Sign In

Error
Error
Create an account

Create a free IEA account to download our reports or subcribe to a paid service.

Join for freeJoin for free

Demand Response

Technology deep dive
More efforts needed
Hector Martinez Ruupyvdsnek Unsplash

About this report

Demand response involves shifting or shedding electricity demand to provide flexibility in wholesale and ancillary power markets, helping to balance the grid. It is based on two main mechanisms: price-based programmes (or implicit demand response), which use price signals and tariffs to incentivise consumers to shift consumption, and incentive-based programmes (or explicit demand response), which monetise flexibility through direct payments to consumers who shift demand in a demand-side response programme. 

A positive trend in the regulation and implementation of demand response has continued in a number of countries since 2020, including the expansion of existing programmes and by allowing smaller resources to participate.  

However, to correspond with the Net Zero Emissions by 2050 Scenario, the pace of policy implementation and technology deployment needs to accelerate. The Net Zero Scenario milestone has 500 GW of demand response brought onto the market by 2030, corresponding to a tenfold increase in deployment levels in 2020. 

Activity

Globally, the pace of market growth in demand response is not aligned with the 500 GW of capacity available in 2030 in the Net Zero Scenario, under which the need for electricity system flexibility, defined as the hour‐to‐hour change in output required from dispatchable resources, more than doubles to 2030. Demand response and battery storage combined are projected to meet around a quarter of flexibility needs globally by 2030 (increasing to meet half of flexibility needs by 2050). 

Demand response availability at times of highest flexibility needs and share in total flexibility provision in the Net Zero Scenario, 2020 and 2030

Openexpand

European markets have been increasing demand response capacity since 2020, with some countries launching their first auctions or diversifying their portfolio of demand-side resources.  

Relevant and recent market updates include the following: 

Technology deployment

Distributed energy resources and connected devices have the potential to contribute significantly to demand response, reduce peak demand and support net zero pathways, if coupled with smart meters and digital management systems that allow the aggregation and remote control of smaller and more numerous resources. In the Net Zero Emissions by 2050 Scenario, around 250 GW of demand response capacity is in buildings, and another 50 GW comes from electric vehicles. This capacity is made available to the market thanks to the deployment of enabling digital technologies across key end-uses, and is complemented by the expansion of distributed electricity storage. 

Selected global technology deployment, 2020 and 2030

Technology 2020 deployment status 2030 deployment in line with Net Zero Scenario milestones
Commercial and residential energy storage systems 3.7 GW 510 GW
Smart thermostats 30.4 million 231.5 million
Home energy management systems 4 million 32.7 million
Residential air conditioners 1.9 billion 2.6 billion
Heat pumps 180 million 600 million
Residential electric vehicle smart chargers 117 000 28.7 million

Note: Smart thermostats are thermostats able to optimise heating and cooling based on current and historical data. Residential electric vehicle smart chargers are chargers installed in residential premises that manage smart charging themselves, excluding smart charging done through the car or another device. Source: IEA analysis based on Guidehouse data, 2022.

Innovation

Some countries, such as France, Italy, the Netherlands and the US are increasing experimentation around electric vehicle-to-grid (V2G) charging, which technically allows vehicles to input electricity into the grid.  

In 2022, the UK launched a programme on energy smart appliances to test interoperable demand response, including through smart meters and energy management systems.  

Virtual power plants (VPPs), which digitally link, aggregate and centrally control distributed energy resources for their optimal use, are also expanding, but they remain uneven across geographies and have yet to reach the fully commercial stage.  

New public and private VPP projects have been launched:  

  • In Australia, in 2021 only 31 MW were enrolled in Australian Energy Market Operator VPP programmes; however, initiatives and pilots are multiplying, including in Western Australia, Victoria and New South Wales
  • Tesla has been expanding its VPP from South Australia to four additional states and following a similar expansion in the United States, namely in California and Texas
  • Stem Inc. is developing a VPP in Chile, considered to be the first in Latin America. 
Policy

The energy crisis in Europe brought a renewed push for market design optimisation and power system flexibility. The 2022 REPowerEU plan introduced an obligation to install solar panels on new buildings and the acceleration of storage deployment to support security and flexibility.  

While more effort is still needed to support demand-side flexibility and align with the Net Zero Scenario, important measures were implemented in the past year: 

Policies

Policy
Country
Year
Status
Jurisdiction
International collaboration

International initiatives are central to accelerating the implementation of innovative technologies to support demand-side flexibility, allowing the exchange of best practices. Efforts to collaborate more closely are multiplying.  

