Trading in the flexibility market Sthlmflex has been limited because Svenska kraftnät set a very low price for its so-called temporary subscriptions to the regional network companies, write PA Consulting's Torbjörn Severinsson and Oskar Almén.
By raising the price level of the temporary subscriptions, the regional network companies would choose to request demand flexibility rather than increase their power outlets against the main grid, they say.
Few issues are in greater need of long-term action than energy policy. More efficient use of energy over the course of the day would reduce the risk of acute electricity shortages for industry in more geographically vulnerable areas and at the same time contribute to lower and more stable prices. The energy market is not an exception from other free markets where the price is governed by supply and demand. But the sharp fluctuations in the price per kilowatt hour during the beginning of the year are to some extent unique.
By using the potential in the electricity market for so-called demand flexibility which aims to reduce demand during peak hours, the risk of electricity shortages can be minimised and the price per kilowatt hour stabilised at a much lower level. Aggregators of smaller loads such as heat pumps in homes or industries should be able to redirect their power needs for an hour or two without major problems and impact on operations, if there was an established market for demand flexibility.
In this case, we are not talking about rationing electricity, but rather about applying a smarter approach to electricity consumption. There are lots of electricity-intensive businesses, data centres, greenhouses and aggregate heat pumps are some examples, which could take simple steps to reduce demand if the market conditions were there. Those businesses that do not have the same opportunity to change their electricity consumption around the clock would still enjoy lower costs as a result of the average electricity price falling.
Markets for demand flexibility are in their infancy, but Sthlmflex is a concrete example of a research project that, with the help of this model, can counteract capacity shortages in the electricity grid. The call-off 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. Trade is currently relatively limited as Svenska kraftnät set a very low price for its so-called temporary subscriptions to the regional network companies. The temporary subscriptions mean that Vattenfall Eldistribution and Ellevio can request and use a temporary increase in their subscriptions to the relevant main network point. The price of using this opportunity and the available volumes compete with the flexibility offered by the participants at Sthlmflex. The price of the temporary subscriptions during the period varied between 24 and 25 öre per kilowatt hour and is a weekly subscription. Svenska kraftnät applies a fee corresponding to 1/200 of the annual power fee per subscribed week and kilowatt and an outcome-based fee corresponding to 1/500 of the annual power fee per kilowatt hour used.
Svenska kraftnät makes the actual decision whether to allow a temporary subscription or not. If they refuse the regional network companies but still choose to charge a higher power rate than that for a subscriber, there will be a so-called subscription overrun. Svenska kraftnät then applies a (penalty) fee and the regional network company must pay SEK 2 and 80 öre per kilowatt hour for withdrawals which exceed the subscription, starting from the third hour of exceeding on the same day. During the first hour, a fee corresponding to 56 öre per kilowatt hour is paid. During the second hour of exceeding, a fee corresponding to SEK 1 and 40 öre per kilowatt hour is paid. The price levels for cross-subscriptions are thus significantly higher when compared with the price level for temporary subscriptions.
One way to get more requests for demand flexibility, and thereby reduce the electricity demand for specific hours, is for Svenska kraftnät to simply raise the price level of the temporary subscriptions within the framework of what the electricity network regulation allows. In this way, the regional network companies will have a reason to choose to call for flexibility rather than increase their power outlets against the main grid. The demand for flexibility would increase if suppliers are well paid for adapting what they do.
The ongoing debate has lately focused a lot on who is to blame for the high average price per kilowatt hour at the beginning of 2021. But the need for a long-term solution to Sweden's energy policy must not stop the implementation of existing solutions. With the right commercial conditions, they can both contribute to stabilising and lowering the price of electricity in the spot market and at the same time increase consumers' interest in contributing to a sustainable society in the long term.
The crisis situation that has arisen since the beginning of the year is an excellent opportunity for politicians to act. They should give Svenska kraftnät the task of ensuring that there are actual and profitable markets for demand flexibility, with the aim of creating a sustainable society. Then the government could lay the foundation for value creation so that we can export to the rest of the EU, instead of importing fossil-fuel based electricity.