demand response integration and remuneration in the

Final Master’s Thesis

Double Master’s degree in Energy Engineering and

Management

Demand Response integration and remuneration in the

electricity system

Case study on H2020 – Osmose in collaboration with ABB

Thesis Report

Author: Giulio Italo Rodio

Supervisor: Francisco Diaz-Gonzalez

Co-supervisor: José Pablo Chaves Ávila

Call: June 2020

Escola Tècnica Superior

d’Enginyeria Industrial de Barcelona

Demand Response integration and remuneration in the electricity system

1

ABSTRACT

The increasing pressure of climate change has led to a global effort to an energy transition from

fossil fuels sources to renewable energy sources which, however, are characterized by an

intermittent generation related to weather conditions. As the electrical power system is based on

the fundamental principle of balance between supply and demand, intermittent generation has

drove the attention to the consumption side of the equation. The purpose of this study is to

investigate the flexibility of the demand and its service of demand response in order to maximize

the integration of renewables in the electricity system. On top of an extensive literature review, a

feasibility study of the technology is carried out within the H2020 project named Osmose in

collaboration with the company ABB Power Grids. Next, a qualitative assessment is used to evaluate

the current business models of the aggregator and what are the main blockers that are preventing

the emergence of this new market agent. The results come in the form of a set of recommendations

to encourage and propel the deployment of flexibility services in the electricity system in terms of

both regulatory and financial support schemes. Further research on this topic is needed in order to

assign a precise value to a unit of flexibility and to determine the temporal and adjustable

granularity of demand response required to operate across all the energy sectors.


2

TABLE OF CONTENTS ABSTRACT ...................................................................................................................................... 1

TABLE OF FIGURES ......................................................................................................................... 5

ACRONYMS .................................................................................................................................... 7

1. INTRODUCTION ...................................................................................................................... 9

1.1 Flexibility need in the power sector ................................................................................ 9

1.2 Scope & Boundaries ...................................................................................................... 11

1.3 Methodology ................................................................................................................ 13

1.4 Climate Change............................................................................................................. 15

1.5 Energy and Climate Goals & Targets ............................................................................. 16

1.6 RES in Europe & Italy .................................................................................................... 19

1.7 Importance of renewable energy forecasting ................................................................ 23

1.8 Demand Response ........................................................................................................ 23

1.8.1 DR definition ......................................................................................................... 24

1.8.2 EU Regulation of DR .............................................................................................. 25

2 ELECTRICITY MARKET FRAMEWORK IN EUROPE AND ROLE OF DEMAND RESPONSE ............. 28

2.1 Electricity System ......................................................................................................... 29

2.2 Electricity Regulation .................................................................................................... 33

2.2.1 Europe Regulation ................................................................................................ 33

2.2.2 Italian Regulation .................................................................................................. 33

2.3 Electricity Market ......................................................................................................... 34

2.4 Demand Response Market ............................................................................................ 37

2.5 Demand Response Services .......................................................................................... 40

2.6 Ancillary Services .......................................................................................................... 41

2.6.1 Congestion Management ...................................................................................... 42

2.6.2 Frequency Control ................................................................................................ 42

2.6.3 Automatic Voltage Control .................................................................................... 43

2.7 Aggregator & Virtual Power Plant ................................................................................. 44

3 CASE STUDY ......................................................................................................................... 46

3.1 Osmose ........................................................................................................................ 46

3.2 Osmose in Italy & role of ABB ....................................................................................... 47

3.3 Industrial Sites .............................................................................................................. 49


3

3.4 System Architecture & Site Installation ......................................................................... 51

3.5 Aggregator Platform ..................................................................................................... 53

3.6 Price Identification........................................................................................................ 56

3.7 Impact .......................................................................................................................... 58

4 QUALITATIVE ANALYSIS ........................................................................................................ 61

4.1 Situation Analysis ......................................................................................................... 61

4.1.1 Stakeholder Analysis ............................................................................................. 61

4.1.2 Risk Analysis.......................................................................................................... 63

4.1.3 SWOT Analysis ...................................................................................................... 65

4.1.4 Main barriers for DSM participation ...................................................................... 66

4.2 Overview of Aggregator Business Model ....................................................................... 67

4.2.1 Causal Map ........................................................................................................... 68

4.2.2 Aggregators combining roles ................................................................................. 70

4.2.3 Independent Aggregators...................................................................................... 71

4.2.4 Remuneration scheme .......................................................................................... 72

4.2.5 Aggregators’ Capabilities ....................................................................................... 72

4.2.6 Current Aggregators Business Model .................................................................... 73

4.3 Interviews ..................................................................................................................... 74

4.4 Validation ..................................................................................................................... 75

4.5 Recommendations ........................................................................................................ 77

4.5.1 Access to market ................................................................................................... 77

4.5.2 Market process and coordination .......................................................................... 78

4.5.3 Mechanism and remuneration .............................................................................. 78

4.5.4 Privacy .................................................................................................................. 79

4.6 Discussion..................................................................................................................... 79

5 PROJECT PLANNING AND BUDGET ........................................................................................ 81

5.1 Planning ....................................................................................................................... 81

5.2 Realization Cost ............................................................................................................ 81

6 ENVIRONMENTAL AND SOCIAL IMPACT................................................................................ 83

6.1 Environmental Impact .................................................................................................. 83

6.2 Social Impact ................................................................................................................ 84

7 CONCLUSION........................................................................................................................ 85


4

7.1 Research Question ........................................................................................................ 85

7.2 The Future of the Electricity System .............................................................................. 86

7.3 Research Limitations ..................................................................................................... 87

7.4 Future Research............................................................................................................ 87

8 ACKNOWLEDGEMENTS ........................................................................................................ 89

BIBLIOGRAPHY ............................................................................................................................. 90

ANNEX I ....................................................................................................................................... 96

ANNEX II .................................................................................................................................... 104


5

TABLE OF FIGURES

FIGURE 1 AVERAGE DAILY GENERATION PROFILE OF WIND (BLUE) AND SOLAR (GREEN) (TERNA,

2019) ..................................................................................................................................... 9

FIGURE 2 LOAD DURATION CURVE OF RESIDUAL LOAD (YELLOW) AND DEMAND (BLUE) (TERNA,

2019) ................................................................................................................................... 10

FIGURE 3 TYPOLOGY OF FLEXIBILITY REQUIREMENTS (OSMOSE, 2019) ........................................ 11

FIGURE 4 METHODOLOGY SCHEME .............................................................................................. 13

FIGURE 5 EARTH OVERSHOOT VARIATION SINCE 1971 (GFN, 2020) ............................................. 15

FIGURE 6 GLOBAL EVOLUTION OF GDP AND CO2 EMISSIONS ....................................................... 16

FIGURE 7 SCENARIOS WITH REDUCTION OF EMISSIONS PER SECTOR (MCKINSEY, 2019) .............. 17

FIGURE 8 COAL THERMAL POWER PLANT PHASE-OUT BY 2025 (MISE, 2020) ................................ 18

FIGURE 9 SHARE OF RENEWABLE ENERGY IN GROSS FINAL ENERGY CONSUMPTION (EEA, 2019) . 19

FIGURE 10 RES DIVIDED BY TYPE OF SOURCE IN EU IN 2018 (EUROSTAT, 2019) ............................ 20

FIGURE 11 HISTORICAL MEAN LCOE VALUES (LAZARD, 2017) ....................................................... 21

FIGURE 12 UNSUBSIDIZED LCOE COMPARISON (LAZARD, 2017) ................................................... 21

FIGURE 13 CUMULATIVE INSTALLED CAPACITY PER YEAR (SOLAR IN GRAY, WIND IN GREEN)

(TERNA, 2019) ...................................................................................................................... 22

FIGURE 14 INSTALLED SOLAR (BLUE) AND WIND (GREEN) POWER GEOGRAPHICAL DISTRIBUTION

(TERNA, 2019) ...................................................................................................................... 22

FIGURE 15 DEMAND SIDE MANAGEMENT VEHICLES .................................................................... 24

FIGURE 16 LOAD SHAPE OBJECTIVE OF THE DSM PROGRAM (ALHAM, 2017) ................................ 25

FIGURE 17 THEORETICAL DEMAND RESPONSE POTENTIAL (IN MW) (DONG, 2017) ...................... 26

FIGURE 18 SIMPLIFIED EFFECT OF DR ON ELECTRICITY MARKET PRICES (EETD, 2006) ................... 28

FIGURE 19 POWER SYSTEM GENERAL PHYSICAL STRUCTURE (CASTRO, 2019) .............................. 29

FIGURE 20 SMART GRID (YU & XUE, 2016) ................................................................................... 31

FIGURE 21 SIMPLIFIED SCHEMATIC OF THE ENERGY MARKET (INCITE , 2020) ............................... 32

FIGURE 22 TYPE OF ELECTRICITY MARKET AS A FUNCTION OF TIME OF PURCHASE (INCITE , 2020)

............................................................................................................................................ 35

FIGURE 23 MARKET CLEARING PRICE BY AGGREGATION OF SUPPLY AND DEMAND ..................... 35

FIGURE 24 ANCILLARY SERVICES CLASSIFICATION (KAUSHAL & HERTEM, 2019) ............................ 36

FIGURE 25 DEMAND RESPONSE IN THE ELECTRICITY MARKET (EETD, 2006) ................................. 37

FIGURE 26 MAP OF EXPLICIT DEMAND RESPONSE DEVELOPMENT IN EUROPE (SEDC, 2017) ........ 38


6

FIGURE 27 MAP OF ACCESS TO MARKETS (LEFT), SERVICE PROVIDER ACCESS (MIDDLE) AND

PRODUCT REQUIREMENT (LEFT) ........................................................................................... 39

FIGURE 28 ANCILLARY SERVICES FREQUENCY CONTROL ACTIVATION TIME (KAUSHAL & HERTEM,

2019) ................................................................................................................................... 42

FIGURE 29 THE OSMOSE KEY FIGURE AND CONSORTIUM COMPOSITION (OSMOSE, 2020) .......... 47

FIGURE 30 DEMO SITE LOCATION AND FLEXIBILITY RESOURCES IDENTIFICATION ......................... 48

FIGURE 31 REMOTE TERMINAL UNIT ABB RTU540 (ABB, 2020) .................................................... 52

FIGURE 32 AGGREGATOR CONCEPTUAL SCHEMATIC (OSMOSE, 2018) ......................................... 54

FIGURE 33 THE TASK OF AGGREGATING RESOURCES .................................................................... 54

FIGURE 34 AVERAGE FRR PRICE .................................................................................................... 56

FIGURE 35 AVERAGE UPWARD BALANCING MARKET PRICE .......................................................... 57

FIGURE 36 AVERAGE DOWNWARD BALANCING MARKET PRICE ................................................... 57

FIGURE 37 OSMOSE IMPACTS (OSMOSE, 2020) ............................................................................ 59

FIGURE 38 STAKEHOLDER INTERRELATION DIAGRAM .................................................................. 62

FIGURE 39 RISK ANALYSIS’S LEGEND ............................................................................................ 63

FIGURE 40 RISK ANALYSIS ............................................................................................................ 64

FIGURE 41 AGGREGATOR SHARING ECONOMY ENVIRONMENT.................................................... 67

FIGURE 42 CAUSAL MAP .............................................................................................................. 69

FIGURE 43 GANTT CHART ............................................................................................................. 81


7

ACRONYMS

ACER = Agency for the Cooperation of Energy Regulators

AMI = Analog Measured Values

ARERA = Autorità di Regolazione per Energia Reti e Ambiente

AVC = Average Voltage Control

BESS = Battery Energy Storage System

BM = Business Model

BRP = Balance Responsible Parties

BSP = Balance Service Provider

CEP = Clean Energy Package

DCS = Distributed Control System

DES = Distributed Energy Sources

DR = Demand Response

DSF = Demand Side Flexibility

DSM = Demand Side Management

DSO = Distribution System Operator

DSR = Demand Side Response

DTR = Dynamic Thermal Rating

EC = European Commission

EEA = European Environment Agency

EED = Energy Efficiency Directive

EMS = Energy Management System

EHV = Extremely High Voltage

EU = European Union

EV = Electric Vehicle

FCR = Frequency Containment Reserve

FIT = Feed In Tariff

FRR = Frequency Restoration Reserve

GHG = Greenhouse Gas

GME = Gestore Mercati Energetici

GSE = Gestore Servizi Energetici

H2020 = Horizon 2020

HMI = Human Machine Interface

HV = High Voltage

IED = Intelligent Electronic Device

IEM = Internal Energy Market

INDC = Intended Nationally Determined Contributions

IGCC = International Grid Control Cooperation

IO = Input/ Output

IPCC = Intergovernmental Panel on Climate Change

ITS = Information Technology System


8

JMM = Joint Market Model

LCOE = Levelized Cost Of Energy

LV = Low Voltage

MB = Member State

MCP = Market Clearing Price

MFI = Measured Floating point Information

MGP = Mercato del Giorno Prima

MI = Mercato Infragiornaliero

MSD = Mercato dei Servizi di Dispacciamento

MV = Medium Voltage

NDA = Non-Disclosure Agreement

NECP = National Energy and Climate Plan

NTG = National Transmission Grid

PNIEC = Piano Nazionale Integrato per l’Energia e il Clima

PLC = Programmable Local Controller

PPA = Power Purchase Agreement

RES = Renewable Energy Source

RR = Restoration Reserve

RTU = Remote Terminal Unit

SEDC = Smart Energy Demand Coalition

TOU = Time Of Use

TSO = Transmission System Operator

UVAC = Unità Virtuali Abilitate di Consumo

UVAM = Unità Virtuali Abilitate Miste

UVAP = Unità Virtuali Abilitate di Produzione

VPP = Virtual Power Plant

WP = Work Package

WPP = Wind Power Plant


9

1. INTRODUCTION

This research is going to address the effective penetration of renewable energies into the electricity

grid accounting and pivoting the focus on energy flexibility assets. This introductory chapter has the

intent to provide a broad overview of the topic and the reasons why it is investigated, explain the

methodologies adopted and draw the boundaries of the research, starting with a first glance of what

flexibility is.

The following chapter 1.1 is to describe the theme of this research and the following one is used to

explain the methodology used in this research and to outline the research question that will be used

as a guide throughout the paper. Next, the core of the problem is extrapolated and identified with

a top-down approach starting from climate change, passing through the global effort of identifying

goals & targets and through the use of Renewable Energy Sources (RES) as a mean to achieve the

energy transition, finally reaching the theme of the paper that surrounds Demand Response (DR)

and Energy Flexibility Assets.

1.1 Flexibility need in the power sector

The conventional generation system based on thermal power plants have full capacity to control

and program the amount of energy that needs to be generated. One of the main features of

renewable energy sources is the non-programmability of their generation profile. Both wind and

solar power plants, for instance, are generating energy according to a function of wind and sun

availability, independently from the level of energy demand or necessities of the system. As such, it

is not possible to control the production on request, unless the desire is to reduce it. In this case,

there is the possibility to curtail part of the energy produced which, however, means giving up to

some potential energy (Terna, 2019). The average daily generation profile of solar and wind in 2017,

has an average distribution depicted in Figure 1.

Figure 1 Average daily generation profile of wind (blue) and solar (green) (Terna, 2019)

Especially the generation of solar power is concentrated during the central hours of the day, when

the sun shines the most. It is in this context that is defined the residual load (iea, 2017): the

difference between the demand of energy and the generation coming from non-programmable RES.

This dimension has a relevant importance in the electric system, and it is translated into the effective


10

load that must be covered by “programmable”, mainly traditional, power plants. With the increasing

penetration of RES, the profile of the residual load is going to substantially vary from the demand

profile causing high variation during the course of the day with particular attention on the evening

ramp increase due to increase in demand during evening hours coupled with the reduction of solar

generation (Caiso, 2016).

Figure 2 Load Duration Curve of residual load (yellow) and demand (blue) (Terna, 2019)

Moreover, the load duration curve, observable in Figure 2, of the residual load is positioned below

the demand curve and reaches much smaller values on the left side, when the RES is contributing

with the highest share, with several implications over the electric system. The investigation of these

impacts, such as the standby operations of thermal power plants, is out of the scope of this research.

The way the network is changing from a centralized to a highly decentralized and hyperconnected

system is causing the need for a set of new services that can endure this change and support the

energy transition. The increasing penetration of RES is bringing along high fluctuations in the

generation curve caused by the intermittency of those non-programmable source of energy. As the

ultimate objective of the system is to match the generation with the demand, a new approach is to

adapt the demand to the intermittent generation so to exploit the latter at its maximum. In other

words, the intent is to procure flexibility assets at the demand side so to consume at all time the

energy generated by the RES. This can be done by making the demand flexible, which is to regulate

in terms of increasing, decreasing and shifting the demand in order to match generation. This service

is called Demand Response. The flexibility is provided in agreement with the consumer which is then

involved in a remuneration scheme for his participation. In other words, the goal is to shift part of

the demand to the moments with overgeneration.

Throughout this paper the term flexibility is generally defined as “a power system’s ability to cope

with variability and uncertainty in demand and generation” (OSMOSE, 2019). In fact, as a continuous

share of generation from non-dispatchable sources (like wind and solar photovoltaic), flexibility is

becoming more and more important in the context of the power system. These sort of power

generation supplies coming from renewable sources is only partially predictable and, as a

consequence, cannot be dispatched freely: operators can curtail generation but not increase it


11

(Weibezahn, 2019). Within the energy system there can be identified three temporal kinds of

flexibility:

1. The long-term flexibility arising from the mismatch between the renewable energy patterns

and demand such as solar power generation peak load during summer and winter. This type

of flexibility is little dependent from forecasts and forecasts errors.

2. The medium-term horizon (hours to weeks), in order to contain deviations, dispatchable

generators adjust and align with forecast.

3. The short-term flexibility where the forecast errors must be balanced out in a very short

timeframe by ancillary services to keep demand/supply deviations as little as possible and

ensure grid stability.

Given an energy system with a high share of variable renewables, short-, medium- and long-term

flexibility all serve the same purpose: balancing supply with demand. Even with the same purpose,

these differ in time available for balancing and amount of energy required.

Figure 3 Typology of flexibility requirements (OSMOSE, 2019)

As shown in Error! Reference source not found., short-term must provide flexibility on a very short n

otice but, compared with long-term, the amount of energy required is small. In contrast, long-term

flexibility is characterized by large amount of energy in long time. To provide flexibility there are

four main ways: flexible demand, flexible generation, network interconnection and energy storage

systems.

The goal of this research is to explore and test the service of demand response as a flexibility asset

in order to cope with grid imbalances and to support new market agents in joining the market under

a fair remuneration scheme that can guarantee competitiveness.

1.2 Scope & Boundaries

This chapter is dedicated to defining the scope of the research and to draw the boundaries within

which it takes place. The boundaries are particularly important because they confine the research,

steering it to answering the research question.


12

As it will be introduced in the coming chapters, the climate change crisis involves several sectors

that span a variety of industries. The baseline is, thus, traced upon the use of energy. Considering

the energy sector is vast and it comes in different forms for different purposes, it is crucial to specify

that the scope of this research is in the energy sector dedicated to the generation and demand of

electricity. Now, the latter has been produced for more than a century from different sources of

energy. This research is considering and focusing on the energy coming from renewable sources,

specifically the ones with intermittency as characteristic. Conventional thermal power plants are

assumed to be in a roll out phase and the will to substitute them with RES is assumed as a priority.

However, while analyzing the electricity system as a whole, it is clear that these type of power plants

still play an important role. As such, traditional power plants are going to be assumed as the last

favorable choice in the energy generation mix.

The reference goals, targets and objectives used are the ones that the European Union have settled.

This in turn implicates defining the geographical boundaries of the research. The first general

geographical boundary is the European Union with its interconnections. Going more in the specifics

of the research, given also the case study, Italy is the Member State of more interest. It is assumed

that a model working in Italy, one of the biggest Member States and with one of the largest

economies in Europe, it can be implemented, with the relative adjustments, to any other Member

State of the Union. Due to the nature of the case study, during the characterization of the project,

the focus is on the industrial sites, the Transmission System Operator (TSO) and an aggregator

linking the two of them. As the playfield is on HV lines, the Distribution System Operator (DSO) is

disregarded in this part of the research. The DSO is going to be considered and involved in the rest

of the research when the electricity system as whole is considered.

An overview of the regulation will be provided, but it is assumed to be developing quickly in the

future as more objectives and standards must be met by the Member States (MB). The latter have

the ability to implement measures that they desire in order to achieve these goals. The Clean Energy

Package (EC, 2019) (CEP) has established mandatory goals for the Member States. Throughout this

research the latest regulations are considered together with the will of each and every Member

State to satisfy the given objectives. So, as the regulation is changing at a fast pace, the pillars over

which this research relies on are assumed to be the soon to be reached targets.

This research is focusing on energy flexibility assets as a service of demand response. As such the

focus is oriented on the way the service works and its methods. In this context, large attention is

placed on Battery Energy Storage System (BESS) as these are considered to be part of the energy

transition technologies. However, the research relies on the functions of the service independently

of the nature of the load that provides the flexibility and so not much attention is dedicated to BESS.

The ultimate goal of the research is providing a set of recommendation in order to propel demand

response in the electricity system through the emerging market agent of the aggregator. The

methodology used to reach this goal are explained in the next chapter


13

1.3 Methodology

This chapter 1.3 has an explanatory purpose on how this study is going to be conducted. The

research is structured over a total of eight chapters with an attached Annex at the end. In the Figure

4 below there is a schematic illustration of the logic steps and route of the research. Following, there

is a description per chapter and finally the definition of the research question.

Figure 4 Methodology scheme

The first chapter 1 is used to introduce the topic by providing the base ground knowledge to address

the main theme. The information is gathered through an extensive literature research of scientific

papers, European Union Legislation documents provided by both the European Commission (EC)

and the Member States and official sites. The scientific papers are collected over the database of

Web Of Science and ScienceDirect, and each reference is reported in the bibliography in APA Style.

The goal of this chapter is to support the reader and provide the knowledge so to confidently deal

with the chapters that will follow. The roots of the problem are explained, and the problem is set.

Chapter 2 has the ambition of setting out the playground for operation upon which the research

theme can be explored. It consists in a comprehensive description of the electricity system and the

energy market together with the identification of the relevant stakeholders involved. The

information is gathered through official documents, such as the grid codes, released by the relevant

parties including the government and the Transmission System Operator. In this chapter, demand

response, introduced as the problem solving factor, is presented as a product that is able to provide

multiple services. Moreover, the role of the aggregator and the way it operates in the market is

explored.


14

The third chapter is completely dedicated to the case study. During the period in which this master

thesis is carried out, also an internship is conducted in parallel. Specifically, the latter is conducted

in ABB Power Grid located in Genova. ABB is highly involved into the European scheme Horizon 2020

(H2020) with the participation into a project called Osmose, having a leading role in the settlement

of a demonstration campaign about demand response. By analyzing the project hands-on, the goal

of this chapter is to exhibit the practical ways to implement the technology in the electricity system.

In other words, the case study has a demonstration purpose of the efforts of validating the feasibility

and potential of demand response. The material strictly related to the project required for this

chapter are provided and disclosed in agreement with the company. The personal contribution to

the project has been in the form of analyzing the consumers involved technical needs on one hand

and in terms of transposing the project outputs in business opportunities on the other hand.

The fourth chapter consists of a qualitative analysis of the market agents strictly involved with

demand response, giving a leading role to the figure of the aggregator seen as the market agent

managing the service. The goal of this chapter is evaluating the current situation of both the

electricity system and the energy market from an aggregator point of view in order to identify

possible ways to propel its development. Using a situation analysis and a business model review,

the current state of the aggregator is evaluated. Based on this assessment, a proposal is formulated.

The latter is tested against the opinions of experts with different background in the field. These

viewpoints are collected with the means of interviews and feedback sessions and the outputs are

implemented in the original proposal. The result of the chapter is in the form of recommendations.

The fifth chapter is dedicated to the planning and project of the budget. The planning is disclosed

through a Gantt chart, and the budgeting spans the financial requirements for a period of about five

months. The sixth chapter addresses the environmental and social impact of the implementation of

demand response in the system. Chapter number seven has the intention of wrapping up the

findings and a provide a conclusion to the research. Finally, the last chapter is devoted to the

acknowledgments.

In addition to the methodology described above, this chapter has also the function of specifying the

research question that this paper aims to answer. Before introducing the research question, there

are three hypotheses that the analytical part will test. These are:

1) How effective are the pilot projects, such as Osmose, to support the scalability of Demand

Response?

2) Which of the stakeholders are going to be most affected by the introduction of Demand

Response services and how, if possible, can they take advantage from it?

