW tranche has to curtail in the year, the cost is 1% more expensive than previously. For example, if we need to curtail 1 GW in one period and then 2 GW in another period:
- The 1st period is 1 GWh x £200/MWh = £200,000
- The 2nd period is (1 GWh x £202/MWh) + (1 GWh x £220/MWh) = £422,000
- Total cost of demand shedding for the two periods: £622,000
- The effect is roughly what one would expect: small amounts of demand shedding lead to a modest cost. At this scale, it is quite likely a more economic solution for marginal circumstances than providing additional generating capacity or storage to meet the last few GWh of occasional demand (where there is insufficient dispatchable capacity). But, if the system needs frequent and large amounts of demand-curtailment, the cost would rise exponentially. The 3-day week was a lot more expensive than simply the cost of the missing energy.
- These costs would apply whether demand-side management were achieved contractually, or were imposed by the system operator. That simply changes the parties on whom the costs fall: on the operator in the first case, and on the users in the second case. The opportunity cost is the same. In the first case, the cost ends up falling on all consumers via the system operator’s charges. In the second case, a significant part of the cost cascades to government coffers (and taxpayers) because of the hit to taxes and welfare. There is no such thing as a free lunch. Rationing is simply a less responsive means of allocating resources than the market.
