Role of a forward-capacity market to promote electricity use reduction in the residential sector—a case study of the potential of social housing participation in the Electricity Demand Reduction Pilot in the UK

Abstract

The residential sector is key for electricity demand in many developed economies. Reducing electricity use in households is valuable for carbon mitigation and capacity adequacy and addressing fuel poverty. In many liberalised systems, a forward-capacity market is established to remunerate resources’ capacity value, with some allowing electricity use reduction to participate. This paper focuses on the Electricity Demand Reduction Pilot in the UK that trials a novel approach of incentivising electric efficiency via the Great Britain capacity market. Using a case study of social housing, it identifies barriers faced by the residential sector to utilise funding from the pilot. While opportunities exist for electricity use reduction in lighting, appliances and heating, financial incentives based on the impact on system peak demand are unlikely to be attractive and disadvantage insulation and efficient heating system. Limited budget for electric efficiency project and inflexible requirement of over 2-year payback of Electricity Demand Reduction (EDR) Pilot pose the challenge of funding projects, especially for small organisations, even if they can deliver capacity value to the electricity system. The obligation to deliver and verify committed peak savings and limited scope for payback present challenges and risks for projects to target potential opportunities within households. For communal electricity use, the minimum savings, cash flow and limited internal capabilities are constraints. Therefore, it is inadequate to rely on a forward-capacity market as a primary vehicle for incentivising electric efficiency investment in the residential sector, highlighting the importance of alternative provisions like supplier obligation and market transformation.