3) What type of aggregator business model is more likely to foster in the near future?

The hypotheses are used to guide and steer the research into the relevant outputs. The main

research question that must be kept in mind throughout the entire research is the following:


15

How can Demand Response be integrated in every sector of the electricity system and under

which financial scheme it should be remunerated?

The intention of this question is twofold. On one side it wants to explore the integration and

implementation of DR services across all the energy sectors (industrial, residential, commercial and

transport), whether on the other side it aims at identifying a financial scheme that can support the

aggregator and incentivize the consumers into engaging in offering their energy flexibility.

1.4 Climate Change

The last few decades have undergone an extreme and drastic increase in greenhouse gas emissions

that have caused a raised in temperature that puts the survival of planet Earth and the humankind

in danger. Among the causes, science and public opinion agree on the abuse of fossil fuels as main

driver of climate change. The date that planet Earth will not be able to regenerate as quickly as

humans are consuming its resources in a year timeframe is defined as Earth Overshoot Day, and it

has been calculated by the Global Footprint Network (GFN, 2020).

Figure 5 Earth Overshoot variation since 1971 (GFN, 2020)

In Figure 5, the Earth Overshoot day is rapidly moving from the end of the year reaching to 29th of

July in 2019. This is caused by the average consumption of each human that is equal to 1.7 times

what the planet is capable of regenerating on a yearly basis. One of the main parameters of the

global footprint is the emissions of carbon dioxide, which in turn has a very serious impact on the

environment. The sector that is mainly responsible for these emissions is the energy sector. In the

last century the worldwide energy consumption has raised exponentially, registering an overall

increase of about 550% between 1950 and 2017, from 28.000 to 153.000 TWh per year (OWD,

2020). The growth in consumption has been sustained mainly by fossil fuels, which have represented

the main source of energy on a global scale accounting for more than 80% and directly causing

extreme CO2 emissions. Together with consumption also the welfare of the States (GDP) increased

in parallel, showing a direct correlation with CO2 emissions.


16

Figure 6 Global evolution of GDP and CO2 emissions

However, starting from 2014 a decoupling of the two has been observed as shown in Figure 6. In

fact, the GHG remained constant while the GDP kept on growing. Ultimately, the massive amount

of emissions are causing an increase in temperature and the Intergovernmental Panel on Climate

Change (IPCC) has stated that global warming related to anthropic reasons already caused a 1°C

increase (IPCC, 2018). The global warming is leading to climate change that in turn means much

more frequent natural disasters and, narrowing down to Europe, the European Environment Agency

(EEA) identified and listed the main possible impacts (EEA, 2017). The most impactful ones are: the

negative effects on the ecosystem, welfare, health and economy of Europe; south and east Europe

will significantly increase temperatures, dramatically changing the landscape and the biodiversity;

the energy demand will keep on changing, increasing the need for heating in the North and for

cooling in the South. The situation described above calls for intervention and a need to actively

contribute to stabilize and nullify these changes. In the next chapter, a collection of legislations,

agreements, intents and initiatives is provided.

1.5 Energy and Climate Goals & Targets

The previous chapter described the current conditions of the environment and it is foreseen that

with no intervention the temperature will keep on raising and more and more catastrophes are

going to occur. The countermeasures that are being taken consists in a global effort in reducing the

emissions and containing the damage that those are causing.

In December 2015, at COP21 in Paris, 185 parties agreed on a deal over the fight for climate change

defining an action plan with the intent to maintain the increase in temperature well below 2°C,

aiming to limit it at 1,5°C. The action plan encapsulates the progressive and full decarbonization of

the energy system on a global scale and it has been voluntarily signed by countries expressing their

intentions (Intended Nationally Determined Contributions -INDC).


17

Figure 7 Scenarios with reduction of emissions per sector (McKinsey, 2019)

It has been estimated that in order to respect the targets before 2050 and to contain the raise in

temperature by 1,5°C, a reduction of 2/3 of the total emissions is needed by 2050 (McKinsey, 2019).

Figure 7 shows that the power sector is the one that will endure the major changes to fulfill the

target.

The European Union (EU) has been one of the first movers in setting the targets & goals towards the

energy transition starting in 2009 with the “2020 Climate & Energy Package” drawing three key

targets (EU, 2020):

- 20% cut in greenhouse gas emissions (from 1990 levels);

- 20% of EU energy from renewable sources;

- 20% improvement in energy efficiency.

Subsequently, new targets are being discussed by the European Council in October 2014. In here,

the roadmap is outlined for the long-term and the target of reducing greenhouse gas emissions by

80-95% compared to 1990 is set to 2050. The analysis conducted in the context of the Roadmap

have highlighted that the decarbonization of the energy system is technically and economically

feasible, energy savings and the increase on renewable energies are essential factors and common

and shared efforts among the Member States are more effective than individual initiatives.

Moreover, the analysis confirmed that in order to reach 80% emissions reduction without

decarbonizing around 90% of the electric system is almost impossible (ECF, 2020). Accordingly, the

EU’s strategy focuses on three main fields to materialize its objectives: fostering non-emitting

energy sources, electrification of energy uses and improving energy efficiency (Eurelectric, 2018). In

May 2019 the “Clean Energy Package for all Europeans” has been released by the European

Commission strengthening the targets & goals to be reached by 2030 (EC, 2019). It is based on five

pillars for the Energy Union: 1) energy security, 2) fair energy markets, 3) energy efficiency, 4)

economy decarbonization and 5) research, innovation and competitiveness. The main objectives

declared are the following:

- At least 40% cuts in greenhouse gas emissions (from 1990 levels);


18

- At least 32% share for renewable energies;

- At least 32,5% improvement in energy efficiency.

An additional European massive effort and confirmation of intent of fighting climate change and

accelerating the energy transition is a program called Horizon 2020. It consists in the allocation of

€80 billion to fund over the course of 7 years (2014 – 2020), in addition to the private investment

that this money will attract, the production of world-class science and the removal of the barriers

to innovation. H2020 is the financial instrument adopted by the Innovation Union to secure Europe’s

global competitiveness. It is an agreement to support and unleash the potential for the future of

research that is, in turn, the core of Europe’s blueprint for smart, sustainable and inclusive growth

and jobs (EC, 2020).

Within the context of the ambitious targets affirmed in the “Green Deal” (UNCC, 2020) , Italy has

declared, in the National Energy and Climate Plan (NECP), known in Italy as “Piano Nazionale

Integrato per l’Energia e il Clima” (PNIEC), the phase-out of coal-based thermal power plant by 2025

with a corresponding increased penetration of renewable energies (MISE, 2020).

Figure 8 Coal Thermal Power Plant Phase-out by 2025 (MISE, 2020)

The decommissioning of coal thermal power plant is translated into the need of installing 7,2 GW of

generation capacity of a different source as depicted in Figure 8. The objective concerning the

penetration of renewable energies into final consumption of energy is divided across three different

sectors with the following targets:

- 55,4% share of renewables in the electrical sector,

- 33,1% share of renewables in the thermal sector (heat and cooling);

- 21,6% share of renewables in the transport sector.

The investment plan to develop the strategies and support the actions to achieve the targets and to

phase-out the coal power plant by 2025 is subdivided over five points (Terna, 2019):


19

- Grid investment: strengthening of the lines and new HVDC to connect the islands plus new

synchronous compensators (about 4,500MVAr) installation;

- Creation of new programmable and flexible gas capacity of 5,4 GW;

- Creation of new renewable energy capacity equal to 12 GW;

- Development of 1 GW of Demand Side Response;

- Creation of new centralized storage capacity, both pumped and electrochemical, equal to

3 GW.

To conclude this chapter, it is valuable to remind the two documents over which this paper relies

on in terms of goals and targets to be reached. The first one is the “Clean Energy Package for all

European” (EC, 2019), which states the long-term vision and sets boundary objectives to be achieved

by all the Member States. The second document is the “Piano Nazionale Integrato per l’Energia e il

Clima” (MISE, 2020), which practically shows the roadmap of Italy. It is particularly relevant not only

because the focus is on the Italian peninsula but also because the mid-term ambitions of 2025 are

also highlighted. By summarizing all the agreements, intents and outlined goals, it is clear that the

common intention is to pursue an energy transition to achieve decarbonization from fossil fuels to

renewable energies. In the next chapter, an insight of the situation of renewable energy sources in

Europe and Italy is provided.

1.6 RES in Europe & Italy

To counteract the energy generation coming from fossil fuels and to empower the energy transition,

huge investments have been and are being made in the development and deployment of Renewable

Energy Sources. As such the market designs strive for the pivotal driver of a sustainable energy

future that encompasses the decarbonization of the energy system and the inclusion of a

decentralized supply characterized by a predominant PV and Wind infeed. From a technical point of

view both the technologies have reached a maturity level and can be deployed on a large scale. In

this regard, Europe owns around 40% of global patent applications related to technologies for

mitigation of or adaptation to climate change (Banja & Jegard, 2017). In this chapter a brief overview

of the penetration of renewable energies in Europe and in Italy is provided.

Figure 9 Share of renewable energy in gross final energy consumption (EEA, 2019)


20

First of all, it is important to underline that renewable energy sources provide energy in the form of

electricity, which, if desired, can then be converted in another form. The energy is divided across

three axes namely transport, heat & cooling and electricity (EEA, 2019).

The overall penetration of renewables has increased particularly in the axes concerning heat &

cooling and electricity as shown in Figure 9. Concerning the transport sector, RES is expected to have

a larger impact due to the roll out and the mass adoption of electric vehicles (EVs).

If in 2004 the share of RES in the energy sector amounted to about 9%, in 2018 it more than doubled

reaching 18,88% (Eurostat, 2019). The division of the RES by type is shown in Figure 10.

Figure 10 RES divided by type of source in EU in 2018 (Eurostat, 2019)

Hydropower is representing the largest share; however, the geographical constraints are limiting its

future increase. On the other hand, wind is growing extremely fast also due to the deployment of

new technologies that enables the installation of wind turbines offshore. The largest increase is

expected from the solar industry, that is reducing the price of the panels favoring, in turn, its

installation on mass scale (IRENA, 2020). This large-scale deployment of RES has contributed in

diminishing their cost and their Levelized Cost of Energy (LCOE). It is crucial to highlight the fact that

RES do not incur in marginal cost to produce additional units of energy as these are not in need of

fuel because it is provided for free by nature. In contrast, conventional thermal generation power

plant does incur in marginal cost per unit produced as for each unit these are burning fuel. The LCOE

of RES is, even without the governmental aid in the form of subsidies and Fid In Tariff (FIT), becoming

more competitive than conventional form of energy generation (Lazard, 2017).


21

Figure 11 Historical Mean LCOE Values (Lazard, 2017)

In Figure 11, it is possible to notice how the LCOE of RES has decreased over time, with attention on

Solar that between 2009 and 2017 decreased by 87%, overtaking the LCOE of gas combined cycle.

Figure 12 provides an overview of alternative energy and conventional. The most convenient LCOE

is achieved by the energy generated by onshore wind turbines, whether offshore wind turbines

LCOE is still higher due to intense operation & maintenance costs (it is around 120$/MWh (Banja &

Jegard, 2017).

Figure 12 Unsubsidized LCOE Comparison (Lazard, 2017)

The energy generation capacity has undergone profound changes in the last decade in Italy both in

terms of total capacity and in terms of mix of installed capacity. Between 2008 and 2018 the solar

assets have reached 20 GW and the wind farms capacity increased threefold reaching 10 GW.


22

Figure 13 Cumulative Installed capacity per year (solar in gray, wind in green) (Terna, 2019)

Concerning Italy, as shown in Figure 13, a particularly favorable economic environment incentivized

the deployment of RES, solar in particular by witnessing a six fold increase. The development of the

RES sites did not happen uniformly across the country, as the positioning decisions follow a set of

criteria dictated by geographical and topological convenience, clearly visible in Figure 14.

Figure 14 Installed Solar (blue) and Wind (green) power geographical distribution (Terna, 2019)

The development of wind power plants has strongly occurred in the South and on the islands, where

around 80% of total capacity is installed. Solar power, in contrast, is more spread over the country

with a higher concentration in North Italy, where about 40% of total capacity is installed (Terna,

2019). Moreover, due to the technological characteristics of the sites, the development of RES

system occurred in a non-uniform manner also with regards to the voltage level grid connection. In

fact, mostly of the wind power is connected through High Voltage (HV) and solar is mainly linked to

the power network through Medium Voltage (MV) and Low Voltage (LV) connections (Terna, 2019).

The development of the RES systems brings along a radical change of the electric system,

characterized by decentralization. To highlight how the latter is becoming reality, in 2000 there were

around 3000 generation units compared to the more than 800000 generation units connected to

the Italian electric system in 2018.


23

A key element of the RES is their strict dependency with weather. In fact, whether the sky is cloudy,

or the wind is not blowing, the generation drops quickly. It is therefore important to analyze the

correlation they have with weather forecast.

1.7 Importance of renewable energy forecasting

The energy generation coming from renewable energy sources, specifically wind and solar, is strictly

dependent from weather conditions and varies from seasonal to seconds. Moreover, as these are

inherently distributed, the spatiotemporal variation of the weather must be carefully considered. In

order to integrate the forecast and the production of energy a model is required. This model must

be fed with large amounts of data that is selected according to the purpose of the model in terms

of its local, regional, country or European scope. A big challenge, therefore, is to select and model

the right data. The way wind power forecasts and solar power forecasts are conducted is very

different (Ren & Sunganthan, 2015). The diurnal and seasonal cycles of PV production is the main

reason for this difference.

To build properly a forecast model two main datasets must be included: meteorological forecasts

and energy forecast. The first one assumes a correlation between consumption and its sensitiveness

to temperature. In fact, consumption is higher when air is cold because of electric heater usage.

Moreover, photovoltaic power is affected by temperature and sunshine, whether wind energy

production is related to wind speed. As these parameters are sensitive to local weather conditions,

it is effective to forecast energy production locally and then aggregate more forecasts to have a

larger scale forecast (Kolkmann, 2019).

The development of an accurate forecast model is out of the scope of this research. However, it is

crucial to underline and highlight the importance of the role that precise forecast is and is going to

play. In the context of this paper two model widely spread across Europe are going to be used and

assumed to be solid, valid and consistent: Joint Market Modell (JMM) (Risø, 2006) and

PROMETHEUS (RTE, 2020). Both two models are considering forecast errors together with load and

spatiotemporal fluctuations of renewable energy sources production. The JMM is a renowned

platform with a clear focus on market and system operations. On the other hand, PROMETHEUS is

more oriented towards carrying out economic studies by modelling the behavior of market

participants as time passes by.

In conclusion, the ability of forecasting is among the main drivers affecting the final product

granularity, both spatial and temporal, in market design, starting from long-term up to short-term

and real time. In order to cope with forecast errors, it is possible to increase the flexibility of the

electrical grid with demand response, a method explored in the next chapter.

1.8 Demand Response

This chapter is used to provide an introduction and a general definition of what demand response

is and what its potential in the future is. The analysis of the technicalities together with the

regulatory and market framework is investigated in the chapter number 2.


24

1.8.1 DR definition

Demand Response (DR) is the capability of regulating the load of the energy profile in order to

provide flexibility by reducing, shifting or increasing the electricity usage during peak or valley

periods in response to time-based rates of some sort of financial incentive (Energy.Gov, 2020). In

other words, it is a key characteristic to make the grid a smart grid. In this chapter, DR is going to be

defined and the reasons why it is so important for a successful energy transition are outlined in

agreement with the EU energy ambitions. Two definitions to generally define Demand Response are

provided:

“Changes in electric usage by end-use customers from their normal consumption patterns

in response to changes in the price of electricity over time, or to incentive payments

designed to induce lower electricity use at times of high wholesale market prices or when

system reliability is jeopardized.” (Balijepalli & Pradhan, 2011)

“Demand Response: relates to any program which encourages shift of (demand) of energy

by end consumers. The participation of the end customers is a response to factors such as

incentive pricing, new tariff schemes, greater awareness and an increased sense of

responsibility. The end consumers agree to involvement, but their participation may

involve either active behavioral changes or passive responses, through the use of

automation.” (ENA, 2012)

As such DR pursues a temporary change of load consumption by the consumer and it is one of the

techniques which belongs to Demand Side Management (DSM), which objective is to achieve a

balance between energy production and demand, as an imbalance between these makes the price

more volatile and expensive for the final consumer.

Figure 15 Demand Side Management vehicles

The DSM framework includes all demand-reducing measures, in different words, both vehicles for

its implementation shown in Figure 15 (demand response and energy efficiency) are included. In

fact, DSM encompasses a broader concept in the context of energy demand management, whether

DR works specifically on electric demand (Respond, 2020).

They way DR practically work as a product and as a service is going to be fully disclosed later in the

research. However, it is now important to distinguish the effects that DR is having on the demand

load profile under the DSM objectives.


25

Figure 16 Load shape objective of the DSM program (Alham, 2017)

Within the graphs showed in Figure 16, the behavior of peak clipping, valley filling and load shifting

are of interest as the challenges these pose can be satisfied by DR with the current available

technologies. The adaptation of the level and pattern of electricity usage makes the load profile

flexible for the utilities. This is translated in an optimal power production and consumption. An

important factor is the time of use (TOU), that will determine the magnitude of the service, as

flexibility is provided in a timeframe and for a pre-determined amount of energy.

1.8.2 EU Regulation of DR

The first legislative advancements to include demand-side management in the regulatory

framework of the EU were done in 2009, with The Electricity Directive – 2009/72/EC. However, this

was done still in an advisory manner, with no real impositions and with no boundary conditions.

Article 3.2 is an example: “In relation to security of supply, energy efficiency/demand-side

management and for the fulfilment of environmental goals and goals for energy from renewable

sources, [...] Member States may introduce the implementation of long-term planning, taking into

account the possibility of third parties seeking access to the system”.

In 2012, The Energy Efficiency Directive (EED) – 2012/27/EU started the long process of levelling the

playing field for DR market players to operate, introducing a more strict set of boundary initiatives.

Articles 15.4 and 15.8 are examples:

Article 15.4 states: “Ensure the removal of those incentives […] that might hamper participation of

Demand Response, in balancing markets and ancillary services procurement. Ensure that […] tariffs

allow suppliers to improve consumer participation in system efficiency, including Demand

Response, depending on national circumstances”. Article 15.8 states: “Member States shall promote

access to and participation of Demand Response in balancing, reserves and other system services

markets, inter alia by requiring national regulatory authorities […] in close cooperation with demand


26

service providers and consumers, to define technical modalities for participation in these markets

on the basis of the technical requirements of these markets and the capabilities of Demand

Response.”

In 2017, the regulation known as The Network Codes, compiled by the European Network of

Transmission System Operators for Electricity, with guidance from the Agency for the Cooperation

of Energy Regulators, entered into force. This regulatory framework further strengthened the role

of DR in the EU’s electricity market.

Finally, in the year of 2019, the Clean Energy Package (CEP) went into force, after being drafted in

2016 by the European Commission. In this document, DR is systematically presented as a stipulation

for all organized energy markets in the EU. About the implementation of this new legislation, the

European Commission clearly affirms the aim to: “empower consumers, enable demand response

and energy efficiency, facilitate aggregation of distributed demand and supply, and contribute to

the decarbonization of the economy”.

From the analysis conducted of the EU regulatory framework for DR, it is obvious that over the past

10 years several projects in cooperation with market players and new legislation in the EU have

been moving towards a greater implementation of DR in the European electricity market,

recognizing the need for a flexible energy system in a cost-effective transition from a fossil fuel

based economy to a renewable energy and storage based one.

According to the European Commission and the Smart Energy Demand Coalition (SEDC), the

theoretical potential for Demand Response is around 160 GW in 2030, 100 GW today and 20 GW

already activated (Dong, 2017).

Figure 17 Theoretical Demand Response Potential (in MW) (Dong, 2017)

As shown in Figure 17, it can be noticed that the largest Member States of the EU are also the ones

having the largest potential and Italy is at the third place, only after Germany and France. Moreover,

the potential is divided over the three main energy sectors: industrial, commercial and residential.

The pilot projects and the first initiatives are majorly involving the large industrial sites to test the

service. This is because these are a relatively low number of units with large load. The sector with


27

the higher potential is the residential sector. However, there is a logistical drawback concerning the

extreme wide distribution and the involvement of a massive number of small loads.

Beside the smarter use of energy derived by demand side management, there are several other

benefits that comes along with the implementation of DR. Among all of these, there are

environmental and social benefits, further explored in Chapter 6.


28

2 ELECTRICITY MARKET FRAMEWORK IN EUROPE AND ROLE OF DEMAND RESPONSE

This section has the intention of defining the playground for operation of Demand Response. In

other words, a thorough description of the contexts in which the service can be implemented is

provided together with a deeper insight on the techniques through which the service can be

employed in the system.

The following chapter 2.1 depicts the structure of the electricity system and its requirement

whether the next chapter reports about the regulation in place. Subsequently, the system is tackled

from a market and economic point of view, giving then the possibility to categorized Demand

Response into services and products. The latter are followed by an insightful portrayal of the rising

role of the aggregator.

Throughout the European Union each Member State has some different shades on how the

electricity system and the electricity market works. However, as the EU is highly interconnected the

similarities are much more than the differences. For these reasons, the information provided in the

next section are referring to the European Union in general or to Italy. As the Italian country is one

of the largest Member State, it is assumed that any implementation that works can be replicated in

the other countries. Aside of the academic and scientific literature, the main references are the

European Network of Transmission System Operators for Electricity (ENTSO-E), the Italian TSO

Terna, the Grid Code, the Gestore Servizi Energetici (GSE), the Gestore Mercati Energetici (GME) and

Autorità di Regolazione per Energia Reti e Ambiente (ARERA).

Before diving into the following chapters, a brief explanation to show the benefits that Demand

Response can have on the energy market prices is provided as illustrated in Figure 18.

Figure 18 Simplified effect of DR on electricity market prices (EETD, 2006)

The graph shows that even a modest demand reduction in terms of quantity of electricity can avoid

the necessity to run high-marginal-cost generation measures, in turn substantially reducing the

market prices. This phenomenon is due to the fact that generation cost rapidly increases when it

gets closer to maximum generation capacity. In other words, a small reduction in demand will result


29

in a large reduction in generation cost that, in turn, is translated into a reduction in the price of

electricity supplied (EETD, 2006).

2.1 Electricity System

Electricity is generated through different technologies and primary energy sources like fossil fuels,

gas, water, wind, sun and biomass. The number of generating points in the last few decades has

increased significantly because in addition to the traditional thermopower and hydropower plants

many lower generation facilities, such as renewable sources, have been introduced. In Europe, most

of the Member States have a single company that operates the National Transmission Grid (NTG)

under a public concession agreement with the government. This grid has the role of connecting the

generators to the consumption center. The responsibility to ensuring that the balance between

supply and demand is met at all time is given to the Transmission System Operator (TSO). The TSO’s

revenues are generated from the utilization of the transmission grid tariff, a regulated tariff. Once

the TSO reaches delivery points, the electricity is fed into the distribution network. Electricity

distribution companies, classified as Distribution System Operators (DSO), are responsible for the

management and operation of the distribution system. In other words, the DSO is in charge of

delivering the electricity to the end consumer (Castro, 2019).

Figure 19 Power system general physical structure (Castro, 2019)

As illustrated in Figure 19, the large conventional generation facilities, such as thermal and hydro,

are connected to the Extra High Voltage (EHV) transmission grid. Renewable sources-based

generators and smaller conventional generating infrastructure are linked through the High Voltage

(HV) and Medium Voltage (MV) to the distribution grid. There are also microgeneration facilities,

like residential solar photovoltaic roof installations, which are connected directly to the Low Voltage


30

(LV) distribution grid. Domestic clients are linked to the LV lines, whether high consumption clients,

like industrial sites, are linked to the HV and MV distribution grid.

Electricity generation can generally fall in the framework of open competition under two legal

schemes: ordinary and special status. The former implies that the electricity generated is offered in

the electricity market. In contrast, the special status consists in a feed-in-tariff (FIT) remuneration

scheme, where the price is fixed for an agreed period of time. This is usual for electricity generated

from renewable energy sources. The generation is a market driven activity and the role of the state

is to make sure that the supply is available and to ensure market equity. However, some countries

may apply different rules.

