Demand side response for the electricity market in Sweden has much more potential

Further development of electricity markets for demand side response would be a win-win for both those providing flexibility and all other consumers as electricity prices fall in the long run. Yet the potential for this market isn’t used, partly because the prices today are in competition with the temporary subscriptions of the Swedish Transmission System Operator (TSO), Svenska kraftnät (Svk). The short-term solution of low-priced temporary subscriptions hinder the long-term development of flexible resources.

Sweden had a particularly cold winter, making the need for investment in the north-to-south transmission grid obvious as electricity price differences between the northern and southern price areas escalated. Smarter use of electricity during the day could contribute to lower and more stable prices while reducing the risk of acute electricity shortages for industry in more geographically vulnerable areas.

The electricity market in the Nordics is no exception to other free markets – supply and demand set the price. But the sharp fluctuations in the price per kilowatt hour of electricity are, to some extent, unique. As an example, the market price in Sweden’s two southern price areas (SE3 and SE4) on 12 February 2021 at 8am was approximately €250 for one megawatt hour, yet the average price for the entire day was €80. By utilising the potential in the electricity market for so-called demand flexibility, or demand side response (DSR), which aims to reduce demand during stressed hours, the market can minimise the risk of electricity shortages and stabilise the price per kilowatt hour at a much lower level. It’s not a matter of household customers avoiding vacuuming, rather that certain businesses could control their most energy-intensive processes for an hour or two when demand is at its highest.

We’re not talking about rationing electricity – the total consumption would be the same as before. We’re talking about applying smarter electricity consumption that, by bringing forward or postponing some demand for electricity, can avoid negative effects on the economy and consumers. There are plenty of examples of electricity-intensive businesses where data centres, greenhouses and aggregated heat pumps could simply power up and down if market conditions were there, such as sufficient prices and/or regulation.

With sustainability as the overarching goal, financial incentives wouldn’t need to be extensive. An important aspect of demand side response is that it offers a win-win for everyone as wholesale electricity prices fall and generation is more stable. In the long run, it also means we can reduce the production of expensive fossil electricity, letting imports focus on fossil-free electricity.

Reactive markets for demand side response

Svk is responsible for keeping the power system in balance. To do this, it procures ancillary services on several balancing markets. The size of the market for ancillary services was approximately SEK 1.5 billion in 2019 and is expected to grow in the coming years.

For energy producers and energy-intensive organisations providing ancillary services to the Svk, there is an opportunity to expand business while contributing to a secure and sustainable energy transition. However, hydropower plants provide 98 per cent of ancillary services today, proving demand side response isn’t used even to a fraction of its full potential, even if some data centres are participating.

The graph below illustrates Svk’s projections for how the ancillary services market will grow between now and 2025.

Proactive markets for demand side response

Proactive markets for demand flexibility are in their infancy but Sthlmflex, a research project initiated by Svk, Vattenfall and Ellevio, is a concrete example of how such a model can counteract capacity shortages in the electricity grid. The NODES marketplace offers a trading platform for players that provide demand flexibility. Since the beginning of the year, the prices announced have varied from 20 öre to 5 kronor per kilowatt hour (around €20 to €500 per MWh).

Trade is currently relatively limited as Svk set a very low price for its so-called temporary subscriptions to the regional network companies. The temporary subscriptions are in direct price competition with the flexibility providers. It’s a good thing to make use of the electricity grid as efficiently as possible, but the temporary subscriptions are a short-term solution that’s slowing down the development of demand side response. In the long run, flexibility resources will be needed and the temporary subscriptions will be removed. One way to get more support for demand flexibility, and thereby reduce the need for electricity

for specific hours, is for Svk to raise prices within the framework of what the electricity network regulation allows. This would encourage regional network companies to build in demand flexibility rather than increase the power they purchase (offtake) from the transmission grid. In the future, when the transmission grid is even more constrained, it won’t be possible for the regional network companies to increase their offtake, so it’s vital to develop the markets for demand side response now.

With high wholesale electricity prices at certain hours and the need for importing fossil-based electricity, there’s an excellent opportunity for Svk to act. They can take the lead in ensuring there’s a profitable market for demand flexibility (both reactively and proactively) with the aim of creating a sustainable society.