Relevant initiatives include:    

  • The IEA Digital Demand Driven Electricity Networks Initiative promotes analysis and engagement to accelerate progress on power system digitalisation and the effective use of distributed energy resources for demand-side flexibility.  
  • IEA TCPs are providing evidence, policy guidance and support for high-level government action on the design, social acceptance and usability of clean energy technologies (Users TCP), on smarter, cleaner electricity grids (ISGAN), and on energy-using equipment and systems (4E TCP). 
  • Mission Innovation Green Powered Future Mission launched a roadmap of innovation priorities, including on system flexibility and market design, to effectively integrate up to 100% variable renewables by 2030.  
Recommendations for policy makers

In responding to the current crisis, governments should not lose sight of long-term decarbonisation goals, and therefore they should accelerate the use of demand-side flexibility to support energy security and system resilience.  

Governments and regulators should appropriately value and reward demand-side resources, allowing them to compete fairly with supply-side sources of flexibility, ensuring that explicit and implicit barriers to demand-side participation in demand response programmes are removed. They should ensure there is a level playing field for both traditional and new flexibility providers, including aggregators. Demand-side resources should also be included in power system planning.  

Finally, they should provide incentives, clear communication and education to promote the active participation of consumers and communities in providing flexibility, while strengthening cybersecurity, safeguarding consumers’ privacy, and ensuring equity and affordability.  

Regulators should leverage innovative tools such as regulatory experimentation and sandboxes to rapidly test new technologies and solutions, business models and different roles for the actors involved, in real conditions. 

To broaden participation in demand response programmes, innovation and testing are also needed on behavioural insights and the role of digital platforms and intermediaries.  

Frameworks to support innovative business models should include multiple value streams, and support the deployment of enabling technologies, namely smart meters and controls. Policy makers should also facilitate consumer and third-party (including aggregators) access to relevant data, including from smart meters, while protecting consumer interests. 

Governments should embed connectivity and smart functionality requirements as part of minimum energy performance standards for high-consuming devices, such as air conditioners, heating systems, heat pumps, water boilers and electric vehicle charging, and include these requirements in energy efficiency standards for buildings. This would also unlock opportunities for private charging infrastructure to provide grid services and act as a responsive distributed energy resource.  

The adoption of future-ready devices and systems can also be supported by providing incentives to consumers in the form of rewards.  

In implementing such policies and schemes, governments should ensure supply chain resilience, in coordination with the private sector, including by assessing the potential risks associated with accessing critical minerals.  

Better strategies for the exchange and coordination of data in the electricity system are needed, including consumers, operators of transmission and distribution systems, and aggregators. They should ideally be aligned with broader country digitalisation and data strategies, including data privacy regulations.  

Governments play a central role in creating conducive frameworks, including by assigning clear roles and responsibilities to enable the effective operation and use of distributed energy resources to provide demand-side flexibility.  

The visibility and controllability of distributed solar PV and behind-the-meter battery storage should also be improved by setting up registries and installing smart meters.

Recommendations for the private sector

To maximise the use of distributed energy resources, relevant devices must be able to adequately communicate, be automated or remotely controllable where viable, and be capable of responding to price signals and incentives.  

The private sector should expand the use of open and interoperable communication standards and adopt approaches that favour the use of open-source software and codes over proprietary ones, through initiatives such as LF Energy. This would also contribute to lowering the cost and length of product and solution development, as well as support the creation of new business models.  

Acknowledgements
  • Alexandra Schneiders, Research Associate, UCL Energy Institute, and Lead of Global Observatory on Peer-to-Peer, Community Self-Consumption and Transactive Energy Models (Users TCP), Reviewer 
  • David Shipworth, Professor of Energy and the Built Environment at UCL, and Users TCP Chair, Reviewer  
  • Emanuela Sartori, Head of Strategic Marketing, Enel X, Reviewer  
  • Jeong Seonho, Senior Manager, Demand Response Market Team, New Electricity Business Department, Korea Power Exchange, Reviewer 
  • Paul Troughton, Senior Director of Regulatory Affairs, Enel X, Reviewer 
  • Valeria Sergi, Strategic Positioning, Strategic Marketing, Enel X, Reviewer 

Analysis