The transmission of electricity across EHV is done through the NTG. These lines can have the

following physical dimensions: 150, 220 or 380 kV. In Italy, the State granted, under public service

concession, the exclusivity of transmission to Terna, the Italian TSO. This concession includes not

only operation and maintenance service but also the planning, construction and the development

of the NTG together with the technical management. The objective is to harmonize the operation

of the infrastructure and to ensure continuous and secure electricity supply. The Italian network

registers a total of more than 66000 km of lines and about 870 electric stations (Terna, 2019). Finally,

the TSO is regulated by the Italian regulator called ARERA, which duty is to monitor the TSO and

provide directives and guidelines for the developmental goals. The physical characteristics of the

lines incur in elevated costs and high expertise for maintenance. Competition in this field would be

detrimental, therefore the NTG is given under monopolization conditions to a single party, the TSO.

It is not the case for the distribution network, where many DSOs are present and competing.

Worldwide the electricity network utilizes alternating current with nominal utility frequency of

either 50 Hz or 60 Hz. The European Union has historically always operated at 50 Hz. The frequency

reflects the information concerning the ratio of electricity generation and consumption in a power

grid. In the case the frequency drops too low, the meaning is that there is not enough electricity in

the system. In contrast, too much electricity in the system is represented by high frequency. Usually

the operational margin is +/- 0.05 Hz (Kraftwerke, 2020). Whenever the threshold is passed, ancillary

services need to come into play by supplying or cutting the extra required load. As the EU is

becoming more and more connected, ENTSO-E, that puts together all the TSOs of each Member

State, is developing the International Grid Control Cooperation (IGCC) with the aim of extending and

strengthening the link across country borders networks in order to reduce frequency imbalances

(ENTOSE, 2019).

Frequency regulation is of primary importance, as balance between supply and demand is crucial

for ensuring a reliable and safe electricity network. This balance is largely granted by inertial

response, a property of large synchronous generators. Inertia prevents the experiencing of sudden

changes to the system frequency that would cause stability issues (Eriksson, 2017). Traditionally,

the regulation of the frequency is achieved through rotational inertia of the large-scale generators.

In other words, with excess of electricity the generator would slowdown dissipating in the rotation

of the turbine in the form of kinetic energy. An identical but opposite mechanism works for shortage


31

of electricity. Even though rotational inertia is still the most common method, the rise of power

plant based on renewable energies, such as solar and wind, is changing the paradigm. These sites

are converter-based sites and, thus, do not have any rotational mass to play with. More recently,

concerning the latter, a substitutive methodology has been introduced and it is called synthetic

inertia. Synthetic inertia is the corresponding form of kinetic energy from a rotating mass but in the

form of electrical torque that provides resistance to changes in frequency (Eriksson, 2017). In other

words, it partially resembles the service of inertial response done by synchronous generators via

electrical devices.

As the number of Distributed Energy Sources (DES) is increasing at the expense of conventional

systems, the contribution of inertial response is going to be much more distributed. This is having

an effect on the way the electrical system and its grid operate.

Figure 20 Smart Grid (Yu & Xue, 2016)

The traditional system is based on a linear trajectory from centralized production to

monodirectional systems to final consumers. The introduction of DES steered a change of the grid

into a smart grid, characterized by and integrated and complex interconnected and decentralized

system (Yu & Xue, 2016), as the one represented in Figure 20. The smart grid is characterized by a

multidirectional flow of electricity together with flexibility and storage systems. Moreover, a large

amount of data is constantly gathered and analyzed to manage the grid assets and ensuring the

correct functioning.

With a conceptual explanation of the electricity system in place it is possible to identify the multiple

players involved in it. These are the actors that span all across the electricity supply chain, from

generation to consumption (Incite , 2020):


32

- Producers: power plants of any kind including solar photovoltaic and wind parks. Their

business is electricity production.

- Market Operator: it is in charge for providing the locations and the means for the electricity

to be traded. It is also responsible for the ancillary services that make sure that system is

kept on balance.

- Market Regulator: responsible for ensuring a fair and correct electricity trade by establishing

the market rules.

- Large Consumers: these are big commercial points and industrial sites that buy large amount

of energy. They can decide to enter the electricity market to purchase the energy at a more

convenient price.

- Prosumers: these are market agents that not only consume energy but also generate

electricity. According to their needs they are able to sell or buy energy.

- Retailer/ Aggregator: consists is market agents having a portfolio of small customers and

trading the energy on the basis of an aggregated consumption. (The figure of the aggregator

will be more deeply considered further on in this section)

The above-mentioned actors are the agents of the market. Due to its nature, the energy has to be

physically transported from generation to consumption points over a grid that, in turn, needs to be

maintained. As such two additional actors, already mentioned previously in the paper, are going to

be added:

- Transmission System Operator: it is responsible for the high voltage grid and it is often the

case that it also acts as market operator by measuring the electricity imbalances and

summon the ancillary services when needed.

- Distribution System Operator: it is practically the one responsible for setting up the

electrical installation in order to reach the end-customer.

Figure 21 Simplified schematic of the energy market (Incite , 2020)


33

The Figure 21 summarizes the interactions between the players involved in the electricity market.

To be noted is that the blue lines, for which the TSO is responsible, are HV lines, whether the red

arrows, managed by the DSO, are MV and LV lines.

The system described above is ruled by several regulation bodies and multiple entities come into

play. The most important and relevant regulations are explored in the next chapter.

2.2 Electricity Regulation

This chapter focuses on the regulation concerning the electricity system with particular attention to

the Italian one. As Italy has one of the largest electrical networks in Europe, it is assumed that the

other countries have a similar way of operation in terms of regulation, even though the regulation

is not mirrored and might different in some ways. Anyhow, the guidelines and the developmental

supervision of the entire Union is done by the European entity ENTSO-E. Moreover, as the legislation

bodies are very extensive, the attention is going to be given to the relevant regulation concerning

the research paper.

2.2.1 Europe Regulation

In 2009, with the aim of liberalizing the gas and electricity market, the European Network of

Transmission Systems Operators (ENTSO-E) was established. This entity has been given legal

mandates for the Internal Energy Market (IEM) by the EU’s third Package. It consists in 43 electricity

TSOs from 36 countries, including states beyond the EU borders. The main objective is to implement

the EU energy policy in order to achieve the energy & climate goals. This includes the integration of

RES in the power system and the formation of an Internal energy market to ensure affordability,

sustainability and security of supply on a European scale (ENTSOE, 2020). With the guidance of the

Agency for the Cooperation of Energy Regulators (ACER) (ACER, 2020), ENTSO-E developed a binding

set of network codes that span three areas. Firstly, the connection codes that are framing the

generation and demand sides of the transmission grids. Secondly, the operational codes that define

how the electricity systems must be governed. Thirdly, the market codes that want to facilitate and

harmonize the trade of electricity across the European borders (ENTOSE, 2017). Another important

pillar upon which this entity rely on is transparency of information. In fact, they publicly provide a

platform with access to wholesale energy generation, transmission and consumption of each of its

member (ENTOSE, 2020). Finally, ENTSO-E played a crucial role into defining the EU Clean Energy

Package (EC, 2019). The latter sets boundary objectives for each country to be met.

2.2.2 Italian Regulation

The European directives steered the need for each member State to carefully plan the energy policy

strategies to meet the targets and the States did so developing their own National Plans. In the case

of Italy, it has been developed as the “Piano Nazionale Integrato per l’Energia e il Clima 2030” (MISE,

2020). This document is structured over five line of intervention: decarbonization, energy efficiency,

energy market, research & development, innovation and competitiveness. The interest of the

research is mainly around two of these lines namely energy efficiency and energy market. The


34

former has an annual objective of decreasing final energy consumption of 0,8% until 2030

maintaining high reliability and safety associating incentives and subsidies. The second line, energy

market, imposes high interconnectivity of electricity and high integration of the market together

with the resolution of areas characterized by energy poverty.

The development of the PNIEC has been carried out by the Ministry of Economic Development and,

in order to set reliable goals and targets, the closest involved parties were engaged. The latter

consists in three actors: GME, for what concerns the energy market, Terna and ARERA, for what

regards the energy efficiency among other topics. Several other parties are involved in both

intervention lines, however the one mentioned are the pivotal ones. The GME is responsible for the

management of the energy market; its role and how this operates the market is going to be fully

explored in the next chapter. As mentioned above, Terna, as TSO, has a monopoly situation over the

EHV and HV national grid and it is strictly monitored by the public authority named ARERA. Beside

setting out and being responsible for achieving the targets of the PNIEC, the TSO is in charge of

holding the grid code and make sure it is fulfilled by all the other parties involved in the electricity

system. The grid code (Terna, 2020) consists in a set of rules for the grid usage. It is generally divided

into four, interlinked, sections such as transmission, dispatching, grid development and security.

The regulation bodies reported set the boundaries for the exploration of the electricity market

happening in the following chapter. It has to be kept in mind that regulation is changing particularly

fast due to the introduction of new mechanisms, technologies and services such as demand

response. Several countries are in the process of implementing the latest EU directives, like the ones

disposed by the EU Clean Energy Package. Therefore, the regulation reality is expected to evolve in

the short-term period, presenting new scenarios by 2021.

2.3 Electricity Market

This chapter is dedicated to the exploration of how the electricity market is operating and who are

the players involved. A key reminder is that the market is time dependent and so is the price.

Moreover, the different types of market are identified and described. Finally, a crucial responsibility

for the electricity market is to match the requirement of grid balancing imposed by the electricity

system.

The wholesale market is a key mechanism used to maintain the balance in the grid. It is structured

in such a way to provide the market agents with room for errors. In other words, the planning, for

both generators and consumers, does not always match reality and therefore errors occur. The

market mechanism achieves a constant correction, in favor of grid balance, whenever the planning

goes wrong (Knezevic, 2011). To accomplish this, the market is separated into different markets that

differ in terms of how much time in advance the energy is sold/ bought.


35

Figure 22 Type of electricity market as a function of time of purchase (Incite , 2020)

To clarify, a scheme of the market as a function of time of purchase is shown in Figure 22. The

timeframe of the Future Market is in terms of months or years in advance. It comes in the form of

contracts between two parties to deliver a determined amount of energy at an agreed price. As it is

bought in large quantities and in advance, the electricity is at a relatively low price, however it is

associated with higher uncertainty due to the production/ consumption planning mismatch. The

type of contracts in this market are also known as Power Purchase Agreement (PPA) (Albert, 2005)

and usually involves a seller (electricity generator) and a buyer (an entity or consumer that wants to

purchase electricity). The PPA defines the commercial terms between the two parties and it includes

the schedule for the delivery of electricity, the termination together with the payment terms and

the penalties in case less energy in delivered.

The Spot Market is divided into two markets: day-ahead market and intraday market. The day-ahead

market allows the market agents to interact one day before (24 hours) the energy transaction

actually occurs (Castro, 2019). In this kind of spot market, the market operator receives from the

generators the sales offers with the amount of energy they want to sell for the 24 hours of the

following day. At the same time, the market operator also receives the consumption offers from

consumers, distributors and retailers for the same time period.

Figure 23 Market Clearing Price by aggregation of supply and demand

At this point the market operator aggregates all the sales offers for each hour of the following day,

building the supply function, represented in blue in Figure 23. For the same time intervals, it also

aggregates all the received buying bids, creating the demand function, shown in red in Figure 23.

The intersection represents the marginal price of the system at that hour. This price, which is how

much the buyers pay and how much the producers are paid, is called the Market Clearing Price

(MCP). The MCP takes into account all the aggregation of all the bids and it represents the


36

equilibrium price. In other words, it points at the value where supply and demand are in balance.

Finally, all the bids of the suppliers that are equal or below the MCP are approved and the players

are now liable to produce/ consume the electricity offered/ demanded. On the other hand, the

intraday market is in place to cope with planning errors that occurs in the day-ahead market. In here

the market agents can correct their market transactions before the energy is delivered. The intraday

market can come in different formats, according to the rules imposed by the market regulator. One

option consists in mirroring the day-ahead market structure by having several trading sessions and

each of those determine as a result an MCP. A second option involves the collections of bids from

producers and consumers. Each bid contains the information about the quantity of energy and the

time interval when the energy can be traded. Then, when a supplier bid matches a consumer bid,

the transaction is approved and the two are liable to trade the energy.

The third and last market is the Balance Market. It is also considered a mechanism to maintain the

grid balance in real time. Specifically, the market operator, by constantly checking the frequency

and voltage on the lines, measures any imbalance position of a market agents. Then, when the

frequency oscillates over or under the threshold or when a planned trade of energy does not occur,

the market operator purchases ancillary services to restore the balance. Finally, the expense of

calling out the ancillary service operation is split among the market agents that caused the

imbalance. In other words, the players that consume or produce a different amount of energy than

what they previously agreed on are the ones that are going to pay the ancillary services (Reinier,

2016).

Figure 24 Ancillary services classification (Kaushal & Hertem, 2019)

The ancillary services are of different types and are summarized in Figure 24 (Kaushal & Hertem,

2019). Other services such as controlled islanding and interruptibility are sometimes also considered

as ancillary services. Three of these services are of particular interest for this research: frequency

control, voltage/reactive power control, congestion management. Those are going to be

investigated later on in this section.


37

In the Italian context there are two macro-categories. The first one is related to the energy market

and the protagonist is the market regulator which is GME (Terna, 2019). As mentioned above, a spot

market divided into two is present: “Mercato del Giorno Prima” (MGP) and “Mercato

Infragiornaliero” (MI). Sales offers are valued at the MGP, whether the purchase offers are

calculated through the weighted average of the zone’s prices. The second one concerns the

dispatching service, is known as “Mercato dei Servizi di Dispacciamento” (MSD) and is managed by

the market operator which in Italy is the TSO Terna.

With the electricity market outlook being done, it is now the moment to introduce and place

demand response in the market. The next chapter will provide a description of it.

2.4 Demand Response Market

In this chapter the service of demand response is going to be introduced into the market framework

together with its readiness in the Member States with a closer look to the Italian case. The goal is to

place DR in the context of a monetary system that effectively operates for the energy market as a

mean to keep the grid in balance.

In the electricity system, the management of demand response measures can be deployed at all

time scales (EETD, 2006). There are two types of demand response in the market framework and

these are illustrated in the Figure 25 below.

Figure 25 Demand Response in the Electricity Market (EETD, 2006)

According to the European Commission (EC, 2016) the two kinds of demand response can be defined

as follows:

- Price-based (or implicit) demand response refers to “a situation when consumers can

choose to be exposed to time-varying electricity prices or time varying network grid tariffs

that reflect the value and accost of electricity and/or transportation in different time

periods and react to such signals”.


38

- Incentive-based (or explicit) demand response refers to “a situation where consumers or

agents working on their behalf (demand aggregators) are allowed to participate and provide

demand side resources on the wholesale energy, reserves/ balancing, and/or capacity

markets”.

As shown in Figure 25 and as it can be deducted from the definitions, explicit demand response is

also present in the balancing market on top of the future and spot markets. How exactly demand

response functions as a service and product is going to be addressed in the following two chapters

respectively. Before that, an insight on the current European and Italian market situation is

provided.

The Smart Energy Demand Coalition (SEDC) made in 2017 an extensive research on the status of

demand response across all the Member States and the overall situation in Europe (SEDC, 2017). A

crucial variant that has been taken into account is the current regulatory framework for demand

response.

Figure 26 Map of Explicit Demand Response development in Europe (SEDC, 2017)

The map shown in Figure 26 represents the current overall development status that is the

combination of four factors: access to market, service providers access, product requirements and

measurements. The green Member States are currently the most advanced, however many hurdles

still exist in terms of market design and regulatory issues. The legislative body that is most often

lacking clarity and openness is the one concerning the role of the aggregator and independent

aggregators. Even though countries colored in red are signaled as closed, these are notably making

steps to upgrading their status by slowing starting to take the regulatory efforts to frame demand

response. Overall, despite a gradual opening of the market, customer participation represents one

of the major barriers.


39

Figure 27 Map of access to markets (left), service provider access (middle) and product requirement (left)

For what concerns the access to markets, Demand Response is most likely to be limited to specific

areas surrounding the ancillary services and not fully accepted as a resource in any of the different

types of market. For the countries that allow the service, demand response has to go through the

retailer before participating in the market. Notably, Member States are outlining concrete opening

in their national plans by finalizing the terms and conditions of the Capacity Mechanisms to enable

fair competition between generation and demand-side flexibility. The capacity mechanism is

defined as “administrative measure to ensure the achievement of the desired level of security of

supply by remunerating generators for the availability of resources” (Europarl, 2017).

The context of service providers access results to be, even after a clear European Directive push

(Article 17.3a), one of the most problematic areas in each of the Member States. The problem arises

due to the lack of clarity over the roles and the responsibilities that new market actors have together

with uncertainty over their ability to participate in the markets. This inadequacy of rules results in

unfair competition for independent aggregators as they have to negotiate with the retailer or

Balance Responsible Parties (BRP) to enter the market. The BRP may be a producer, major customer,

energy supplier or trader present at each access point of the grid. With a number of these access

points the BRP is responsible for a portfolio of access points and it is in charge of keeping the balance

between offtakes, injections and commercial power trades within the portfolio (Elia, 2020). The

agreements with retailers and BRP represent a barrier for independent aggregators and in turn is

making the retailers and BRPs being essentially the only actors entering the markets as aggregators.

The product requirement factor is crucial in determining the cost effectiveness of demand response.

In fact, very strict and narrow product requirements work as a blocker for low-cost demand-side

resources and, in the opposite, increase the cost of balancing by inflating the expenditure. It is often

the case that to participate in the balancing market the minimum bid must be over 5 MW and the

frequency of events is high, overall hampering a larger consumer participation. Nevertheless, in the

last years Member States have made a lot of progress in rolling out smart meters on the large scale,

showing the effort of upgrading the system.

The situation that surrounds measurements and the baselines methodologies is proceeding but it is

lacking an established set of standardized prequalification rules over which the Member States can

build on. The problematics around the measurement techniques together with an unclear method

to quantify the consumption reduction act as disincentives for new markets entrants. According to


40

SEDC, the penalties that occur for non-performance are acceptable, but a fair and adequate

payment scheme for demand response is missing.

As highlighted in the maps above, Italy has not yet a favorable market for demand response even if

the potential is enormous. The regulation is slowly building up the framework for demand-side

resources to participate with a Balancing Market Reform that took place in 2017 (AEEG, 2016). In

the annex are reported two set of results, FigureAnnex 1 and FigureAnnex 2, summarizing the

current situation of the wholesale market and the balancing market in Italy. It is clear that currently

the conditions are limited and the access to the market is very restricted. The technology readiness

is forcing the country to make important steps towards the opening of the market for new services.

These steps include several pilot projects with a number of tests to establish which modifications

have to be made to the system in order to be ready to implement the new services.

2.5 Demand Response Services

The service of demand response can be applied into different branches of the electrical system. In

this chapter the various applications of DR are going to be explored. Moreover, some of the

requirements for both implicit and explicit DR will be addressed.

In order to maintain grid reliability and security, demand response is being studied and adopted as

a cost-effective solution. By adjusting the energy profiles, a large number of possible and very

different players can participate such as households, government agencies and businesses.

Generally, there are four types of demand response (enel x, 2020):

- Emergency

- Ancillary Services

- Network

- Wholesale

The emergency situation occurs when the electricity supply has evident difficulties in meeting the

need of the consumers. Examples are the breakdown of a large generator or a very high unplanned

demand. The ancillary services, presented in Figure 24, are adopted to maintain the frequency of

the electricity system stable around the range of 50Hz together with balancing and keeping the

voltage level to avoid blackouts (Kaushal & Hertem, 2019). Network demand response has a

particular value for the network as it can lower the energy use and in turn reducing the times that

the lines reach their maximum capacity. This has added benefit for the grid as it avoids expensive

new network investment for lines enhancement. The last type, wholesale, has the energy users

changing their demand according to price of the electricity in the wholesale market, which fluctuates

according to the supply and demand. In other words, consumers may decide to reduce their demand

during peak price periods reducing their bills. Doing this, a downward pressure on electricity prices

for all energy users is also generated.

Another area where demand response can be very effective is electric vehicles (EVs). EVs have not

been considered a lot throughout the paper as these are out of the scope of the research, but in the


41

future of the electricity system they might play a crucial role. Several smart charging strategies are

undergoing pilot projects and testing in order to observe how the shift in time of day when the EVs

draw electricity from the grid enables and unlocks flexibility (IEA, 2019).

When considering implicit and explicit demand response it is important to note that these are not a

replacement for the other and neither of these is exclusive of the other. In fact, a consumer can

participate in implicit demand response with a dynamic pricing tariff and, simultaneously,

participate in explicit demand response via an aggregator (SEDC, 2015 ). The two have different

functions within the markets. Also, the way these are valued is different. In the case of implicit, the

consumer is going to receive a lower bill, while in the context of explicit the consumer will receive a

direct payment for participating in the market. The main features that implicit demand response

requires are an appropriate communication system and a measurement technology. With these in

place the consumer and the retailers can restructure the billing process. Moreover, transparency

and guidance over the dynamic pricing is required in order not to penalize the consumer. From a

regulatory perspective is relatively simple to be implemented, however the need of public

investment and a change over the retail process structure seem to slow down the deployment

across Europe. On top of communication and measurement technologies, explicit demand response

requires a regulated and standardized process between the aggregators and the BRPs. The risk for

the consumers is limited as it is the aggregator who is assuming the performance risk and the

responsibility of providing the requested load change.

Given the above described insights of demand response as a service, it is now possible to explore it

as product in the following chapter.

2.6 Ancillary Services

After highlighting what options are available for demand response, it is now possible to identify it

as a product. As the previous chapter described, there are a variety of options. For the sake of the

research goals, the focus is going to be on those form of demand response that can most benefit

the electrical system. Explicit demand response is particularly valuable for the electrical system

because it can serve as an operational tool for system operators in order to resolve functional issues

and to adjust the load. As such, it allows the consumers to participate in the balancing market by

providing the system as a whole with a dispatchable source. On the other hand, implicit demand

response is more valuable for the consumers as they can benefit from price fluctuations in the

wholesale energy market not providing any immediate operational support to the system (SEDC,

2015 ).

Participating in the balancing market is one source of revenue for consumers as these can get

financial incentives from it. In order to enter the balancing market an ancillary service has to be

provided. The ancillary services, schematically represented in Figure 24, are various, but the ones

more needed by the market operator system are three. Thus, the focus is on explicit and implicit

demand response in the balance market exploiting ancillary services. The three services in

consideration are:


42

- Congestion management

- Frequency control

- Average Voltage Control (AVC)

2.6.1 Congestion Management

The first service is congestion management. Congestion happens when the transmission capacity of

a transmission line is not able to transport the electrical power needed. According to the severity of

the overload, congestion can have serious effects on the power system from causing system damage

to blackouts (Pillay, 2015). The magnitude of the excess current also determines how quickly it has

to be solved before damage occur; it can range from few milliseconds to few minutes. To cope with

the situation (corrective or preventive), generation and/ or demand is adjusted according to the

topology of the grid. Congestions physically occur on a nodal or zonal area of the grid, as such the

nearby sites are called by the market operator to adjust their load to let the current respect the

capacity thresholds of the line.

2.6.2 Frequency Control

In order to maintain the system frequency at its nominal value, there is a designated set of control

actions known as frequency control measures. Frequency control follows different time stages of

implementation, categorized in the ENTSO-E area as follows (Kaushal & Hertem, 2019) and

represented in Figure 28.

Figure 28 Ancillary services frequency control activation time (Kaushal & Hertem, 2019)

- Inertia Support: is the automatic response of the synchronous machines to frequency

deviations in the power system. When a deviation occurs, the power generated by the

generators varies accordingly. For an increase in frequency above nominal value the

synchronous generators decrease their power generation to take the frequency back to the

nominal value. The opposite occurs in case there is a decrease in frequency. Inertia response


43

is the fastest response for any deviation in frequency. The activation time is in the range of

less than 2 seconds and the actuation time length is of seconds.

- Frequency Containment Reserve or Primary Control (FCR): is an automatic response and

consists in active power injection of the generators in the form of reserves available to

contain the deviation of the frequency when generation and load have a mismatch. The

activation time is in the range of less than 30 seconds and the actuation time length is of

minutes.

- Frequency Restoration Reserve or Secondary Control (FRR): is composed of restoration

reserves of active power that, when a disturbance in the system occurs, are able to take the

frequency back to nominal frequency. FRR has also the function of reestablishing the

scheduled power balance over a control area by restoring the power exchanges to the

original values. The secondary control can be activated manually or automatically with an

activation time length of minutes and an actuation time of as long as required.

- Replacement Reserve or Tertiary Control (RR): is a manual response that consist in active

power reserves to support the required level of FRR. Usually RR is operated by the system

operator for system optimization purposes. The activation time is in the range of minutes

and the actuation time is as long as required.

It is always the case that for frequency control a positive injection of active power occurs when the

frequency is below 50 Hz and a negative injective happens whenever the frequency goes below the

nominal value. When in the negative, the frequency control is known as High response (Obaid &

Cipcigan, 2019).

2.6.3 Automatic Voltage Control

The third service form of demand response in consideration is Automatic Voltage Control. It is

intended to keep constant levels under acceptable limit, the voltage managed by reactive power at

each node of the system through a set of measures and control actions. Voltage is a local quantity

and it varies according to the system topology, the load location and the generator and thus it can

be varying at every node of the system. Similar to frequency affected by active power, the voltage

is governed by the reactive power via the deployment in the power system of static VAR

compensators, capacitor banks and reactors. ENTSO-E provided a range of operation for the

electricity transmission system operation that is in accordance with the connection point (SmartNet,

2016). Keeping the voltage within the limits is a responsibility of the TSO which is then in charge of

ensuring enough reactive power is available. The AVC can be of two different type. First is local

control in which in order to maintain a constant voltage value in a local point the sites can adjust

their reactive power generation. This type of AVC goes along with demand response as it can involve

the consumer in the operation to maintain the reactive power in balance. Second is centralized

control occurring on request of the TSO. This control has a wider range of actions than the local

control. It has the purpose of minimizing system losses and to coordinate the reactive power

resources in real time in the grid so to increase dispatch control efficiency (IEEE, 2007).


44

There is an additional product of demand response to be noted: interruptibility. It is an emergency

service that arises from agreements between the TSO and large industrial sites (RED, 2020). When

the TSO requests, the industrial site, given a financial incentive, shift the power consumption out of

a specific time of day. The request can happen because of supply-demand mismatch. Due to the

nature of the industrial site and the agreement, the amount of power is generally large. For the

reasons of being and emergency response and for accounting only very large quantities of power in

blocks it may not always be considered a part of the DSM schemes.

It is extremely difficult for a small consumer to engage with the reality explained above. For this

reason, several consumers of different nature can come together as a unit. The latter is represented

by an aggregator. The role of the aggregator is explored in the next chapter.

2.7 Aggregator & Virtual Power Plant

The figure of the aggregator has been mentioned before. This chapter has the intent of clarifying

and explaining exactly the role of the aggregator. It has to be acknowledged that the aggregator is

a relatively new player in the market and, as such, its role is not well established yet especially when

it comes down to the regulatory framework.

The aggregator is a gathering of agents, that can be of different nature, in the power system to

operate as a single unit to participate in power systems markets, like wholesale market, or to

provide a service to the system operator, balance market. By managing a number of disperse

sources and loads and aggregating them into a single energy profile, the aggregator is practically

operating a virtual power plant (VPP). The goal of a VPP is to collect together small energy sources

and loads to provide services to the grid (IRENA, 2019). The regular features of a traditional power

plant such as ramping and minimum and maximum capacity are maintained in a VPP. The latter is

administered via a central information technology system (IT) where all the data is analyzed,

processed and stored in order to optimize the performance of the VPP over time.

The aggregator is an adaptable player when it comes to helping the grid to better integrating

renewable energy sources. This is because it can provide both demand- and supply- side flexibility

services to the grid. To keep in mind is that one is not exclusive for the other, in fact the aggregator

can have a portfolio mixed with generators and consumers. Moreover, the aggregator can also

engage with both implicit and explicit demand response according to the market is participating to.

When employing implicit demand response, it is collecting a number of consumers’ energy profiles

and entering the spot market to buy energy in bulk when the prices are a lower or sell when the

prices are higher. Something that the consumer, or prosumer, alone is not able to do as he is too

small to enter the market (BEUC, 2018). In the case of explicit demand response, the aggregator

groups energy profiles so to enter the balancing and spot market in order to provide ancillary

services to the TSO.

For an independent aggregator to participate and enter the market in a safe and scalable manner,

it is crucial that its responsibilities are clearly defined. Particularly, the relationship with the retailers


45

and the BRPs need to be transparent and do not undermine fair competition. The standards need

to cover four areas (SEDC, 2015 ):

- Volumes: assessment of the traded energy and its quantity between the BRP and the

aggregator.

- Compensation: an agreed formula to calculate the price over the energy transferred and

the flexibility offered.

- Data Exchange: transparent and clear definition of which exact data has to be exchanged

and shared between the aggregator and the BRP in order to fulfil the privacy obligation and

avoid sharing sensitive information.

- Governance Structure: in the case issues occur there is a need of an appeal system where

problems can be resolved.

In the Italian context there are several pilot projects being launched and ongoing around the

aggregation. All these projects are coordinated by Terna and ARERA and have the objective of

experimenting the functioning of the new resources and, if positive outcomes show up, proceed to

a review of MSD and the Grid Code in order to comprehensively include the aggregators. Terna

identified three type of “Unità Virtuali Abilitate” (UVA), Italian technical terminology for the

aggregator, as follows (Terna, 2019):

- Unità Virtuali Abilitate di Consumo (UVAC): these are aggregating consumers.

- Unità Virtuali Abilitate di Produzione (UVAP): these are aggregating producers.

- Unità Virtuali Abilitate Miste (UVAM): these are aggregating both consumers and producers.

The UVAs are directly managed by the Balancing Service Provider (BSP), which is responsible for the

performance of the services negotiated on the MSD.

As mentioned before, there are several projects running at the moment in Italy which are involving

several parties from both the public and the private sector. One of the biggest pilot projects is

Osmose that is going to be outlined in the next chapter 3.


46

3 CASE STUDY

This section is designed to have a practical understanding of demand response with the use of a

case study. As anticipated the case study is Osmose, a large project under the European scheme of

H2020 with several parties involved. The goal is to demonstrate the feasibility of the implementation

of demand response.

The structure is including at the beginning an introduction of the project followed by an insight of

the case study in Italy with a more hands-on approach on what it consists in. Following the actors

of the project will be introduced and described and then the technical implementation that they

need to put in place is explained with the system architecture needed to bring the service online.

After this, the developed aggregation platform is introduced and how it is going to cluster the

consumers is shown. With all this in place, it is possible to start exploring the financial measures in

terms of how the service provided is quantified and remunerated. Finally, the impacts of the project

are going to be assessed.

Throughout the development of this master thesis research, an internship is conducted in parallel

in ASEA Brown Boveri, better known as ABB (ABB, 2020). The company is a well-established Swiss-

Swedish multinational corporation operating in four areas: automation, robotics, power grids and

heavy electrical equipment. Being a leader in these sectors, the company reached out to be on

global Fortune 500 for 24 years in a row. Specifically, the internship is conducted in the Power Grid

Business Line in the quarter of Genova, Italy. More in particular, the intern position is in the Grid

Edge Solution department. The latter is highly involved as one of the major parties in the Osmose

project with several responsibilities. To be noted is that the project was launched in 2018 and is

planned to be done in 2021. As such, the timing of the internship will not see the end of the project

but is definitively witnessing a crucial part of it. The exact role of ABB is going to be explored

throughout the entire section but more specifically in the chapter 3.2.

3.1 Osmose

One of the largest running pilot projects involving demand response and the integration of

renewable energy sources in flexible grids in Europe is “Optimal System Mix of Flexibility Solutions

for European Flexibility” (Osmose) (Osmose, 2020). This project is under the European Horizon 2020

program and is funded by the European Commission. The objective is to provide a ‘Demonstration

of system integration with smart transmission grid and storage technologies with increasing share

of renewables’ (Osmose, 2020) starting with the based assumption that the traditional electricity

system is going to require in the short-term a significant increase in level of system flexibility. The

project is characterized by a global approach that aims to capture the synergies coming from the

combination of different solutions in order to address not only technical benefits but also positive

externalities for the society.


47

Figure 29 The Osmose key figure and consortium composition (Osmose, 2020)

As illustrated in Figure 29, the large number of relevant and established players involved together

with the extensive available budget are drivers to push for the achievement of valuable results. The

project spans a period of 4 years and comprehend several Work Packages (WP). More in particular,

Osmose is divided into sub-projects in different countries and into seven complementary WPs

(Osmose, 2020):

Due to the extensiveness and magnitude of the entire project, not every WPs will be deeply

considered. However, it is important to keep in mind that these WPs have a complementary value

and are developed interactively.

3.2 Osmose in Italy & role of ABB

The project, after a thorough analysis of the grid topology and available flexible resources in terms

of RES power plants and industrial loads, has its attention in the southern part of the Italian country.

Across this part of the grid there has been identified the need of a provision of flexibility services. In

fact, the goal is to test congestion management tools, frequency control and AVC methods. The

selected grid portion consists of seven different 150 kV backbone lines in the geographical area that

spans through the regions of Apulia and Basilicata as illustrated in Figure 30 (Osmose, 2018).

With the topological section of the grid being identified, the next step was to identify and engage

with the industrial customers. The latter have to match requirements such as being connected to

the HV grid and possibly directly connected to one of the seven main lines.


48

Figure 30 Demo site location and flexibility resources identification

As part of the budget and to incentivize the customer participation, three main benefits were

offered:

- The energy audit for the assessment of demand response availability to the industrial site is

carried out and at the expense of Osmose.

- All the hardware and software components necessary for the experiment are freely

provided.

- A first-mover advantage in case the Italian ancillary market would open to DSR services due

to the know-how acquainted.

The campaign involves the testing of DSR by letting the industrial sites actively participating by

providing flexibility services. The duration is designed so not to economically affect the performance

of the company. As a result, the test period is expected to last for about 10 months with a total of

100 hours of flexibility. The testing time is arranged as follows:

- In a month, one week out of four

- In a testing week, two days out of seven

- In a testing day, five hours out of twenty-four

To be noted is that the testing time is part of the campaign in which the involved industrial

consumers have agreed to participate, and it does not come with the support of finance measures.

In other words, the 100 hours of testing are not being paid.

For what regards the RES power plants, two wind power plants (WPP) are involved: “Potenza

Pietragalla” and “Vaglio 2”. The first one is owned by Enel Green Power and has a nominal capacity

of 18 MW (9X2 MW – REPower MM92 turbines). The WPP is connected to a primary substation of

150kV and it has been recently equipped with a 2MW Battery Energy Storage System (BESS) to

evaluate a potential provision of ancillary services. The second WPP is owned by E2I and has a

nominal capacity of 15 MW (6X2.5 MW – Siemens Gamesa G114 WTG turbines). The turbines are


49

linked with a 30 kV medium voltage switchgear to the 150 kV HV grid by a dedicated transformer.

This WPP is not equipped with any storage system.

As outlined in chapter 3.1, Osmose consists of several work packages all being developed

simultaneously. Each WPs is assigned to specific players. This does not mean that a player does not

participate to the other WPs, but rather that its main focus is on the assigned WP. For what regards

ABB has assigned a leading role in the fifth work package, with the following tasks (Osomse, 2002):

- Support in Analysis and design of DSR/RES Flexibility services

- Support in DEMO software specifications for Energy Management System and aggregator

platform

- DSR and RES facilities adaptation to DEMO requirement

- Support in DEMO implementation and execution

According to the timeframe in which this research is conducted, the actual focus of the company is

on the second and third task. The goal stated in the first task has been achieved by the design of the

flexibility services that wanted to be accomplished. The two tasks at hand are going to be explored

in the later chapters, whether the chapter 3.3 regards the industrial sites participating in the

demonstration. The WP5 also includes other two experiments. The first one is about Dynamic

Thermal Rating (DTR) for the estimation of the cable temperature in order to evaluate the capacity

of the line to transmit current. The second one involves the two WPPs by evaluating the

effectiveness of the techniques of synthetic inertia for frequency control purposes.

3.3 Industrial Sites

This chapter is going to illustrate and provide the specifications of the industrial sites that are

engaged in the project. Each industrial consumer matches the requirements stated previously and

has been personally inspected by ABB agents for validity as part of the first task duties. The

consumers are both from the private and public sectors and characterized by a large consumption

of energy throughout the year.

The industrial sites that have been involved and will actively cooperate in the project are seven and

of different nature. A description of each of them is provided and the way they plan to participate

is described. The order in which they are presented is not an indication on the magnitude of their

contribution. Moreover, a summary of the industrial sites and the way they participate in provided

in the Annex as shown in FigureAnnex 3. The name of the sites cannot be disclosed due to a non-

disclosure agreement (NDA) they have signed with Terna in the context of the project.

The first (1) industrial consumer is located in Modugno in the region of Apulia. It is one of the largest

world’s supplier of transmission systems (both manual and automatic) for cars and commercial

vehicles. The industrial site is specialized in manufacturing gearboxes for the automotive drive train.

Multiple load flexibility solutions have been investigated such as production and assembly lines,

compressors, chillers and generators. According to feasibility and cost implementation restrictions,

the chiller of the new warehouse has been selected for the campaign.


50

The second (2) industrial consumer is quartered in Pisticci, province of Matera in the region of

Basilicata. It was founded in 1990 in the reindustrialization phase of the region. It is a multi-utility

facility that supplies small and medium industrial activities with waste treatment services and gas-

and oil-based energy generation. On sites there are several groups of engines and two turbines.

After investigation on flexibility potential, the water treatment has been excluded, leaving the

engines and the compressors. Due to complexity, the compressors were not taken into account,

letting the generators take part in the campaign.

The third (3) industrial consumer is a naval military base located by the coastline in Taranto, Apulia.

Beside the several military operations, the base is responsible for charging up the boats and vessels

that stand or stop in the navy harbor. The investigation carried out showed many possibilities for

implementing flexibility as the charging process can be either stopped or modulated according to

the needs.

The fourth (4) industrial consumer is in the automotive field and is an assembly plant located in

Melfi in the region of Basilicata. The corporation operates in the auto maker industry and it is one

of the tenths largest in the world. The plant is very large, and many flexibility sources have been

investigated such as water treatment, generators, cogeneration, air treatment, production process

and the evaporation tower. For the sake of the test campaign the cogeneration system, the

compressors, the chiller and air treatment system have been selected.

The fifth (5) industrial consumer is located in Bari in the region of Apulia. The industry is a foundry

plant manufacturing mainly railways double crossers and railways junction parts. The plant offered

for the test several of its equipment including blast units, condensers, hot water boilers and

machines in the production process.

The sixth (6) industrial consumer is an iron metallurgy industry. The site is located in Potenza, in the

region of Basilicata. The production site includes electric steelwork and a mill for reinforced concrete

bars. Two furnaces and a compressor were initially selected, but then the latter has been excluded.

The furnaces consist in an Electric Arc Furnace (EAF) and a Ladle Furnace (LF).

The seventh (7) and last industrial consumer successfully involved is a refining plant in the region of

Apulia by the sea. It is owned by one of the seventh largest oil company in the world. The site in

question is a refining plant, where the oil undergoes several refining phases before reentering the

market. Due to the vast dimensions of the site, several flexibility possibilities were investigated also

considering the fact that a Distributed Control System (DCS) is already in place monitoring and

controlling the quantity and quality of the production. Finally, an adjustable load has been selected

for the campaign and it is a hot oil heater.

An additional industrial consumer, a tire manufacturer, was initially involved but then called out due

to internal issues. To be noted is that ABB is going to operate in the industrial sites by installing the

necessary technical equipment for the operation of the project, but it is not directly involved with

the WPPs. In fact, the latter are being managed, in the context of the project, directly by the TSO.


51

3.4 System Architecture & Site Installation

In this chapter the necessary gear and how the system is architected are presented. Obviously, every

industrial site has his own requirements due to its structure, size and the status of its current

communication system. As such, a general system architecture is provided and explained. To be

noted is that in some sites the definitive system architecture has yet to be defined due to

complexities and particular customer needs and more modifications can incur during the installation

phase. The goal is to install in every site the required equipment to interact with the aggregation

platform. The latter is then discussed in the next chapter 3.5.

As stated previously, the industrial loads have to provide one or more of the three following

flexibility services: congestion management, frequency control and voltage regulation. In order to

achieve this, on each site ABB will install a hardware solution to enable the services provision from

single and aggregated loads. The hardware is characterized by a cabinet containing the devices

necessary to interface the plant with the remote system (the aggregator platform and Energy

Management System (EMS)). This cabinet is identified as a “Local Controller” and in pictured in

FigureAnnex 4.

The main component installed inside the cabinet is the Remote Terminal Unit (RTU) that is able to

connect, through the network devices, the field device to the aggregator platform. Each selected

industrial site is going to be equipped with a Local Controller, that is able to exchange data, in terms

of acquiring data and send output commands or set points, using both traditional wired Input/

Output (IO) and communication protocols operating on adequate communication channels. The

data can be managed by logics performed on the Programmable Local Controller (PLC); a feature

provided by the RTU. Moreover, the cabinet contains an Intelligent Electronic Device (IED), ethernet

connectivity devices and power source. The RTU has a twofold purpose. First, it connects the data

to the aggregator platform and receives the commands from it. Secondly, it reflects the Input/

Output list (I/O list) together with the aggregator’s commands to a Human-Machine Interface (HMI)

located on site or remotely. Through the HMI the responsible operator can monitor the loads and

act on the loads when an activation or deactivation order arrives. The communication protocol

between the Local Controller and the aggregation platform is IEC 60870-5-104, while on the field

side the Modbus RTU or TCP seems to be the best solution due to the high penetration of this

protocol in industrial applications. A physical layer architecture is graphically illustrated in the Annex

as FigureAnnex 5.

The product chosen for the campaign is the ABB RTU (540CID01). It consists of a communication

unit (CMU), a multi-I/O module (IOM) and a galvanic isolated wide range power supply (PSM),

housed over a metal DIN rail. It is based on an ARM cortex A8 controller AM3352, on which a real-

time operating system is implemented. The 540CID01 is responsible for the interface management,

the event handling, the time base and the internal data base management.

The essential tasks of this device are:


52

- Managing and controlling the IO (coming from the on-board available interfaces or from

external optional modules) via the serial I/O bus.

- Reading Process events from the inputs.

- Send commands to the outputs.

- Communicating with control systems and local HMI systems via the serial interfaces (RS232)

and the Ethernet 10/100BaseT interfaces.

- Communication with Sub-RTU’s, IED’s or multimeter devices via the interfaces (RS485) and

the Ethernet interfaces.

- Handling the dialog with Web-Browser via the LAN interfaces.

- Capturing of 8 analog input signals (mA or V signals), fast scan cycle of 100 ms for 2 inputs.

- Capturing 16 digital inputs, 1 high speed counter input (max 16 kHz).

- Check (1 out of n).

- Managing the time base and synchronizing the I/O modules.

The product is visible in Figure 31 below, and its electrical schematics are presented in the Annex.

Figure 31 Remote Terminal Unit ABB RTU540 (ABB, 2020)

The current and voltage measurements are available with analog data acquisition. In particular the

module is able to proves Analog Measured Values (AMI) and Measured Floating point Information

(MFI). The module provides, on-board, the capability to acquire up to eight measures coming from

physical signal. Concerning digital data acquisition, the module can acquire, as on-board capacity,

up to sixteen contacts and can provide up to eight relay contacts for the digital outputs. By mean of

an additional module (520AOD01), the on-board IOs are extended in order to manage up to two

analog outputs. Even for the digital data it is possible to extend these numbers by coupling the main

unit with additional modules, if necessary.

The inputs are galvanic isolated by means of an optical coupler. On the input modules are applied

digital filtering and validity check for the suppression of double indications and intermediate

statuses together with a consistency check for all the channels.

Regarding the communication, the RTU provides the following interfaces:


53

- 4 Communication Port serial (according RS232C or RS485 with RJ45 connectors).

- 2 Ethernet Interface 10/100BaseT (with RJ45 connectors).

- 1 USB 2.0 device interface for diagnosis and maintenance purposes.

- 1 USB 2.0 host interface for future extensions.

- 1 I/O bus interface for local communication with the I/O-modules.

To one of the serial interfaces is connected the multifunction digital power meter and it can be used

to directly acquire electrical measures from ammeter circuits (up to 5A) and voltmeter (up to 400Vac

L-N, 690Vac L-L). On one of the Ethernet interfaces is connected the router for external connections.

The module for the analog output is connected to the I/O bus interface. The remaining interfaces

are available and can be used to connect acquisition devices or other systems based on the

customize needs. For what regards the connectivity, all the data undergoes encryption and

authentication between parties based on cyber security.

In order to have a more practical approach, an example is provided. The system architecture is

illustrated in FigureAnnex 11 and represents the situation in the refining industrial site (7). In here,

the available flexibility is provided by six different substations within the industrial site. Each of these

is equipped with a local RTU that collects the loads I/O list. In this case, only the substation 6 and 7

are already equipped with fiber optic cables, as such for the other four substations it needs to be

installed. The RTUs, trough the cables with connectivity Modbus RTU or IEC 60870-5-104, are linked

to the PLC. The latter is upward connected in the system with the aggregator platform with a

continuous exchange of information and downward is connected with the HMI. The client requested

that the data and commands would be directly replicated over their Distributed Control System

(DCS). As this request was out of the scope of the project and intervening in an external private DCS

is expensive and time-consuming, ABB proposed the agreed HMI with the possibility to connect it

to the DCS by sharing the data over the protocol IEC 60870-5-104 or Modbus TCP. However, the

connection and installation of this link would be at the expense of the industrial consumer.

To be noted is that ABB is designing the system architecture and providing the equipment but, due

to the large size of the industrial sites and their complexity, the installation process is outsourced.

In fact, for each industrial consumer, the technician company suggested by the client itself is

contacted and with them the final technical details and equipment layout together with the

installation costs are established. With the system architecture disclosed, it is now possible to

conceptually move up in the system by practically exploring the aggregator platform in the next

chapter.

3.5 Aggregator Platform

In this chapter the development of the aggregator platform and its functionalities are explored.

Since 2017, when the Resolution 300/2017/R/eel opened the Italian Ancillary services market to all

the resources, Terna allowed the aggregation of loads and generators properly managed by a BSP

in a so-called Virtual Power Plant (VPP).


54

The goal of an aggregator is to aggregate a certain number of units in order to control the resources

according to the dispatching orders so to provide a relevant service to the TSO’s request.

Figure 32 Aggregator conceptual schematic (Osmose, 2018)

The result provided by the aggregator in the eye of Terna is as a single production unit. The

aggregation platform receives the dispatching orders directly from Terna, elaborate the best way to

satisfy the order and sends the signals to the field devices which enable communication between

single resources. In parallel to this, the field devices upload into the aggregation platform all the

information needed for optimal management, such as availability of flexibility. The VPP is a

centralized software that manages bundled resources by enabling hardware and software adapters

to control dispersed resources and acquire data.

Figure 33 The task of aggregating resources

The main requirement for the platform is provide a reliable service so to compete with traditional

plants. To do so the aggregator has to provide the dispatching service as if it was a single unit. This

is achieved by the so-called “Tetris algorithm”, in which the flexibility embedded in dispersed

resources is bundled to emulate a traditional plant. Moreover, in case of response failure, the

platform needs to be able to replace any of the failing resource so to guarantee reliability upon the

service. This is achieved via the VPP by analyzing and evaluating the reliability of each individual

resource and establishing the amount of back up resources needed when the formers are in play. It

is crucial for the platform that the communication happening both with Terna and with the field

devices occurs in a clear and smooth way. Initially, the established communication system was IEC-

870-5-104 with Terna and private connection to manage the field devices. However, after a round-


55

table discussion with all the technical parties involved including Terna, it has been decided that the

communication system is going to be based on email. In other words, the dispatching orders arrive

through email to the aggregator, which then, via email, sends them to the selected industrial

consumers.

As explained previously in chapter 2.3, the spot market is divided into two: the day-ahead market

and the intraday market. The day-ahead can be identified with n-1, where n is the day. Every day,

by 12am (GME, 2020) each industrial consumer has to submit in the day-ahead market the planned

consumption energy profile and, through the aggregator, the availability for flexibility. During the

intraday market, the day-ahead baseline is modified according to the corrections made on the

planning. The optimization of the platform in satisfying the dispatch orders runs above two functions

in line with the intraday market. The two functions are powering up and powering down and do

follow the dispatch orders. The time interval over which an event can occur is quarter of hours. As

such there are 96 windows in each 24 hours’ time frame. The system starts at n-1 but then it

constantly updates every 15 minutes to maintain a 24 hours span. The updates are given by Terna

and the intraday market, by the consumers and by the day-ahead planned consumption corrections.

The dispatching order comes in the form of increasing or decreasing power, price offer in €/MW or

in €/MWh every quarter of an hour and it is declared for how long the service is needed and what

activation time is required. The aggregator can propose himself by bidding for the full order or just

for a percentage of it and if the load is not adjustable then it works on an ON/ OFF base. It is the

aggregator that is in charge of deciding how many bids to make and of which magnitude. As such,

from a single industrial site one or more bids can be placed. Each bid encapsulates the price, the

power, the activation time and the duration time. The aggregator is in charge of equally providing

each consumers the ability to provide flexibility. However, the choice of the load adjusted occurs in

accordance with a prioritization order that enables the best load or combination of loads to be

controlled. As the AVC service in Italy is not remunerated and the aggregator still offers the service,

a way for it to make the consumer benefit for providing AVC services is to give them a higher priority

in being chosen.

Thanks to the fact that the consumers declare their planned consumption in advance, it is possible

for the aggregator to register into their total energy profile any sort of events that happens on site.

For example, strikes and maintenance operations together with bank holidays in which the energy

consumption is heavily reduced can be implemented in the aggregator’s strategy. The seven

industrial consumers involved are being split among three aggregators. The load aggregation is

clustered as follows: Edison is going to manage number 4 and number 1, Enel X will be responsible

for number 3 and number 6, and Compendia is in charge of number 2, number 7 and number 5. To

be noted is that ABB is taking care of all the system architectures and is also developing the

aggregator platform and interface for Compendia.

Even if in the context of Osmose the service are going to be provided without charge, it is important

that the campaign represents a scenario as close as possible to reality. It is for this reason that the

next chapter is dedicated to identifying a price for congestion management, frequency control and

AVC.


56

3.6 Price Identification

In order to support the modeling of remuneration schemes and assess the impacts of the projects

it is necessary to establish which are the price tags of the respective three products of the research:

frequency control, congestion management and average voltage control. The way the price is

estimated is through an analytical revision of the historical data of the Italian market and a

calculation of an average that will then be used as a reference.

Concerning the provision of frequency control, the prices of the bids have been analyzed for the

period going form July 2017 to June 2018 provided by Terna (Terna , 2020) and includes all the bids

for the FRR market in continental Italy, Sicily and Sardinia.

Figure 34 Average FRR price

As highlighted in the graph in Figure 34, the prices for upward frequency are much higher than the

downward ones. This is because it is much more costly for the market agent to start injecting active

power rather than decreasing or stopping that as units had already been paid in the energy market.

The average peak price occurs in the hour 7 and reaches 130 €/ MWh, whether the average price is

110 €/ MWh aside the hours 1, 23 and 24 where is 120 €/ MWh. The average downward price is 16

€/ MWh in the first quarter of the day, reaching a price of 20 €/ MWh during the rest of the day.

Generally, the bids can reach high values, in fact throughout the 24 hours the maximum bids range

from 350 €/ MWh to 500 €/ MWh for what regards the upward price. No particular distinction has

been observed on average prices between holidays and working days. However, seasons affect the

upward prices, as summer prices are lower in respect to the ones of the other seasons and the peak

average price occurs in the winter season. Downward average prices tend to be similar for every

season in the first quarter of the day, but for the remaining part of the day winter has the highest

price. Finally, it has been observed that both downward and upward prices are higher and more

fluctuating in the islands compared to continental Italy.


57

For what regards congestion management, the analysis took into account all the bids for the period

going from September 2017 to August 2018 provided by Terna (Terna , 2020) in the MSD, excluding

the ones dedicated to the FRR market. The market zones are examined together, resulting in

average prices. The mean, working days and holidays prices were evaluated for both upward and

downward values of the balance market.

Figure 35 Average upward balancing market price

Figure 36 Average downward balancing market price

The graphs represented in Figure 35 and Figure 36 shows that the average upward price tag peaks

at 162 €/ MWh around the hour 21 , but has a mean value around 125 €/ MWh. On the other hand,

the average downward price is around 26 €/ MWh, finding values greater than 30 €/ MWh in the

evening between the hour 19 and 23. The maximum price bid in the upward balancing market can

reach 3000 €/ MWh, whether the minimum downward price is always zero. It can be noticed that

holidays have a much higher upward price peak (184 €/ MWh against 118 €/ MWh of the mean

value). The downward prices of both working days and holidays follow a very similar behavior, being


58

however higher in the working days. No relevant difference has been noticed due to seasonality

variations as the profiles are quite similar in each season.

The last product in consideration is active voltage control. The estimation of a price tag for it are of

difficult estimation because in Italy AVC is a mandatory service and it is not remunerated. Therefore,

another market is used as reference. Due to its dimension, the British market is used. In the United

Kingdom the National Grid comprises two kinds of reactive power services: Obligatory reactive

power service (ORPS) and Enhanced reactive power service (ERPS) (ESO , 2020). The historical values

of reactive energy quantities and prices resulted in an average reactive price of 3.11 £/ MVArh,

which corresponds to 3.55 €/MVArh. Notably, a studied carried out by Terna in collaboration with

the Politecnico di Milano and published by ARERA (PoliMI, 2016) have calculated an average price

of 4.48 €/MVArh.

3.7 Impact

In this final chapter of the section, the impacts of the projects are evaluated from different

perspectives. First, the effects of the products on the market are explored and, subsequently, the

overall influence of Osmose on the electric system and the electric market is addressed. As the

project did not come to end and only will in 2021, its real impacts are of difficult estimations.

However, the already achieved results and by looking at other concluded pilot projects, it is possible

to assess which will be the effects.

Concerning the product of frequency control, a larger number of participating market agents can

benefit the system with an overall cost reduction of FRR. This is because the “pay as bid” market

design accepts all bids starting form lower price bids. As such, more competition in bidding has the

potential of reducing the overall price. There are two possible evolution paths. First, the amount of

reserves that the new participants offer at low price is small compared to the quantity required. In

this scenario the market price is going to be still dominated by the price imposed traditionally by

high cost plant, making the impact of new entrants limited. Second, the total amount of reserves

offered by RES and load flexibility is large enough to cover the system needs of FRR, even for some

hours of the day only. In this scenario the market prices are going to be determined by the new

market players at lower cost providing high economic benefits for the power system.

When considering congestion management, the participation of a new actors in a more

decentralized way can have the impact of total cost reduction for the resolution of congestion.

Traditionally, only few units were involved into solving local congestion, giving them the ability to

price the service higher than the average. However, the resolution of local congestion can be

achieved with a quite small amount of energy and the new flexible actors, if properly located, could

satisfy it entirely. As such, the entrants of new market players will determine an overall lower

market price, resulting in high economic benefits for the power system.

The last product, AVC, is currently a mandatory service in Italy and it is not under any remuneration

scheme. Even if an economic value has been indirectly evaluated in the previous chapter, its effect

on the power system are of difficult estimation. In order to integrate AVC under a pricing scheme,


59

the way the Italian market operates would have to undergo several modifications of which, at the

moment, there is no sign. However, the aggregator can make great use of AVC, by integrating it as

a priority parameter for the flexibility service they provide.

The dimension of a project like Osmose does not only have impacts on the engineering side of the

technology but also has effects on multiple other aspects of different nature. It is now important to

recall the first hypothesis that guided the research as it is going to be answered: How effective are

the pilot projects, such as Osmose, to support the scalability of Demand Response? To be noted is

that term scalability does not only include the replication of the technology, but it also entangles a

series of improvements that can potentially unlock the implementation of demand response in the

electricity system.

Figure 37 Osmose Impacts (Osmose, 2020)

The effectiveness of a project can be evaluated by the impacts that brings along. A summary of the

impacts generated by Osmose is represented in Figure 37 and it comprehend six aspects. It

contributes to the energy transition by enabling a high share of RES to be integrated in the power

system in a safe and reliable manner. The large-scale of the project makes the demonstrations

replicable and ready for scaling up. In fact, by involving such large partner and conducting the tests

on such big facilities, it is possible to collect the necessary know-how to replicate the service on a

wide range of other players of the same or smaller size. The partners involved have access to global

markets, therefore an impact of the project is a Pan-European roll-out of flexibility solutions and

associated services together with the creation of new market opportunities. The project aims at

deploying demand response which is inherently a measure to increase the of integration of RES in

the system. Therefore, it positively contributes to the reduction of GHG emissions in the power

system. Osmose, by being in close contact with public entities and the regulation, is able to provide

and support the government with recommendations on market designs and regulations to promote

sufficient and cost-efficient provision of flexibilities. In other words, the project can provide the

policy makers with suggestions specifically on demand response by showcasing the outputs of the

testing campaign. Finally, Osmose has an impact in the market as it contributes to its transformation


60

into a dynamic market with real-time dispatching happening both at national and at cross-border

level and with supply-demand matching bids able to maximize social welfare. The combinations of

all the impacts mentioned above, gives the ability to a pilot project such as Osmose to showcase the

potential of the technology by addressing all the stakeholders involved. For this reason, answering

the formulated hypothesis, Osmose is very effective in supporting the feasibility of demand

response, the potential that the service brings along and the scalability possibilities that are in place

by highlighting the benefits that all the stakeholders would gain.


61

4 QUALITATIVE ANALYSIS

This chapter has a qualitative approach on demand response and, more in particular, it focuses on

the role of the aggregator. The latter is an emerging new market player and the regulations and

standards around it have not yet been clearly defined. The foggiest aspect that is currently

undermining its establishment in the market is the remuneration scheme as the price signals and

the business case are absent. In other words, an unclear paradigm surrounding how the provision

of financial benefits for the aggregator is biasing its dissemination in the electricity market. The

current regulation and remuneration scheme are sabotaging the aggregator’s competitiveness

realm in favor of the already established market agents. The goal of this chapter is to review and

combine existing business models to validate a path for the aggregator to profitably express its

potential.

The chapter is structured with an initial situation analysis in chapter 4.1, where the stakes, risks and

blockers are evaluated. Subsequently, the business models of existing aggregators and the ones

proposed in the literature are reviewed in order to understand which are the value propositions

that are most likely to lead to profitability. With these being collected, a validation process is going

to be carried out through the use of interviews conducted with experts in the field. The experts are

knowledgeable people that work in the field both in an academic, political and industrial context.

With their inputs implemented, a final assessment over the current situation of the aggregator is

done and recommendations are formulated. Moreover, at the end of this chapter, the second and

third hypothesis stated in chapter 1.3 are going to be answered.

4.1 Situation Analysis

In this chapter a situation analysis on demand response is carried out. It consists in the adoption of

three analytical tools: stakeholder analysis, risk analysis and Strength-Weaknesses-Opportunities-

Threats (SWOT) analysis. These are going to establish the current situation of demand response by

taking into account the stakes of all the market agents together with their respective risks.

Moreover, also the main blockers are going to be identified. Once the stakeholders have been

identified, the interests on the project and the impacts that the project has on them is evaluated

(Smith, 2000). Finally, with the outputs of the three analysis in hand, the main blockers are

discussed.

4.1.1 Stakeholder Analysis

A stakeholder analysis is a tool used to assess the potential changes that a project can bring on the

interested parties. These changes do not necessarily have to be positive, in fact some stakeholders

may find that the project is not providing them with any benefit, or it can even be detrimental for

them.

A graphical representation of the analysis is shown in FigureAnnex 12, in the Annex. The

stakeholders and the main aspects investigated are the following:


62

- Bulk Generators: for this party the implementation of DSR in the system would not be

beneficial as the service would promote and facilitate the spread of RES, in turn decreasing

their participation.

- Grid Operators: DSR is facilitating their task of integrating RES in the system and, as such,

meet the goals imposed by the government. Grid operators are regulated entities for which

the income is defined by regulators. Therefore, how DSR can affect them will depend on

how the remuneration regulation is set.

- RES power plant: this actor is in favor of DSR as it can solve or alleviate their intermittency

generation causing curtailment, providing them with more market opportunities.

- Manufactures: the roll-out of new electronic devices such as smart meters and IT platforms

is a requirement for implementing DSR. Therefore, the manufacturers take advantage of

new market opportunities around the development of new devices complementary to the

service.

- Aggregator: as new market agent, they would greatly benefit from the implementation of

DSR as they would supervise and ensure that demand response is an effective service. New

business opportunities would arise with them as managers of the service.

- Customers: these would benefit from a higher engagement in the market that in turn would

lead to a decrease in the electricity bill costs by an income via offering their flexibility.

- Policy makers: these are in charge of developing and providing the regulatory framework

and the legislation body for all the stakeholders involved. In the medium-long term their

profitability potential may increase as the taxation methods over electricity can change.

The interrelation between the stakeholders are shown in the diagram represented below in Figure

38. The direction of the arrow indicates to which direction the interaction is flowing.

Figure 38 Stakeholder interrelation diagram


63

It is possible to notice that the aggregator has a bidirectional interrelation with both the consumers

and the grid operators. The aggregator in order to provide the service has to match the

requirements imposed by the grid operators and the latter are paying the aggregator for the service

provision. In order to participate in the market, the aggregator uses the flexibility of the consumers,

which in turn are paid by the aggregator for their provision of flexibility.

4.1.2 Risk Analysis

A risk analysis is a tool adopted to identify and evaluate the likelihood of an adverse event occurring

within the sector. The assessment aims at analyzing potential issues that could negatively affect the

DSM development and identifying the potential for harm from these events. First the risks are

identified, then evaluated and finally a response plan is outlined (Rausand, 2013).

The full analysis is presented in Figure 40, where risk severity, risk likelihood and impact level are

evaluated for each risk type. The legend of the risk analysis is shown in Figure 39. The risks and

impact are classified according to a level shown in the legend and represented with a different color,

increasing its density as the risk or impact becomes stronger. The risk type with the highest impact

is been identified as the energy market, followed by regulation, disruptive technologies and the

social environment. The latter one involves all types of end-users including industrial, commercial

and residential consumers. Following a brief description of the risk types and their response plan:

Figure 39 Risk analysis’s legend


64

Figure 40 Risk analysis

- Regulation: it may take long time for the regulation to implement all the standards and the

legislation body for DSR, and even longer time to include all its potential benefits. There is

even the risk that the regulators may not support the service, heavily hampering its

development. A response is to let the regulators learn from pilot projects where the service

showcased positive impacts and from other countries in which DSR has already been

implemented successfully.

- Weather: unfavorable weather conditions for an extended period would decrease the need

for flexibility solutions. A response is to implement the technology at small scale alternative

solutions that involve storage systems and fuel cells.

- Disruptive technologies: a breakthrough discovery in the energy field in the market like

nuclear fusion can cease the need of DSR solutions. A response is to redirect the market

segment to off-grid decentralization, improving the stand-alone system.

- Social: the consumers may not be willing to invest and install all the necessary equipment

for DSR to work due to lack of awareness of the potential benefits. A response is to let the

complementary products be installed at the expense of the utilities and the aggregators or

to make the energy prices convenient enough so that the payback time is guaranteed in the

short term. An additional risk is in the form of privacy concerns as the personal data of

energy consumption may be monitored. A response is to develop an exchange of data

system that is cyber secured and accessible at all time from the end-users.


65

- Energy market: the access of a large number of new players in a liberalized energy market

has the risk of causing unexpected price fluctuations. A response is to involve all the

stakeholders in the decision making processes in order to set clear and transparent rules

and to place price thresholds.

4.1.3 SWOT Analysis

A SWOT analysis is a tool used for the assessment of the current position of a project in order to

make strategic decisions. As the name suggests it identifies the strengths, weaknesses,

opportunities and threats that will help in the decision making process to evaluate which favorable

and unfavorable internal and external factors are in place. Strength and weaknesses usually refer to

the internal situation whether opportunities and threats are more related to the external

environment (Gürel, 2017).

A graphical depiction of the SWOT analysis is displayed in the Annex as FigureAnnex 13, where the

four areas are explored. From the analysis is possible to highlight:

- Strength: the service of DSR is able to contribute in solving the instability problem of DER,

whose development is growing enormously also due to social recognition. Advances in the

ICT side of the technology enabled it to become more cost-competitive and compatible to

a wider range of loads. Moreover, DSR as a capacity resource is offering a minimal carbon

footprint compared to traditional methods.

- Weaknesses: DSR is very dependent on the conditions of the grid and the presence of DER.

Moreover, several complementary products such as smart meters are needed for it to

effectively work. With the entrants of new market agents, many parties will be involved,

and this may pose challenges in reaching agreements. Finally, end-consumers may

experience discomfort in changing their energy behavior in terms of consumption patterns

and their awareness of the pricing in the electricity market may be low, discouraging them

from understanding the benefits.

- Opportunities: DSR can provide the electrical system with the capacity to displace the pricey

traditional plants that dealt with peak loads. For the grid operators it can provide a cost-

effective method to avoid costly grid expansions and upgrades. By involving the end-

consumers energy behavior more actively, the forecast can become more accurate and

precise. Finally, it promotes new business opportunities in the market and invites new

figures to emerge such as the one of the aggregators.

- Threats: the backbone technologies have not come to a common standard yet, therefore

different smart meters might lack the synchronization required to share the data. The latter

can also be a threat as it poses data ownership problems and big data confidentiality issues.

The lack of standard government policies for DSM and remuneration methods for end-

consumers can lead to business and social uncertainty respectively. As the electrification of

the economy grows, there is a threat of the State in the medium-long term to apply a higher

taxation rate on electricity bills.


66

4.1.4 Main barriers for DSM participation

The three analytical tools highlighted several aspects that concern the DSR surrounding

environment. With the outputs in mind, it is possible to pinpoint which are the main blockers. In

other words, what are the largest hurdles and barriers to overcome in order for demand response

to be adopted and implemented on a large scale in the electrical system. Multiple barriers arise

when taking the different standpoints (ESGTS, 2019). In the next paragraphs, the barriers from the

different perspectives are going to be discussed.

Taking into account the customer perspective a barrier is standardization and interoperability as the

technical solutions that the customers may have installed can be not recognized by the energy

managers as viable for their engineered system. Another barrier concerns the customer’s lack of

awareness about DSR in terms of what the service is, what the opportunities are and their

possibilities to take part in the business. This lack of clear information is caused by a blurred

definition of the benefits that both implicit and explicit DSR can have on the customer’s energy bill.

Moreover, the business case is not clear in terms of financial incentives creating uncertainty around

the initial investment. As the flexibility services lacks a clear quantification of the costs and benefits,

it is complicated to demonstrate the profitability on the long term.

Several barriers have been identified attempting to access the market with a DSR service. A barrier

is represented by the lack of standardization as across Europe there are different principles and

prequalification. The technology providers, especially the ones providing flexibility services to the

system and Energy Management Systems, face different requirements in each country forcing them

to develop a new device and system for each market. A lack of framework for DSR providers, like

the aggregators, is another barrier. In fact, the uncertainties around the balance responsibility, the

lack of a baseline methodologies for operation and a blurry remuneration scheme that differentiate

DR services from generation are creating barriers to access the market.

There are barriers also in the point of view of the system and grid needs. Whether HV lines have a

good level of automation and can provide real time data to the TSO, MV and LV have a lower degree

of monitoring and controlling capabilities. As such DSO have low observability in the LV grids, an

essential element for DSR validation. At the same time market agents are stimulating the use of

energy in windy and sunny periods through dynamic prices, creating higher peaks and more

congestion that the DSO wants to mitigate through DSR. Another barrier is represented by several

actors developing and piloting platforms that work differently. This competition can lead to efficient

market structures, but it carries the risk of market fragmentation. Moreover, platforms working with

different techniques may not be synchronized, affecting the coordination between the TSO and the

DSO. Finally, another barrier is represented by the reasonability of the system operator of power

quality and system stability. As such, with a DSR system in place, they would be responsible for

assets of which ownership resides at the customer. In the case these assets are not correctly

integrated in the energy system, the system operator is held responsible. Therefore, its risks in

engaging with assets not directly controlled and not standardized represents a risk.


67

The last barrier that has been identified regards privacy and security. For DSR to work efficiently,

large amounts of data have to be exchanged and, as the number of market agents having access to

it is increasing, privacy concerns are increasingly representing a barrier. Private data must be

protected at source, in transit and at rest. Particularly, consumers need to trust that their data is

treated according to privacy measures and if they do not feel that it is the case they will not engage

in the market.

The European Commission has established a vision for the implementation of demand response,

but a more standardized set of rules and clearly profiled requirements is needed. As reported “in

the Commission’s view inadequate market signals as well as regulatory obstacles are frustrating

progress: stimulating adequate levels of demand response and active prosumers participation on

wholesale market” (Hancher, 2017), shows the acknowledgment of the Commission that a viable

and concrete business case has yet to be developed.

4.2 Overview of Aggregator Business Model

In this chapter the business model of the aggregator is going to be investigated, with particular

attention to the remuneration scheme. It previously emerged that there are several uncertainties

to overcome before a clear business case upon which is possible to rely on is in place. The business

model of an aggregator falls into the sharing economy domain. The latter is defined as “an economic

system that is based on people sharing possessions and services, either for free of for payment,

usually using the internet to organize this” (Cambridge Dictionary , 2020), and notorious examples

of it are Uber and Airbnb. In the context of the electricity system the aggregator is defined as “the

act of grouping distinct agents in a power system (consumers, producers, prosumers, or any mix

thereof) to act as a single entity when engaging in power system markets (both wholesale and retail)

or selling services to the system operator(s)” (Burger, 2017). Another definition that suits the

research is “an aggregator is a company who acts as an intermediary between electricity end-users

and DER owners and the power system participants who wish to serve these end-users or exploit

the services provided by these DERs” (Ikäheimo, 2010).

Figure 41 Aggregator sharing economy environment


68

In fact, the aggregator is creating a platform positioned in between parties and enables them to

cooperate. In particular, the consumers are enabled to participate in the energy market and the

system operators are able to use the flexibility offered by the consumers. To be noted is that the

intent is provide a general scheme and not a case-specific one. When addressing the value

proposition that the aggregator’s business model delivers it is important to remind that it is twofold

as its platform directed to the consumers on one side and to the power system to the other. Facing

the consumers, the aggregator has the capability to let the consumers participate in the energy

market by letting them receive financial benefits. When pointing at the system operators, the

aggregator value relies on the supply of flexibility to solve balancing issues and reducing the energy

peaks on the grid. In the next chapter 4.2.1 a causal map is presented in order to have a better

overview of the situation. Moreover, there have been identified two types of business model for

the aggregators according to their operational methods: combined and independent. These are

explored in 4.2.2 and 4.2.3 chapters, and their risks, strengths, weaknesses and causal relationships

are explained.

4.2.1 Causal Map

The value of a causal map resides in the ease of observation of the overall problem and better

comprehend the key issues. Mapping the problem helps in relating the elements and, therefore,

understand which are the variables that defines it. There are three type of variables:

- Decisional variables: these are under the control of the decision maker.

- Exogenous variables: these are variables over which the decision maker has not control

because are determined by external factors.

- Endogenous variables: these are the results of the interactions between the other type of

variables.

The map is to be red from the final objective that is an endogenous variable. Decisional variables

are represented in blue, endogenous variables in black and the exogenous ones in green. Moreover,

the minus or plus signs are to indicate the upstream or downstream relationship flow of the variable.

Whenever the sign is not present, it is because the stream is to be determined on a case specific

scenario or because it not possible to clarify the impact.

4.2.1.1 Causal Map Aggregator Business Model

The causal map shown below in Figure 42 concerns the aggregator business model. Following a brief

insight on the explanation:

- Market zone & energy prices: the final economic benefits are achieved according to the

price situation. The latter is subject to various changes and it is not easily predictable.

Moreover, the energy price is also influenced by the market zone where there are the points

of withdrawal and injection.

- Technological choices: the decision over the technologies has a relevant impact over the

performance of the service delivered. However, a higher performance comes with an

increase in the costs of the technologies.


69

- Financial method: the form of financing has a strong impact over the economy of the

business. The presence or lack of incentives together with contractual clauses influence the

result of the investment. The more favorable is the debt contract and the time length of it

for the borrower, the lighter is its impact on the investment.

- Bidding strategy: this variable is directly correlated to the gains of the business and so to its

profitability. As such a properly crafted bidding strategy is would lead to the best results in

terms of gains and so in profit.

- Current regulations: there are several norms that are in favor but also many that are not.

As such it is difficult to determine whether the impact is positive or negative. The current

regulation is also influencing the size of the VPP, that is the reason why it is labeled as an

exogenous variable. In any case, the regulations are crucial in determining how the business

operates and so how it can generate profit.

The size of the VPP is theoretically a choice to be made on the magnitude of the investment.

However, there are several restrictions posed by the regulations. In particular, the minimum size to

participate in the market is 1MW in Italy, therefore the aggregator has to be sure to have at least

1MW capacity of flexibility available to run the business. If there is a restriction on the minimum

size side, there is no limit on the maximum one. As such the stream size is positive since a large

investment is likely to be correlated to a large VPP size.

The presented causal map addresses a generic causal relationship of variables. In the next two

chapters, the different causal interactions are explored according to the specific type of business

model.

Figure 42 Causal Map


70

4.2.2 Aggregators combining roles

BUSINESS MODEL DESCRIPTION OBSERVATIONS

COMBINED AGGREGATOR – ENERGY SUPPLIER

Aggregation and utility services are offered together as a package. The aggregator and the BRP are the same entity and, as such, there is a single BRP per connection point.

The level of complexity is relatively small as no new actors are involved. No need for financial settlements between suppliers and aggregators. The retailers, having already the connections with the market and a customer base, are in the best position to become aggregators.

COMBINED AGGREGATOR - BRP

For each connection point there are two BRPs: the supplier and the independent aggregator. The consumers are contracted by the aggregator served by the supplier, which, in turn, is compensated for balancing services and dynamic market pricing.

Major complexities arise whenever the aggregator contracts consumers from different suppliers. The service that the supplier outsource to the aggregator has an unknown remuneration baseline.

The combined model has the advantage of relying of an already established know how of the market

and its mechanisms together with the advantage of possessing a customer base. In addition, the

energy supplier is in the position of affording the installation of the necessary equipment on

consumer sites for the operation of the service. Nevertheless, it is still facing the risk of consumer

acceptance of the service and the matter of dealing with data under clear privacy protocols. The

main weakness point to the combined model is that the cluster of loads aggregated has to be under

the same contractor. In other words, the aggregation is constrained within the contracted customer

of the energy supplier. This is because when aggregating loads of other consumers with a different

contractor, major complexities arise in the form of double counting the load in the intraday market

baseline, potentially causing imbalances.

Consider the causal relations highlighted in Figure 42, it is interesting to note that in the case of this

combined business model some links are less influential. First of all, an energy supplier has a more

direct monitoring control over the consumer’s meter and the additional equipment can be easily

installed on the site of its customer. Secondly, the financial method can be in the form of an

additional business line rather than an independent business and, therefore, funds and loans can

be accessed and granted with the company collateral backup. The bidding strategy adopted is

proved and tested by the experience of being an energy supplier, incrementing the financial

margins. Another relation concerns the number of consumption units as, with this model in place,

a percentage, if not all, of the already existing customer base can be involved in the aggregator’s

portfolio providing a mixed and distributed pool of resources to start. Finally, the current


71

regulations, even if are imposing restrictions, are keener to allow established companies to operate

with more freedom and engage in innovative business models.

4.2.3 Independent Aggregators

BUSINESS MODEL DESCRIPTION OBSERVATIONS

INDEPENDENT AGGREGAOTR SERIVCE PROVIDER

The aggregator operates as a service provider for another actor in the market but is not accountable for balancing responsibility. In this model the aggregator benefits from its action and the counterparty is being exposed to the price risks. For these reasons, a long lasting relationship between the aggregator and the counterparty has to be established.

The cost of the actions and the installation of the system of the independent aggregator are not covered by any other player. This initial investment represents a loss that eventually is paid back by the grid users, but the business case is not clear yet.

INDEPENDENT DELEGATED AGGREGATOR

The independent aggregator takes all the risks of selling to TSOs, BRPs and wholesale market. Its operation can affect the balancing position of other market players, so the communication and interactions between them have to be transparent and previously formalized.

The system built by the independent aggregator has to comply with the regulatory framework, and its complexity, as more independent aggregators enter the market, is expected to increase.

PROSUMER AGGREGATOR

Large commercial/ industrial prosumers that decide to enter the market as aggregator with their own portfolios.

Due to bid restrictions, the scale is a key factor. Energy Communities (EC) of domestic prosumers are arising but are still far from competing in the market.

The independent aggregator business model is most likely to have the highest potential but at the

same time is the one facing larger obstacles to enter and establish itself in the market. In fact, the

independent aggregator not only has to create a customer base but also has to take care of the

equipment installations as part of its own investment. Moreover, the customer base has to be large

enough in order to reach the minimum bid. By participating in the market as a third party it is taking

the risks of delivering a reliable service and meeting the prequalification required to participate.

However, this model has the capability of reaching out to every customer independently of their

energy contractor by building its own platform and system. Its business opportunities are seen more

on the long run when the flexibility as a service has already gained acceptance and popularity.

In the case of the independent aggregator, the causal relationships represented in Figure 42 are

affected due to the nature of this model in terms of some links being more influential. First of all,


72

the nature of the investment that an independent aggregator has to undergo to implement the

system is much more consistent compared to the combined model. This is because, all the devices

and the information system are not covered by any other player but itself. On top of that, the

independent aggregator needs to take into account the financial settlements with the energy

supplier and approach customers with an aggressive marketing campaign. In fact, before reaching

out to the capacity threshold to participate in the market, a big enough customer base needs to be

in place. In contrast, the bidding strategy of an independent aggregator can function as a leverage

to come up with novel strategies and tactics so to differentiate from existing players and, in turn,

attracting early adopters and innovators. This is because the service delivered represents the core

business of the aggregator. Finally, the current regulations are playing in disfavor of this model as

both policies and market rules are still hesitant on accepting and opening up to it.

4.2.4 Remuneration scheme

Conceptually, the remuneration scheme is one where the aggregator gets paid for the service it has

delivered and splits the revenue with his clients. However, it is important to make a distinction

between implicit and explicit demand response as the monetary measures change. Moreover, it is

crucial to highlight that one is not exclusive for the other, in fact an aggregator can operate both

with explicit and implicit demand response at the same time. In case of implicit demand response,

the aggregator bids into the power exchange market with its coordinated fleet of client’s sources

reducing the costs for the electricity procured. The reduction is achieved because the electricity is

bought in a cheaper timeframe of the day. The consumers are benefitting from a decrease in the

energy bill and the system operators find benefits in a decrease of energy peak due to peak shaving.

As such, the revenue that aggregator generates from the sales in the market is divided among its

clients minus a commission fee to cover the expenses. When enduring into explicit demand

response, the aggregator is gathering up the flexibilities of its clients and bids into the balance

market offering ancillary services. The system operators benefit by having a more stable grid and

the consumer profit from an extra income. In fact, ancillary services undergo direct payments. Thus,

the aggregator is paid by the system operator for delivering the service and then it distributes the

revenue over the clients minus a commission fee to cover the expense. The relationship between

the aggregator and its clients can take two forms. Firstly, the client’s compensation can be based on

its active participation, so receiving a remuneration that corresponds to his individual energy profile

behavior. Alternatively, the client’s remuneration approach is for the aggregator to divide the

compensation among its portfolio according to client’s capacity. The first one promotes the

individual efforts and performance, whether the second one advocates for collective operations.

4.2.5 Aggregators’ Capabilities

In order to deliver a reliable service to both the system operators and its customers, the aggregator

needs a set of key capabilities:

- Observability: it is the ability to constantly monitor the energy assets of the clients to not

only check on their current status but also to collect data for historical purposes. An


73

historical database can provide a reliability assessment on the asset that can qualify it for a

higher number of services.

- Predictability: it is the capacity to integrate in the aggregation platform system both

weather and market forecasts. Accurate integration of weather forecast enables the

aggregator to better predict the trading capacity that will be needed. Prediction of market

prices can lead the aggregator and its clients to larger savings.

- Controllability: it is the capability of the aggregator to manage its portfolio of assets. In order

to work efficiently, the activation time has to be quick and respect the time requirements

imposed by the service. To achieve this a high degree of control is necessary on the loads.

A complete overview of the business model in the form of a Business Model Canvas can be found is

the appendix as FigureAnnex 14.

4.2.6 Current Aggregators Business Model

In the current market conditions, the typology of aggregator with the best perspectives in terms of

encountering a viable and forthcoming development is the first one: combined aggregators shown

in chapter 4.2.1 (BestRES, 2018). The reasons are to be linked to the regulation state as the MBs

have not yet clearly defined a framework for the aggregator that includes their role and duties and

their relationship with the other electricity market players. As such, the lack of regulations is

expected to favor combined business model since the seems to be the most compatible solution

aligned with the current market structures. Moreover, the combined aggregator business models

appear to be the most feasible way for a company to enter into the market: utilities and retailers

already have a customer base and an established market penetration upon which they can expand

their business with aggregation services. For independent aggregators a lack of an adequate

customer base at disposal is hampering their potential of delivering flexibility and, in turn, their

competitiveness.

The uncertainties around the business case of the aggregator and the relative profitability emerge

especially when its operations occur on MV and LV lines. In the case the aggregator is operating on

the HV lines, so with very large consumers, the transactions for the provided services occur directly

with the TSO. However, when the field of operations happen on lower capacity lines, also the DSO

comes into play. The presence of the DSO hampers the key capabilities of the aggregator as it needs

to be approved by the system operator for every action towards the power system and the energy

market, since it is the BRP. Moreover, the aggregator has to pay to the DSO the use of the

distribution grid for the physical transportation of the electricity, greatly reducing the profitability

potential. These elements and relations are not well defined in the regulation and are impeding the

spread of the aggregator as a market agent.

There are two factors influencing the business model of the aggregator: the market design and the

regulation. For what regards the market design there is a gradual opening in terms of minimum bid

sizes for spot and balancing market that will facilitate the restrictions of the aggregator portfolio

dimension. A second driver is represented by the presence or lack of incentives and subsidies for

demand response. Looking back at how the wind and solar energy deployed in the last decade, there


74

was great support in terms of policy incentives such as the FIT scheme and the priority status

afforded state-subsidized renewables facilities versus fossil fuel generation. Due to the increasing

portion of renewables in the European grid, the subsidies are being reduced, allowing DERs’ owners

to become interested in more profitable markets, such as the one of ancillary services. A similar

approach can be used to promote the integration of renewables energies in the electricity system

by supporting demand response and aggregation schemes. The policy incentive should aim at the

prioritization of the procurement of ancillary services to aggregators by supporting their relationship

with the grid operators with a preferred or protected entry in the market. The support can be in the

form of tax discount and/ or price coverage of the distribution tariffs.

This policy tool would push the DSOs into collaborating with aggregators and has a twofold

advantage for them: first, it can solve congestion issues locally by exploiting the energy profile

flexibility that the aggregator offers and, secondly, the need to upgrade the capacity of the grid lines

to endure high energy peaks decreases. The policy also positively affects the aggregator by providing

a financial support upon which a profitable business case can be constructed, facilitating the rise of

the aggregator as a market agent building up a customer base. Moreover, by having the support

from the state, a sense of trust diffuses among the consumers towards the aggregators and towards

adopting demand response services.

The current goals of the Italian electricity system do set a capacity of 1GW dedicated to demand

response services with prioritization over the conventional methods. Within this capacity limits the

aggregators is able to bid at prices high enough to cover the expenses of putting in place their

system. This GW is allocated over an auction where the current aggregators bid and who gets a

capacity granted received a bonus of 30000 Euro per year on top of a remuneration per MWh

delivered. To be noted is that once the aggregator system is in place the marginal cost of the demand

response over time is minimal while traditional solutions incur into the fuel expenses for each

additional unit of service delivered (same analogy with RES and fossil fuels). Outside the capacity

threshold the aggregator is not able to compete with the traditional competitors as its bids are too

high. Despite the positive effort of allocating a determined capacity with a priority status to demand

response, to boost the development of the service, the policy should also intervene with financial

aids in per units of service delivered.

4.3 Interviews

In this chapter the interviewed experts are presented together with the general questions the

interviewer has asked. During the interview there was space for discussion and elaboration of

interesting insights. For disclosure, it was explicitly asked for their educated opinion on the themes

and not a corporate position. To be noted is that not every expert was comfortable with the full

disclosure of their name and role. In this case only the company is reported. Below is shown the set

of questions:

1) What do you perceive is the main barrier for the deployment of demand response in the

market?


75

2) What role should regulators take in respect to demand response and the aggregator?

3) Do you believe an explicit policy support should be established for the emergence of the

new market agents such as the aggregator?

4) How to actively integrate consumers into the flexibility world? Which obstacles do they

perceive (privacy, security, high economic cost for activation…)?

5) How do you foresee the figure of the DSO and the one of the utility/retailers changing in

the future?

6) Which services are more likely to be provided by aggregators (ancillary services like

frequency response and congestion management (explicit), or more market services so to

buy energy when more convenient (implicit))?

7) Finally, do you think this current pandemic can somehow influence the development of

demand response or the electricity system as a whole?

8) Is that okay if I disclose your name and company in the report?

The highlights, in the form of comments taken during the meetings with the experts, are reported

in the Appendix II for each conducted interview. The following experts have been interviewed:

- Terna employee – Undisclosed role

- Angeliki Malizou – Castor – Sales and business Development Manager. Former Energy Policy

Officer at BEUC – The European Consumer Organization

- Rui Castro – IST – Professor & Researcher – Aggregation and doctorate in electrical and

computer engineering – Distributed energy resources and management

- Alessandro Drappo – Etneo – Energy Efficiency Manager

- O. V. – European Commission External Consultant – Expert in sustainable energy policies,

energy efficiency, renewable energy sources, energy system

- Alberto Pesce – ABB – Project Leader and responsible for ABB role in H2020 Osmose project

- Fabio Gambino – M5S – Engineer and parliamentary assistant of deputy Alessandro

Melicchio (M5S)

- Acciona employee – Undisclosed role

- Enel X employee – Undisclosed role

- Filippo Cantelmi – NEXT Kraftwerk Italia – Business development manager

- Montse Mussons – km0 – Project manager innovation and markets

- Giuseppe Mastropieri – European Commission – IEC Innovation European Council Expert

evaluator for Horizon 2020 IEC accelerator, REM Srl Reliable Energy management –

President

4.4 Validation

This chapter has the intent of validating the previous conducted analysis through the outputs of the

carried interviews with experts. Different opinions were collected during interesting talks which

helped in the adjustment and confirmation of the current status and foreseen situation of demand

response and the role of the aggregator.


76

The identified main blockers have been confirmed with particular attention to the need of

standardized approach on both a technical and legislative aspect. As each MBs has a different

market and system structure, businesses struggle in their expansion across borders. Another barrier

that has been spotted is the infrastructure. The current infrastructure is not yet developed enough,

especially MV and LV lines, to support efficiently the service. Moreover, a recurrent blocker is the

general lack of awareness of the consumer. The end users do not know about the service and the

possibility of offering their flexibility. Finally, remuneration is an additional obstacle slowing down

the diffusion of DR as the market and regulation do not define the rules and mechanism for it to

happen.

There is a general agreement on the need of a more active role of the regulators. As a foggy

regulation represents a barrier for demand response and the aggregator, the regulators should work

on a clear definition of a framework where the exact roles and responsibilities are defined. The

regulators should be able to transpose the EU directives in the country in accordance with the

mechanisms already present in the Nation. The implementation of the regulation should, however,

leave enough space for innovation and creation of new business models to happen. For what

regards the roles of the policy makers a clear support is deemed necessary. However, it is important

that the support, in terms of incentives, is designed so to demonstrate the needs of the aggregators

in the market and not to create businesses that are based on these financial aids. The provision of

a support per unit of service delivered can be a solution, but the market mechanisms and the way

incentives are decided is country dependent and can vary over time.

There is a general consensus on the combing role aggregator business model being the first to find

success, however different opinion arises on which services it will be delivering. The fact that each

Member States has different mechanisms is reflected also on the typology of service that can be

delivered. Nevertheless, implicit demand response is expected to be easier to implement both from

a technical and regulatory point of view. In contrast, explicit demand response has to match a series

of requirements but has much more potential both in terms of remuneration and of business

opportunities. For what regards the obstacles that the aggregators may face in engaging consumers

into flexibility, the high activation costs and the difficulties in showing the business case and

profitability do represent blockers. In a small medium industry environment energy is perceived as

a cost and not as an opportunity and the strategic decisions made on it are on the short term, since

energy is not at all part of the core business of the industry.

There is agreement and confidence that the figure of the DSO is and will undergo a process of deep

changes and development in the future. The main point of development will not only be the upgrade

of the infrastructure but also the digitalization process that will grant a capacity of monitoring and

controlling the grid in a much more capillary way. This development poses another question

concerning what the DSO will do with this capacity. It heavily depends on the way the regulatory

framework is going to unfold. Technically, in the future the DSO could be managing the balance on

local part grids independently from the TSO. There is an inverse trend coming from local energy

communities and energy district that are characterized by the ownership of a private an isolated

grid.


77

The pandemic did not affect the influence on the development of demand response nor the energy

transition but rather is provided an additional push in meeting these goals. As there is a potential,

not verified, correlation between the pandemic and high level of pollution the efforts towards the

adoption of renewables is even stronger and more shared. An increase of RES is strictly linked with

the development of demand response solutions. The lockdown period worked as a test for the grid,

in which there has been a relevant decrease in consumption and the consumption points shifted

from the industrial sector to the residential one.

The validation process confirmed the main blockers and the risks previously identified. There is a

general agreement that flexibility assets and demand response will play a major role in the coming

year. On the remuneration methods there are still many doubts and due to little clarity in the

regulation. Also, the fact that in every country it works slightly different and there are no common

standards is a not helping the creation of a solid business case. Moreover, the service to be

remunerative is need of a large consumers base and, as of today, is still hard to involve them.

4.5 Recommendations

The situation analysis together with the business model evaluation and its validation through

interviews, enables the formulation of recommendations in this chapter. These recommendations

are touching the access to energy market and coordination, its mechanisms and the privacy field

(ESGTS, 2019). Also, the interrelation between the DSO and the aggregator and its remuneration

scheme are subject of recommendations (Dang & Wang, 2019).

4.5.1 Access to market

Concerning the area of access to market, the principal recommendation is in the form of

standardization of the EMS, smart-meter platforms and technologies both on an EU and national

level. On the European level an effort of stakeholder coordination to determine standards and best

practices leads to a larger addressable market that reduces the costs for the consumers and in turn

increase their level of acceptance. The orchestration of actions of large EU actors, such as grid

operators and regulators, can not only increase coordination but also stimulate interoperability of

devices among the Member States. For what regards the devices, it is recommended to define a set

of smart capabilities with particular attention to the communication of the data for validation of

flexibility services towards the market and the grid operators. Moreover, a stimulus for the adoption

of the devices by consumers that spans different customer classes is a “plug-and-play” configuration

with an affordable price, especially for what concerns the residential sector for which at the moment

the investment is still too high. Another recommendation in the context of access to market is the

implementation of a clear framework for DSR providers. Even though the goals have been

established in the CEP, the European Commission should provide guidance and at the same time

the national level decisions should be made in respect of the EU framework. In order to access the

market, there must be a prequalification process in which the participants take responsibilities and

matches the technical expectations. This prequalification measures, done at national level, should

be reviewed so not to create entry barrier to the market. In particular for an aggregator, the


78

prequalification should occur on a pool level rather than individual end-point. The product

prequalification should assess if the aggregated pool is able to deliver, whether grid prequalification

should check if the grid can transport the delivered energy.

4.5.2 Market process and coordination

The market process and coordination are an area that is undergoing changes both on the

infrastructural side of the grid operators and on the regulatory framework to open up the market.

The market accessibility should be based on an equal and transparent level playing field for all the

actors providing flexibility resources and explicit or implicit demand response. Every service provider

should be able to access different markets if the product requirements are met. The role and

responsibilities of each market agent, particularly regarding new entrants, needs to be well defined

and clear in particular for what concerns the BRP position. In fact, if the aggregator or another actor,

is not the BRP, the relation with the latter has to be explicitly defined and agreed. Special attention

has to be paid to the TSO and DSOs in the coordination of their activities. The TSO is making use of

flexibility sources for balancing and congestion purposes that are located on the distribution grid

and, as such, managed by the DSO. Therefore, a high level of coordination and real-time data

exchange has to occur flawlessly for to the operations to occur. A framework for TSO-DSO

coordination should be outlined at a European level and assessed at national level. For that is

recommended to develop a baseline methodology for specific products of flexibility resources

encompassing all the ancillary services and the wholesale market and at the same time the

operators should standardize the flexibility requests to the market to ease its accessibility.

4.5.3 Mechanism and remuneration

Generally, the validation, settlement and measurement procedures are done on a national level.

However, there is a need to harmonize these procedures on a European scale in order to facilitate

the cross border exchange of energy and of ancillary services. Moreover, with a similar procedural

design, it would be possible for market parties to extend their business in other Member State

without incurring in important modifications and implementations in their system. For what regards

the place of measurements it is recommended to develop a set of best practices and standards for

controlling devices and the sub-metering. In particular, the specification of the characteristics

required by the hardware to allow embedded or separated metering equipment to work is needed

for validating the service delivered. For what regards the remuneration, the compensation

principles stated in the CEP should be clarify the financial flows at a national level. The foundation

relies on the supplier being remunerated according the volume energy deducted from him and, on

the other hand, when an increase in consumption is led by the demand response the remuneration

is directed towards the aggregator or the consumer. The payment should not surpass the cost of

energy. For consumer engagement it is recommended to present the service with transparent and

understandable approach so to clearly show the financial benefits. The aggregators and the

flexibility providers should be able to stack value (access multiple markets) to better manage their

portfolio of assets without hard restrictions. To do that it is recommended to mirror the

requirements to enter a market as much as possible to other markets. Finally, a number of incentives


79

from the grid operators and the policy maker should be developed to smoothen up the emergence

of flexibility providers.

4.5.4 Privacy

Exchange of information in the systems and markets has to occur efficiently in order for flexibility

to operate. The recommendation is to establish on a European level which information should be

transparent and accessible in the energy sector. On a national level it is advised to identify what are

the data needs and determine who can access this data and how. Especially when it comes to the

residential sector, the disclosure of the energy behavior can arise aversity in the adoption of new

services. The adjustability of the load needs to be previously agreed with the consumer, that has to

be aware, through transparent information, where his data is going and for what purposes. The data

must be secured through encryption and has to fulfill the national and EU privacy regulations. The

communications between the electricity actors, for instance between TSO/ DSO and aggregator,

must be secured and reliable. The recommendation is for the regulators to incorporate the other

actors and stakeholders in the decision process to address the new complexities of privacy as

customer, in order to participate in the system, need to be confident that their data is secured and

not misused. It is suggested to develop a code of conduct for service providers to prove their

legitimacy and ensure their trustworthiness to the consumers.

4.6 Discussion

In this conclusive chapter there is going to be a discussion and the considerations over the

conducted analysis and the second and third hypothesis are going to be answered. It is important

to recall the two hypotheses previously formulated in chapter 1.3. The first one is: Which

stakeholders are going to be most affected by the introduction of demand response service and

how, if possible, can they take advantage of it? The second one is: 3) What type of aggregator

business model is more likely to foster in the near future? In order to answer these two, the

outcomes of the previous chapters are taken into account.

Regarding the hypotheses number two, it is possible to assume that the implementation of demand

response in the electricity system is going to affect to some degree all the stakeholders involved.

However, between the entire set of actors involved, there are two market agents that are mainly

going to be interested: bulk generators and grid operators. The former is influenced by a decrease

in their dependency and presence in the energy mix. This is because demand response is expected

to increase the integration of renewable energies in the power system in disfavor of conventional

power plants. As the energy transition is taking place and both EU and Member States plans include

a gradual phase out of this type of plants, the bulk generators are not in a position of taking

advantage of the introduction of the demand response as a service. As a response they could refocus

their generation strategy concentrating in providing back up resources and emergency services at

the cost of reducing their operational capacity. The second stakeholder affected is the grid

operators, to be distinguished in TSO and DSO. The TSO is affected as demand response is going to

bring a number of new agents in the market that are to be controlled and trusted by the TSO to


80

provide flexibility services. The DSO is going to have to deal with much more complexities as demand

response will increase the presence of distributed resources spread on the distribution grid. The

DSO is the technical manager of the distribution grid and as such is expected to provide the technical

conditions for DR trading taking place. Assuming a high degree of coordination between the two

grid operators, the TSO can take the advantage of a higher integration of renewables and exploit

energy flexibility assets for grid balance purposes. The DSO benefits from demand response not only

by restructuring the investment plan for grid upgrade and enhancement but also by a more effective

resolution of grid inefficiencies like congestion and over loading, playing, in turn, a more active

managerial role. A third stakeholder that is obviously going to be affected by demand response is

the aggregator. However, due to its limited presence in the current market, its stake is still small.

The introduction of flexibility assets in the power market is generating several business

opportunities that the aggregator can exploit and take advantage of.

The third and last hypotheses concerns the figure of the aggregator and aims at identifying a

business model that currently has the most favorable conditions to foster. The choice of the business

model should be seen as a first mover advantage in respect to the other types of models rather than

a prevarication over the others. As discussed in chapter 4.2 there are two main types of business

model: aggregator combining role and independent aggregator. The actual market conditions and

the regulatory framework create a more favorable development path for the combing role model.

In particular, when the energy supplier is also the aggregator it seems to be best option to let the

role of the aggregator develop and foster. From a regulatory perspective, in this model, as the

aggregator and the energy supplier are the same, there is a single BRP which grants reliability to the

grid operators on one side and avoids misunderstandings and complex data flows between multiple

parties on the other. No new actor is being involved since the energy supplier begins providing a

new service as aggregator, reducing the level of complexity compared to the scenario of an

independent aggregator dealing with consumer on one side and energy supplier on the other. Not

only the level of complexity is relatively small but also there is no need for a financial settlement

between supplier and aggregator as they are the same actor. From a market point of view, the

combined energy supplier - aggregator model has the advantage of already having a customer base

that can potentially be involved and a set of data to analyze for energy profiling. Moreover, is already

familiar with the market mechanisms and connections and access to it, facilitating its participation

in the provision of flexibility services. Finally, has been observed that retailers have recently started

offering flexible energy contracts with dynamic pricing (BEUC, 2019) , showing a clear intent of

implementing implicit demand response in their businesses.

To conclude, many the implementation of demand response poses a number of challenges and it is

expected to have a disruptive impact on the electricity system and the energy market. These are in

the form of an extensive work of the regulatory framework that gradually opens up the market and

lets new market agents such as the aggregator participate in it and also in terms of technological

improvements especially for what regards coordination of information exchange between actors

and the accessibility to smart equipment that able matching the grid operators standards.


81

5 PROJECT PLANNING AND BUDGET

This chapter is dedicated to the planning of this project and the budget needed to carry it out. The

overall duration that the project has had is of four months gross during which an internship has also

been done. The following chapter 5.1 will elaborate on the planning, whether chapter 5.2 is going

to explain the project realization cost.

5.1 Planning

The project started at the beginning of February and submitted in the middle of June. The defense

of the project is then occurring within the first two weeks of July. The first meeting with the tutor

occurred at the end of January where the research question and the table of contents was settled.

The internship has started on the 10th of February lasting for six months. Throughout the entire

period the project went through different phases according to the different activities that needed

to be completed. A synthetized Gannt chart is presented below in Figure 43.

Figure 43 Gantt chart

Each of the activities mentioned in the Gantt chart is composed by multiple tasks dedicated to the

completion of each chapter of the research. Moreover, also the feedback session from the

supervisors, both at universities and in the company, are included.

5.2 Realization Cost

The main costs for the realization of the project are going to be taken into account and explained.

Finally, the total cost is estimated. The costs are bulleted down as follows:

- Basic material such as notebooks and pens, approximately 20 €.

- The internship in the company has a compensation of 600 € per month. As the project ends

before the termination of the internship, 5 months are taken into account. The company

has provided the laptop and the necessary software. To conduct the research, the

company’s laptop has been used, as such the cost of the laptop is accounted within the

salary amount. Resulting in a cost of 3000 €.

10/02/2020 02/03/2020 23/03/2020 06/04/2002 20/04/2020 11/05/2020 25/05/2020 08/06/2020 22/06/2020 13/07/2020

Resarch

Internship

Regulation Review

Osmose

Interviews

Write Report

Presentation


82

- The Final Master Thesis Project amounts to 30 ECTS. Each ECTS is equal to 25 hours of class-

work, for a total of 750 hours. Throughout the internship, not all the time was dedicated to

the thesis, but some time was allocated to other projects. As such, 300 hours are calculated

to have been done outside the work environment. The approximate salary of a student of

UPC is 8 € per hour, resulting in a cost of 2400 €.

- The location where the project has been developed is rather the workplace or at home. The

workplace is accounted in the salary. The home consists in a room in a shared apartment.

However, this is accounted under other forms outside the research and it is therefore not

taken into account.

Summing up the voices of the list, the total cost to carry out this research amounts to 5420 €.


83

6 ENVIRONMENTAL AND SOCIAL IMPACT

The push towards electrification and a full commitment towards decarbonization, has led to several

directives, both at European and Member State level, to implement DSM services such as demand

response, in order to take advantage of environmental positive externalities that this service brings.

The externalities can be differentiated in environmental and social impacts.

6.1 Environmental Impact

The environmental impacts are those advantages that the deployment of demand response brings

on the environment and, ultimately, into the fight of climate change. There are three main direct

environmental benefits (Dahlke & McFarlane, 2015):

- Energy Efficiency: by shifting electricity consumption away from peak loads to more

favorable moments, DR increases the overall efficiency of the system. Increasing the

efficiency of the system is translated into a smarter use of energy and avoidance of

electricity losses.

- Reduced Reliance and Dependency on Fossil Fuel Power Plants: the power plants that are

called to work during peak hours tend to be inefficient and to be high emitters. With DR

offsetting these kind of thermal power plants, the environmentally and harmful emissions

can be significantly reduced.

- Renewable Energy Integration: as renewable energies are keeping coming online, the

conventional power plants are not able to keep up with the intermittency in the generation

they have. DR is helping to manage this variability by smartly integrating them in the system

and avoiding their curtailment. By properly integrating the renewable energies into the

electricity system it is possible to reduce the need of energy generated by conventional

power plants. These elements give the opportunity to drastically reduce the polluting GHG

arising from fossil fuel generation plants by relying more on clean alternative sources.

The short term goal of Italy is to effectively implement at least 1 GW capacity of Demand Response

by 2025 as explained previously in Chapter 1. Assuming that the service that would be taken care of

by DR once implemented is done by a combined-cycle power plant, is possible to calculate the

avoidance of the carbon emissions. To be noted is that combined-cycle is the less polluting among

the power plant sourced with fossil fuels. The carbon intensity of combined-cycle is 0.438

kgCO2/kWh (Bunyamanid, 2016). The entire operation of a combined-cycle system with 1 GW

capacity would be replaced by demand response with renewable energies as source with no related

emissions.

An additional benefit concerns the development of the infrastructure in terms of strengthening and

upgrading the electrical grid. Traditionally, in order to cope with peaks of various nature and to keep

a balance between demand and energy production, the grid infrastructure would be upgraded so

to have a larger capacity. Obviously, this come with a very large expense, especially if the location


84

in question is not particularly close to any urban agglomeration. In other words, upgrading the grid

in remote areas might not be financially beneficial, creating areas with energy poverty where

accessing to electricity becomes challenging. Moreover, HV cables and overhead lines are a cost-

intensive solution to engage with peaks and their upgrade requires high amount of metals, such as

copper, with a high carbon footprint. The service of Demand Response provides the possibility to

better exploit the current electrical network by spreading the demand over time and, in turn,

reducing the number and magnitude of peaks. Nevertheless, all the Transmission System Operators

around Europe are continuously investing in the upgrade of the grid for a more safe, reliable and

smart distribution of energy.

6.2 Social Impact

The social impacts are those effects that demand respond brings on the society as an outcome of

the externalities arising from the deployment of the service. In other words, the social implications

of having the final consumer actively involved in the system are addressed (Darby, 2012).

- Reduced electricity bills: by participating in the market through an aggregator, consumer

can purchase the electricity following its dynamic pricing, buying it when it is more

convenient. This results into savings in the electricity bill. Moreover, by having access to the

ancillary service market, final consumers can have a source of income based on the

flexibility they offer.

- Energy behavior: by offering their flexibility, the consumers are willing to adapt their energy

behavior by shifting part of their activities to times more favorable to the system. In order

to achieve it, they are willing to install smart meters and smart plugs to monitor and control

the appliances. Having hands-on on their generation and consumption patterns, the

consumers become more aware of their energy behavior.

- Renewable energies adoption: given the proved profitability of demand response, end-

users, especially in the residential sector, are going to be more attracted towards the

installation of renewable energies, such as solar photovoltaic, in their homes. Such

investments are going to support the deployment of sustainable technologies that,

ultimately, are going to help the power system to achieve a smaller carbon footprint.

The social awareness and responsibility on energy generation and consumption has also the effect

of acceptance towards the adoption of new technologies and the recognition of the need of

renewable energies beyond the mere financial figures. The implementation of demand response is

related to five of the seventeen sustainable development goals (SDG, 2020): 7 – affordable and clean

energy, 9 – industry, innovation and infrastructure, 11 – sustainable cities and communities, 12 –

responsible consumption and production, 13 – climate action.


85

7 CONCLUSION

This last chapter has a conclusive intent and the goal of answering the main research question that

guided the entire research. Moreover, some considerations on how the electricity system will look

like in the future are provided. Finally, the research limitations that have arose during the

conduction of the study are explained and the future research that would be interesting to carry out

in the theme of energy flexibility assets and demand response is pointed out.

The first chapter was used to provide the background information on the reasons why flexibility is

needed, whether in the second demand response was explained in terms of its mechanisms and

functions. The third chapter had a more practical approach on the H2020 Osmose project so to show

how the service of demand response is applied in practice. On chapter 4, the figure of the aggregator

has been investigated and, through a situation analysis and several interviews with experts, a

qualitative assessment has been carried out in order to formulate recommendations to make

demand response flourish in the electricity system. The fifth chapter was used for accountancy

purposes and the sixth one to assess the environmental and social impact. With all the information

and outputs in hand, it is now possible to approach and answer the main research question.

7.1 Research Question

The study has been guided by the purpose of answering the main research question stated at the

beginning of the paper: How can Demand Response be integrated in every sector of the electricity

system and under which financial scheme it should be remunerated? The question comprises a

twofold approach. The first intention is to explore and address they ways demand response can be

implemented and deployed across all the energy sectors: industrial, commercial, residential and

transport. Secondly, it aims at identifying a remuneration scheme that enables the new player of

the aggregator to develop and enter the market with an incentive plan that also makes the

consumers willing to engage into offering their energy flexibility.

For answering the research question, it is important to recall the three hypotheses outlined at the

beginning of the study in chapter 1.3. The first one has been used to explore and demonstrate the

feasibility of implementing a demand response system with an aggregation platform with the use

of a demonstration campaign in the H2020 project Osmose. The second hypotheses testing pointed

out that the grid operators, both TSO and DSO, and the aggregator are the stakeholders mostly

involved in the implementation of demand response practices in the electricity system. The third

and last hypotheses identified in the combining role aggregator business model the one in the best

position to foster in the near future.

In order to integrate demand response in each segment of the power system, every stakeholder has

to be involved in the decision making process so to achieve a collaborative framework where

suitable technological, regulatory and financial standards can be laid down to address all the needs

and flatten out the barriers. The functioning of demand response comes with the need of high

degree of information exchange that requires extreme precise level of coordination between all the

players. Particular focus has to be given to the coordination between the TSO and DSO, since the


86

former is controlling sources that are being managed by the latter. Each addressable segment has

different needs and can provide a different behavioral flexibility. Considering the industrial sector,

the installation of the required devices for demand response comes at a relatively small price

compared to the magnitude of the load that is going to be controlled and, thus, easily reachable.

However, industries already have a consumption plan well optimized and, as such, the flexibility that

these are willing to provide is constrained by the factory operations. A large flexibility can be

achieved in the residential sector, where the load can be controlled and adjusted among a wider

timeframe. In this case, though, the hardware to be installed results to be expensive in comparison

to the size of the load controlled, posing doubts on the profitability of the service for the residential

sector. The idea is for the aggregator to gradually incorporate all the segments from large to small,

gradually building the business case and unlocking its potential. This gradual process has to be

steered by the policy makers and the regulation which progressively introduce rules to allow the

creation of a favorable environment for the aggregators. The progression has to follow steps that

need to be validated by each stakeholder. At the same time, it is crucial that regulation remains as

a guideline so to create a market that stimulates development and does not slow down innovation

by prescribing specific and narrow solutions.

When conceptually approaching demand response, the financial returns of an aggregator may seem

evident. However, being at the early stage of development, the business case is not clear yet and

the price signals are still weak. Acknowledging the need of flexibility assets, grid regulators and

policy makers are working on designing an incentive scheme to support the implementation of the

service. Particular attention is being paid to the design methods as the willingness is to help the

aggregator business model to become viable and prevent that the business model is based on the

reliance of the incentives. Moreover, a transparent and regulated remuneration scheme would

foster fair competition in the market, encouraging new players, including independent aggregators,

to emerge and participate in the energy transition.

The electricity sector is strictly intertwined with the energy sector, that in turn spans the entire

economical ecosystem. The mega trend of digitalization that is taking place, is setting out a favorable

base ground for smart appliances, information systems and distributed sources to roll out at a fast

pace. This is directly related to the dissemination of demand response, as the consumers will

become more and more aware of their energy behavior and the value of flexibility. It is also visible

with the rising of micro grids and energy communities where consumers share and adjust their load

profiles to be independent.

7.2 The Future of the Electricity System

As the global efforts are uniting the forces to fight climate change and undertake an energy

transition process, the future of the electricity market in the next decade is going to be much

different compared to what it was in the past years and what it is nowadays. The electricity system

is expected to become much more decentralized and hyperconnected with a lot of big data flow to

predict and regulate both generation and consumption of energy. New market agents, such as the

aggregator, are going to enter the system bringing innovation and new models of business. The roll-


87

out of electric vehicles is also expected to have a large impact on the system for two main reasons:

the load they require to undergo fast charging is relevant and, secondly, because these vehicles can

be designed and programmed to actively interact with the needs of the system. Another trend that

is going to play a major role is the development and deployment of storage systems. Batteries

followed by fuel cells with stored hydrogen are the main energy storage systems receiving particular

attention and their large scale production can turn the financial figures positively by cutting down

the costs. Finally, consumers and prosumers are going to be much more engaged in the electricity

system not only trough aggregators but also by creating Local Energy Communities operating on

micro grids.

7.3 Research Limitations

This chapter is going to address the research limitations that have been encountered during the

execution of the research. The first limit was caused by the unfortunate period during which the

research was conducted. In fact, the timing corresponds to the crisis caused by the COVID-19 that

has heavily affected every socio-economic aspect worldwide. It particularly influenced the

internship at ABB. By the time of the submission of this research paper the writer was supposed to

have worked five months in the office, but, due to the virus, the month or March (from the 16th on),

April and May were frozen with a suspension. This is reflected on the quantitative analysis and the

deepness of it together with the investigation of the Osmose tool as it was deemed to be conducted

hand in hand with the company. Another limitation arose from the experimental purposes of the

project Osmose. In fact, the project only involved HV lines, leaving out a large portion of the grid

and its potential. Moreover, the demonstration campaign had the main purpose of practically

testing the aggregation platform and the communication system more than providing the grid with

flexibility services. In other words, the campaign had the task of actually verifying if the sources

could provide the services on request.

7.4 Future Research

In the context of this research some additional investigations are interesting to carry out. The first

one would be to investigate the cross-border interconnections and what role can demand response

play in it. Considering the goals of ENTSO-e of uniting the grid of the Member States in a cooperative

network, the interconnections between countries supporting each other’s grid can be facilitated by

demand response services on a national level exchange scheme. Another potential additional

investigation concerns the future pilot projects in the energy sector. Similarly, to H2020, the

European Union is launching another program for 2030 to achieve the climate and energy targets.

Several will be the themes of these program, and it would be interesting to investigate what is the

weight and the financial budget that the European Union is allocating to demand response.

The topic of demand response and, in general, energy flexibility is trending up and it will receive

more and more attention in the coming years. As the research progresses and the technologies

become more reliable and efficient, the theme of forecasting both weather and energy generation

and consumption will become pivotal. As such, it is going to be interesting to research ways to


88

increase granularity both in terms of time and adjustability of a load in order to provide an accurate

and precise service that can operate on small alteration of grid balance in a very short period of

time.


89

8 ACKNOWLEDGEMENTS

This thesis represents the conclusion of a long journey in which I have grown not only professionally

but also as a person. I would like to thank my mother and father for supporting me and my aunt and

sister for their assistance in stressful periods. Also, a lot of gratitude goes to several friends who

always have been there for me.

To have guided me throughout this research project, I would like to thank Professor Francisco for

the freedom and support in choosing a topic I am passionate about and Professor Jose for having

believed in me since our meeting at the European Utility Week in Paris.

Finally, I would like to show my appreciation for Domenico Fortugno, Alberto Pesce and the other

members of the team for welcoming me in the company and for disclosing the complex dynamics

of an industrial environment in the energy sector.


90

BIBLIOGRAPHY

ABB. (2020, April 24). ABB Group. Retrieved from new.abb.com/: https://new.abb.com/

ABB. (2020, May 4). Library . Retrieved from library.abb.com: https://library.abb.com/en

ABB. (2020, May 4). RTU520 product line . Retrieved from new.abb.com:

https://new.abb.com/substation-automation/products/remote-terminal-units/rtu520

ACER. (2020, April 9). Agency for the cooperation of energy regulators . Retrieved from

nra.acer.europa.eu: https://nra.acer.europa.eu/m/Pages/default.aspx

AEEG. (2016). Prima fase della riforma del marcato per il servizio di dispacciamento: apertura alla

domanda, alle fonti rinnovabili non programmibili e alla generazione distribuita. RDE-1.

Albert, T. (2005). Energy project financing: resources and strategies for successs. CRC Press.

Alham. (2017). Optimal operation of power system incorporating wind energy with demand side

management. Ain Shams Engineering Journal , 1-7.

Balijepalli, & Pradhan. (2011). Review of Demand Response under Smart Grid Paradim . IEEE PES

Innovative Smart Grid Technologies .

Banja, & Jegard. (2017). Renewable technologies in the EU electricity sector: trends and

projections. Luxemburg: Publications Office of the European union .

BestRES. (2018). Life Cycle Analysis (LCA) of the improved Business Models . EU.

BEUC. (2018). Electricity aggregators: starting off on the right foot with consumers . Brussels:

European COnsumer Organization .

BEUC. (2019). Fit for the consumer? Dos and don ts of felxible energy contracts . BEUC.

Bunyamanid. (2016). An analysis of energy and carbon internsities and exergy efficiency in natural

gas combined-cyle power plants: a case study of thailand. MATEC Web of conferences 68.

ICIEA.

Burger. (2017). A review of the value of aggregators in electricity systems. Renewable and

Sustainable Energy Reviews, 395-405.

Caiso. (2016). What the duck curve tells us about managing a green grid. Los Angeles: California

ISO.

Cambridge Dictionary . (2020, May 13). Sharing economy . Retrieved from

dictionary.cambridge.org: https://dictionary.cambridge.org/dictionary/english/sharing-

economy

Castro. (2019). Economics and Energy markets. Lisbon: IST.


91

Dahlke, & McFarlane. (2015). Environmental Benefits of Demand Response . Great Plains Institute.

Dang, & Wang. (2019). Distributed generation planning for diversified participants in demand

response to promote renewable energy integration . Journal of moder power systems and

clean energy , 1559-1572.

Darby. (2012). Social implications of residential demand response in cool temperate climates.

Energy Policy , 759-769.

Dong. (2017). Explicit Demand Response in Europe. Lucerne: SEDC.

EC. (2016). Impact Assessment study on downstream flexibility, price flexibility, demand response

& smart metering. European Commission DG Energy.

EC. (2019). Clean energy for all europeans. Luxemburg: March.

EC. (2020, March 13). What is Horizon 2020? Retrieved from ec.europa.eu:

https://ec.europa.eu/programmes/horizon2020/what-horizon-2020

ECF. (2020, march 12). Roadmap 2050. Retrieved from roadmap2050.eu:

https://www.roadmap2050.eu/

EEA. (2017). Climate change, impacts and vulnerability in Europe 2016. Luxemburg: European

Union.

EEA. (2019, December 19). Share of renewable energy in gross final energy consumption in Europe.

Retrieved from eea.europa.eu: https://www.eea.europa.eu/data-and-

maps/indicators/renewable-gross-final-energy-consumption-4/assessment-4

EETD. (2006). Benefits of Demand Response in Electricity Markets and Recommendations for

Achieving Them . U.S. Department of Energy .

Elia. (2020, April 17). The Role of the BRP. Retrieved from elia.be:

https://www.elia.be/en/electricity-market-and-system/role-of-brp

ENA. (2012). Smart Demand Response Report. London: energyuk.

enel x. (2020, April 20). The four types of demand response in the NEM . Retrieved from enelx.com:

https://www.enelx.com/au/en/resources/the-four-types-of-demand-response-in-the-nem

Energy.Gov. (2020, March 18). Demand Response. Retrieved from energy.gov:

https://www.energy.gov/oe/activities/technology-development/grid-modernization-and-

smart-grid/demand-response

ENI. (2020, April 28). ENI. Retrieved from enigaseluce.com:

https://enigaseluce.com/?ds_rl=1275625&ds_rl=1276858&ds_rl=1281051&ds_rl=128105


92

1&gclid=CjwKCAjwqJ_1BRBZEiwAv73uwDtxRm-PKjhHDr9ULK9cOUW_CUxzY9dO415QJ-

kc4neToLMWQtC_fBoC29IQAvD_BwE&gclsrc=aw.ds

ENTOSE. (2017, january 7). network codes. Retrieved from networkcodes.entose.eu:

https://arquivo.pt/wayback/20160107214432/http://networkcodes.entsoe.eu/category/i

ntroducing-network-codes/?p=what-are-network-codes-data

ENTOSE. (2019, March 15). Imbalance Netting. Retrieved from entose.eu:

https://www.entsoe.eu/network_codes/eb/imbalance-netting/

ENTOSE. (2020, april 9). Transparency Platform. Retrieved from transparency.entose.eu:

https://transparency.entsoe.eu/generation/r2/actualGenerationPerProductionType/show

?name=&defaultValue=false&viewType=GRAPH&areaType=BZN&atch=false&datepicker-

day-offset-select-dv-date-

from_input=D&dateTime.dateTime=08.04.2020+00:00|CET|DAYTIMERANGE&dateT

ENTSOE. (2020, April 9). entsoe. Retrieved from entose.eu: https://www.entsoe.eu/

Eriksson. (2017). Synthethic inertia versus fast frequency response: a definition. IET Renewable

Power Generation.

ESGTS. (2019). Demand side flexibility: perceived barriers and proposed recommendations .

European Smart Grif Task Force .

ESO . (2020, April 29). Reactive power services . Retrieved from nationalgrideso.com:

https://www.nationalgrideso.com/industry-information/balancing-services/reactive-

power-services

EU. (2020, 12 12). 2020 climate & energy package. Retrieved from ec.europa.eu:

https://ec.europa.eu/clima/policies/strategies/2020_en

Eurelectric. (2018). Decarbonization Pathways. Brussels: eurelectric .

Europarl. (2017). Capacity Mechanism for electricity . Brussels: European Parliament .

Eurostat. (2019, April 15). ENERGY FROM RENEWABLE SOURCES. Retrieved from ec.europa.eu:

https://ec.europa.eu/eurostat/web/energy/data/shares

FCA. (2020, April 27). Production plants . Retrieved from fcagroup.com:

https://www.fcagroup.com/en-US/group/plants/Pages/default.aspx

GFN. (2020, March 11). Global footprint network . Retrieved from footprintnetwork.org:

https://www.footprintnetwork.org/

GME. (2020, June 10). Mercato elettrico e pronti (MPE). Retrieved from mercatoelettrico.org:

https://www.mercatoelettrico.org/it/Mercati/MercatoElettrico/MPE.aspx#:~:text=La%20s

eduta%20del%20MGP%20si,precedente%20il%20giorno%20di%20consegna.


93

Gürel. (2017). SWOT analysis: a theoretical rewview. The journal of international social research,

10(51).

Hancher, W. (2017). The EU Winter Package . Allen & Overy .

iea. (2017). Residual Load Curves in TIMES. ETSAP.

IEA. (2019). Tracking Energy Integration. Paris: IEA.

IEEE. (2007). Frequency and Voltage control ancillary services - part I: technical features. IEEE

transactions on power systems , 350-359.

Ikäheimo. (2010). DER Aggregator Business: the Finnish Case . Finland: VTT.

Incite . (2020, April 14). Introduction to electricity markets, its balancing mechanism and the role of

renewable sources . Retrieved from incite-itn.eu: http://www.incite-

itn.eu/blog/introduction-to-electricity-markets-its-balancing-mechanism-and-the-role-of-

renewable-sources/

IPCC. (2018). Global Warming of 1.5 C. IPCC.

IRENA. (2019). Aggregators: innovation landscape brief. Abu Dhabi: Energy Agency.

IRENA. (2020, March 17). EUROPE. Retrieved from irena.org: https://www.irena.org/europe

Kaushal, & Hertem, V. (2019). An overview of Ancillary Services and HVDC Systems in European

Context . Genk: ELECTA Research Group.

Knezevic. (2011). Electricity spot market simulation involving bilateral contracts hedging . EEM 11

(pp. 122-127). internation conerence on the european energy market, EEM11.

Kolkmann, S. (2019). Modelling multivariate intraday forecast update processes for wind power.

Kraftwerke. (2020, April 7). what does utility frequency mean? Retrieved from next-

kraftwerke.com: https://www.next-kraftwerke.com/knowledge/utility-frequency

Lazard. (2017, November 2). Levelized Cost of Energy 2017. Retrieved from lazard.com:

https://www.lazard.com/perspective/levelized-cost-of-energy-2017/

Magna PT. (2020, April 27). Magna Powertrain. Retrieved from magna.com:

https://www.magna.com/company/company-information/magna-groups/magna-

powertrain

McKinsey. (2019). Global Energy Perspective 2019.

MID. (2020, April 27). Comando Stazione Naval Taranto . Retrieved from difesa.it:

http://www.difesa.it/Protocollo/AOO_Difesa/Marina/Pagine/MSTNAVTA.aspx


94

MISE. (2020). Piano Nazionale Inegrato per l'Energie e il Clima. Roma: Ministero dello Sviluppo

Economico.

Obaid, & Cipcigan. (2019). Frequency control of future power systems: reviewing and evaluating

challanges and new control methods. Journal of Modern Power Systems and Clean Energy ,

9-25.

Osmose. (2018). Techno-economic analysis of DSR and RES slected services . RSE.

OSMOSE. (2019). Deliverable 2.1 - Technology and Cost Data of Flexibility Options.

Osmose. (2020, April 22). Osmose . Retrieved from osmose-h2020.eu: https://www.osmose-

h2020.eu/

Osomse. (2002, April 25). ABB. Retrieved from osmose-h2020.eu: https://www.osmose-

h2020.eu/?partners=abb

OWD. (2020, March 11). Research and data to make progress against the world’s largest problems.

Retrieved from ourworldindata.org: https://ourworldindata.org/

Pillay. (2015). Congestion management in power system: a review. International Journal of

Electrical POwer & Energy Systems, 83-90.

Pittini. (2020, April 28). Siderpotenza. Retrieved from pittini.it: https://www.pittini.it/il-

gruppo/aziende/siderpotenza/

PoliMI. (2016). Documento per la consultazione 420/2017/EEL. Milano: ARERA.

Rausand. (2013). Chapter 1: Introduction . In Rausand, Risk assessment: theory, methods and

pllications (pp. 1-28). Hoboken, New Jersey : Wiley.

RED. (2020, April 21). Interruptbility Service. Retrieved from ree.es:

https://www.ree.es/en/activities/operation-of-the-electricity-system/interruptibility-

service

Reinier. (2016). The electricity balancing market: exploring the design challange . Utilities Policy ,

186-194.

Ren, Y., & Sunganthan, P. N. (2015). Ensemble methods for wind and solar power forecasting.

Renewable and Sustainable Energy Reviews, 82-91.

Respond. (2020, March 23). 4 Differences between Demand Side Management & Demand

Response. Retrieved from project-respond.eu: http://project-respond.eu/4-differences-

between-demand-side-management-demand-response/

RFI. (2020, April 28). Rete ferroviairia italiana . Retrieved from rfi.it: http://www.rfi.it/


95

Risø. (2006). Joint Market Model Documentation. Denmark: Risø National Laboratory.

RTE. (2020, March 10). prometheus. Retrieved from prometheus.io: https://prometheus.io/

SDG. (2020, May 18). Sustainable development Goals. Retrieved from

sustainabledevelopment.un.org: https://sustainabledevelopment.un.org/?menu=1300

SEDC. (2015 ). Demand Response: clarification of the standard processes required between BRPs

and independet aggregators . SEDC.

SEDC. (2017). Explicit demand response in europe. Mapping the markets 2017. Brussels: SEDC.

SmartNet. (2016). Ancillary service pwovision by RES and DSM connected at distribution level in the

future power system. European Commission .

Smith. (2000). Stakeholder analysis: a pivotal practice of successful projects. . Project management

institute annual seminars & symposium . Houston : Prohect Management Institute.

Tecnoparco . (2020, April 27). Tecnoparco Valbasento . Retrieved from tecnoparco-vba.it:

http://www.tecnoparco-vba.it/

Terna . (2020, April 29). Statistical Data and forecast. Retrieved from terna.it:

https://www.terna.it/en/electric-system/statistical-data-forecast

Terna. (2019). CONTESTO ED EVOLUZIONE DEL SISTEMA ELETTRICO. Roma: Terna.

Terna. (2020, April 9). Italian Grid Code. Retrieved from terna.it: https://www.terna.it/en/electric-

system/grid-codes/italian-grid-code

UNCC. (2020, March 12). COP 25. Retrieved from unfccc.int: https://unfccc.int/cop25

Weibezahn, J. (2019). Report: Current and Perspective Technology and Cost Data of Flexibility

Options.

Yu, & Xue. (2016). Smart Grids: a cyber-physical systems perspective. Proceeding of the IEEE (p.

104). IEE.


96

ANNEX I

FigureAnnex 1 List of balancing market products, including volumes and load accessibility in Italy


97

FigureAnnex 2 Description of some main Product requirements in the balancing products accessible to DR in Italy

FigureAnnex 3 Industrial Sites


98

FigureAnnex 4 ABB'Cabinet

FigureAnnex 5 Physical layer architecture

The following 5 Figures are retrieved from the digital library (ABB, 2020) of ABB and the schematics

are taken from the Data sheet of the product in question.


99

FigureAnnex 6 Communication Unit RTU 540CID01

FigureAnnex 7 Analogic input Block Diagram 540IOM01


100

FigureAnnex 8 Digital input Block Diagram 540IOM01

FigureAnnex 9 Analogic exit Block Diagram 540IOM01


101

FigureAnnex 10 Digital exit Block Diagram540IOM01

FigureAnnex 11 System Architecture Design of refining industrial site (7)


102

FigureAnnex 12 Stakeholder Analysis

Stak

ehol

ders

Bulk

gen

erat

ion

Grid

ope

rato

rsD

ER o

pera

tors

Man

ufac

ture

rsAg

greg

ator

sRe

gula

tors

Cust

omer

s

Wha

t is

the

purp

ose

of

the

stak

eho

lder

?

To

pro

vide

and

sec

ure

a st

eady

and

sta

ble

ener

gy a

cces

s at

any

time

To

inte

grat

e R

ES

in th

e

grid

, whi

le m

aint

aini

ng

stab

ility

at a

ll tim

e

To

gen

erat

e su

stai

nabl

e

ener

gy a

nd f

eed

it to

the

mai

n gr

id a

t all

time

To

pro

vide

the

tech

nolo

gy a

nd th

e IT

serv

ices

To

ens

ure

and

supe

rvis

e de

man

d

resp

ons

e is

an

effe

ctiv

e

serv

ice

To

pro

vide

a r

egul

atio

n

body

fo

r th

e

stak

eho

lder

s

To

pur

chas

e (a

lso

sel

l if

pro

sum

er)

ener

gy,

pro

vide

fle

xibi

lity

Are

they

pro

or

cont

ra th

e

pro

ject

?

Co

ntra

. Dem

and

resp

ons

e is

fac

ilita

ting

the

usag

e o

f

rene

wab

les,

suc

h

redu

cing

the

base

line

pro

duct

ion

and

the

mar

ket d

eman

d

Pro

, ren

ewab

les

are

chea

per

and

mo

re

sust

aina

ble

Pro

, dem

and

resp

ons

e

can

solv

e th

eir

inte

rmitt

ency

issu

e an

d

pro

vide

mo

re m

arke

t

opp

ort

uniti

es

Pro

, new

mar

ket,

mo

re

mo

ney

Pro

, new

bus

ines

s

opp

ort

unite

sN

eutr

al

Pro

. Ben

efiti

ng f

rom

chea

per

ener

gy p

rices

.

Opp

ort

unity

to e

nter

the

ener

gy m

arke

t

Ro

le in

the

pro

ject

Pro

vide

a s

afe

back

-up

solu

tion,

in c

ase

of

criti

cal f

aults

Cru

cial

, pra

ctic

ally

they

man

age

dem

and

resp

osn

e

Gen

erat

ors

, ene

rgy

sto

rage

, co

mpe

nsat

ion

Impo

rtan

t as

IT

plat

form

s ar

e

fund

amen

tal f

or

the

fast

dem

and

resp

ons

e

Man

agin

g de

man

d

resp

ons

e

Set

the

stan

dard

s,

supe

rvis

e an

d m

ake

sure

eve

ry s

take

hold

er

is le

git

To

pro

vide

fle

xibi

lity

Cur

rent

leve

l of

enga

gem

ent

At t

he m

om

ent h

igh

leve

l of

enga

gem

ent,

but o

n th

e lo

ng r

un th

eir

influ

ence

is d

ecre

asin

g

Hig

h, e

spec

ially

DS

Os

in a

lread

y ex

istin

g

case

s ar

e th

e

aggr

egat

ors

Hig

hH

igh

Hig

hH

igh

Low

at t

he m

om

ent,

but

pote

ntia

lly v

ery

high

in

the

long

run

At w

hat s

tage

the

stak

eho

lder

gets

invo

lved

?

Indi

rect

ly in

volv

ed a

t

ever

y st

age

Dire

ctly

invo

lved

at

ever

y st

age

Dire

ctly

invo

lved

in

gene

ratio

n

Set

ting

up th

e sy

stem

and

O&

M

At m

ange

rial s

tage

,

Aft

er g

ener

atio

n be

fore

cons

umpt

ion

Indi

rect

ly in

volv

ed a

t

ever

y st

age.

Fin

al s

tage

s:

cons

umpt

ion

(als

o

gene

ratio

n if

pro

sum

er)

Pro

fitab

ility

Po

tent

ial

Low

Hig

h H

igh

Hig

h H

igh

Med

ium

, on

the

med

ium

-

long

ran

ge it

mig

ht

beco

me

high

due

to ta

x

impo

sitio

n

Med

ium

-Hig

h. T

he

cost

umer

stil

l hav

e to

pay

the

tran

smis

sio

n

tarif

fs


103

FigureAnnex 13 SWOT Analysis

FigureAnnex 14 Aggregator Business Model


104

ANNEX II

This annex is used for the collection of the conducted interviews of chapter 4. The results are

reported here in the form of comments and notes taken during the interview. To be noted is that

some interviews were conducted in Italian and, as such, the translated comments may not reflect

the exact literal translation, but the meaning is maintained.

The questions were asked as a starting point for discussion, so to extrapolate the most from each

interviewee and touching all the topics to be validated. The asked questions, also in Italian, are the

following:

1- What do you perceive is the main blocker for the deployment of demand response in the

market?

Quali pensa che siano i maggiori ostacoli per la diffusione del servizio di demand response

nel marcato?

2- What role should the regulators take in respect to demand response e the aggregator?

Che ruolo dovrebbero avere i regolatori in rispetto alla demand response e agli aggregatori?

3- Do you believe an explicit policy support should be established for the emergence of new

market agents such as the aggregator?

Pensa che uno schema esplicito di supporto statale debba essere stabilito per favorire

l’emergere della nuova figura dell’aggregatore?

4- How to actively integrate consumers into the flexibility world? Which obstacles do you

perceive (privacy, security, high economic costs for activation…)?

Come si potrebbero integrare attivamente i consumatori nel mondo della flessibilità? E quali

sono gli ostacoli (privacy, sicurezza, alti costi di attivazione…)?

5- How to do you foresee the figure of the DSO and the one of the utility/retailers changing in

the future?

Come prevede che le figure del DSO e delle utility/retailer cambieranno in futuro?

6- Which services are more likely to be provided by aggregators (ancillary services like

frequency response and congestion management (explicit), or more market services so to

buy energy when cheaper (implicit))?

Quali servizi verranno forniti dall’aggregatore (servizi ancillari come controllo di frequenza

e gestione della congestione (esplicita), o servizi di mercato per comprare l’energia a prezzi

più convenienti (implicita)) in primo luogo?

7- Finally, do you think this current pandemic can somehow influence the development of

demand response or the electricity system as a whole?

Infine, pensa che la pandemia possa aver influenzato in qualche maniera lo sviluppo o la

concezione del demand response e del sistema elettrico nel suo insieme?


105

8- Is that okay if I disclose your name and company in the report?

Va bene se indico il suo nome e ruolo nel report?

Following the results of the interviews. For each interview the name and role (if they agreed with

disclosure) are stated and the date of the interview is shown. The answers are then reported

according the question number. The interviews are reported in the chronological order that these

have been conducted.

Terna employee – 29/05/2020

1) Many steps ahead and many targets reached at a European level and on slower services

Italy is performing very well compared to other countries in Europe. In Italy, there is

flexibility service up to 1 GW, in fact in 2020 the UVAM have a total of 1 GW with contracts

signed with Terna. The extra step: right now, the resources are large plants with few big

adjustable points. The challenge is on the small scale, where, however, the biggest limit is

economical in terms of the installation costs. The TSO wants reliability. Generally, the

obstacles are high fixed costs, technology and regulation

2) Incentives to unlock flexibility, which has a 1-2 billion Euro value per year. Rolling out

conventional source of energies, there is more space for new methods. Flexibility value

will be increasing a lot in the coming period.

3) UVAM: fixed price per MW + provision per MWh delivered. The allocation of the 1 GW

capacity occurs according to a bimestrial auction. Outside this allotted capacity, they can

still participate in the market. A large plant may not be very keen to participate in the MSD

even if there is financial return, as their energy consumption is already well optimized and

may not like flexibility. However, the installation costs compared to the available load are

feasible. In contrast, the residential can dispense a much wider flexibility, but the

activation cost are extremely high for the magnitude of the load. The UVAM are in

competition but are not really competitive.

4) High activation costs. Measurement. The independent aggregator (only service not

energy) does not have a binding program on the energy market. This bring difficulties in

measuring the flexibility, as the aggregator presents himself with an unreleased clustered

group that the market does not know. A group represented by consumers of different

utilities, that have previously included their consumer in their bid. The limit is

technological and regulatory.

5) The DSO need to keep upgrading his lines. Terna will continue to manage the flexibility,

and the DSO needs to be more active. Coordination between DSO and TSO needs to be

high to manage flexibility, as every movement of resources is reflected across all the grid.

Terna is managed a resource that is not on its lines, the DSO has to operate it without

difficulties and without creating problem on the distribution line. The DSO does not have a

market. For Terna a larger number of aggregators is beneficial.

7) The energy transition is a point from where restart. It did not heavily affect as it is too big

of a goal to be stopped. It was a good test for the grid.


106

8) Preferably not.

Angeliki Malizou – Castor – (Author of: Electricity aggregators – starting off on the right foot

with consumers – BEUC) 02/06/2020

1) On the residential, legislative blockers. The way electricity has been priced is not an

incentive, there is hesitation and lack of trust and demand response is not known.

Prerequisite as a smart meter can be a blocker, might be very expensive. Unless a

household has a huge load, it is not convenient.

2) To set facilitating rules. Lack of transparency and comparison since the beginning of the

liberalization of the market, when the offers were simple. DR is strictly related to

digitalization, which in turn comes in very granular information on privacy. Adapt

technological legislative improvements to make people secure. Regulator has a big role, so

consumer can feel at ease in engaging with the service. More clarity on the electricity bill

would be in need, imagine with a dynamic tariff how much more clarity you need to be

trusted.

3) –

4) The aggregator can be a service also for prosumer, playing an active role. Explore what are

the interest of prosumer. Raise awareness. How will the prosumer need the clarity over

the information? Are tasks to be addressed by the aggregator.

5) No absolute disruption, but changes will occur. Digitalization will play a major role. They

have to innovate, but its slow due to the gigantic infrastructure. Unbundling for better

competition. No consumer has to be left behind.

6) Explicit would be great, but significant sign yet. Dynamic contract is definitively the first to

appear. Will the consumer engage if the don’t see clear benefit? So many actors are

involved that is difficult to anticipate how can the market react to a sort of incentive.

Collaboration is key.

7) –

8) Ok

Rui Castro – INESC-ID / IST – Professor and Researcher – Distributed Energy Resources and

Management – 03/06/2020

1) In my opinion, the main blockers of DR deployment are the absence of organized and

commercial DR markets, lack of advanced metering infrastructure and inadequate price

signals.

2) The regulator should create the legal conditions for DR and aggregators to flourish,

namely, to establish adequate tariffs and contractual framework for the deployment of

DR.

3) Yes, I do. In Portugal, recently, new legislation was approved to define the role of the

aggregators. This is the first step towards the emergence of new market agents, that are

necessary in a new decarbonized energy framework.


107

4) Consumers are willing to be active market agents. But they need a favourable legal

framework and adequate price signals. The obstacles you mention, and others, should be

taken into consideration when new market designs come forward.

5) The DSO is the technical manager of the distribution grids and is expected to create the

technical conditions for DR trading to take place. Retailers can serve as aggregators too

and should create the economic conditions to incentivize DR trading.

6) In my view, market services, like flexibility to shift consumptions, peak shaving and so on,

are most likely to be provided by aggregators, at least in a 1st phase of DR development.

When there is more experience, ancillary services will certainly be provided.

7) I think the current pandemic can be an opportunity to accelerate the energy transition.

The recovery of the pandemic is expected to be directed towards the decarbonization

objective. Flexibility is most needed in this new world, which can be an opportunity for DR.

8) It is okay, no problem.

Alessandro Drappo – Etneo – Energy Efficiency Manager – 05/06/2020

1) Infrastructure obstacles. The experience on the RES has shown that the infrastructure has

been left behind, and only in recent years the large actors have committed in upgrading

the infrastructure. The infrastructure is old and creates obstacles. The plants and the grid

is very old, and RES with its technologies like DR requires more sophisticated

infrastructure.

2) There is no necessity for incentives to promote the development of energy business. Like

FIT puts the real interest of green economy behind, making business plans based on the

acquisition of incentives. The incentives should be aimed at the decrease of energy costs

and energy savings.

3) Remuneration formula with DR packages. The aggregator imposes to the client the

possibility to generate / consume less. When the aggregator controls the load, in

agreement with the client, he has the control on the market, and, as such, so support from

the government. The fact that the aggregator is selling energy, is his choice and should be

treated like every other trader of goods.

4) Regulatory and bureaucratic. In the topic of the energy communities something is moving,

however is still logistically, from legislative perspective, difficult to make a centralized

system and provide energy to all the consumer in the system. On the privacy side there

are many problems and it is difficult to have transparency. There should be clear

protocols. A general lack of clarity from the top organizers can slow down the entire

process.

5) Yes. The digitalization will play a crucial role. Smart cities work with many integrated

platforms. Generally, a large platform takes in all the other smaller platforms, but a lack of

standards in the communications can make these platforms not smoothly interact with

one another. The Scada system are obsolete, cloud systems are more innovative. But an

old infrastructure imposes the use of Scada as it is cheaper than upgrading the grid.


108

6) Management of energy in the market. The aggregator will initially be an energy broker and

take commissions on the operations.

7) Many solar systems on industry sites were in standby, as if there is no consumption there

is also no need of generation.

8) Yes, it is okay.

O.V. - European Commission External Consultant - Expert in sustainable energy policies, energy

efficiency, renewable energy sources, energy system - 08/06/2020

1) The absence of a precise baseline methodology it is difficult to communicate. It can lead to

different results in different countries according to the adopted approach. Therefore, a

different measurement system

There is lack of awareness from the consumer side on their possibility to engage with

flexibility.

There is an absence of standardized technical measures for measurement. It is important

to define the granularity of the measurement.

2) The regulators should make sure that the integration of distributed and intermittent and

charging EVs can cope with relevant oscillation in the grid. Till some years ago it was

achieved from the production site, but now with RES in place is different. As such the

effort are on the demand side. The grid has to be maintained efficient and stable at all

time. Generally, the TSO agrees with the implementation of the European directives but is

the DSO that takes time as it is himself that practically has to implement the measures.

3) In the latest regulation demand response and aggregator are mentioned much more

often, showing the interest and effort. DR must be facilitated e not forbidden. The policy

support has started in many MBs. However, every MBs has different characteristics, as

such the European directives are kept general so each MB can adapt them to their needs.

Some problems that arose are high activation costs and long time to be approved. The

liberalization of the market is complex. Support and incentive not only have a direct

impact but also indirect, like disfavor carbon power plants.

4) Lack of awareness in respect of the solution. The technologies should be simpler for the

consumers, as they are not experts. Also, the return on the investment should be clearer.

5) The DSO will surely witness changes as the market is going towards liberalization. More

and more small retailers, but the largest are still reference points. Also, for the technical

solutions, like the smart meters, it has to be clear who will be in charge of their control

also in terms of privacy and data transfer. In some MBs, there is aggregation only in the

generation side.

6) The toughest will be to integrate both implicit and explicit in the same business. Implicit

has a simpler implementation in the short term. With DR is thought the reduction of

energy consumption, but this is not always the case.

7) On the consumption side big reduction as many industries stopped working. Consumption

behavior never witnessed before, geographical distribution changed a lot and so di the


109

energy flows. It has been a good test for the system. The actuation and implementation of

the norms can be delayed a bit.

8) To be confirmed.

Alberto Pesce – ABB – Project Leader and responsible for ABB role in H2020 Osmose Project –

08/06/2020

1) Technical: difficulties on making the consumption and generation equipment ready to use.

Slow process.

For the service: lack of awareness. Many consumers, also large industrial site, are not

aware of what UVAM are and what demand response is.

Lack of standards: osmose tries to replicate already existing models. A uniform method

can also be beneficial for the consumer when he wants to change provider.

2) The grid is becoming more and more bidirectional, as such there is the necessity for

aggregators. To control locally the overall stability of the grid. The aggregator as

somebody who control an area of the territory. As such, the regulators, Terna, should give

more responsibility to the aggregator in zonal areas.

3) It can be a vehicle to engage curiosity and raise awareness on the service. Also, can favor

new opportunities such as local energy communities. This goal needs to be necessarily

driven by the government. Policy intervention as a driver to promote this new world of

flexibilities.

4) Comfort: to change the energy behavior can difficult. Difficult to make the client

understand that he still has the final decision.

The ultimate goal of DR is not to consume less but to integrate as much as possible RES in

the grid.

5) More and more like a highway where you pay for transit. More intertwined with the TSO

with more technical advanced relations. Digitalization bot vertical and transversal on

lower levels and faster.

6) The real challenge is on frequency control. For the TSO the important this is frequency

control. Frequency is the most critical solution to implement. On the generation side:

breaking the turbines can shorten their lives, so new R&D in the field to extend their

lifetime (like start and go on the car).

7) Drastically reduced consumption. Moreover, the consumption also moved from industries

to residential. Hard test for the system, a lot of curtailment on the WPPs.

8) Sure.

Fabio Gambino – M5S – Engineer and parliamentary assistant of deputy Alessandro Melicchio

(M5S) – 11/06/2020

1) The technology and the algorithms did not reach a mature level yet. A level that is

necessary to guarantee a service with good performance and with continuity.


110

2) Right now, is only possible to talk about pilot projects in a regulatory and normative

framework in a national context that is evolving at a fast pace and still has to define and

address all the players involved.

3) Absolutely yes, even though the economic and profit factors should not be the only drivers

for the development of the aggregators. Also, other values should be included as drivers

such as energy transition, climate change and environment and social impacts.

4) The integration of consumers in initiatives linked to energy communities is one of the

possibilities in the organizing configuration of all the actors involved. Generally, there

three pathways: 1) top down, in which a big industry or the government support and

promotes, mainly in financial terms, the project. 2) bottom up, where the actors who take

the initiative are the single prosumers. 3) mix of the two, in which the project since the

beginning has the support from the top and the willingness from the bottom.

The main obstacles are in the high activation costs and the difficulties in explaining and

make the consumer understand which are the advantages of the aggregator and of being

part of an energy community. Another important aspect is the simplicity of the use of the

technology from the consumer side, as right now it may seem complex.

5) With the future opening of the market to renewables, for sure there will be several

impacts on its primary activities.

6) Explicit, for frequency control services (frequency up and down). For implicit, there must

take into account the factor of “social acceptance”. Many users are not willing to change

and prefer the big and established companies as they do not trust the liberalized market

and new entrants.

7) As DR is mainly in a development phase, pilot projects and research & development

activities, the pandemic did not really influence.

8) Certainly.

Enel X employee – 11/06/2020

1) Each source of DR has its peculiarities. A 360 degree view a general problem is

remuneration. The criteria is on 3 sides: remuneration, requirements for the delivery of

the service like reaction time and length, and market rules. It is important to see who

delivers the service: RES + storage, variable loads. The largest share is from loads that

requires more attention from the consumer side. RES is quicker, but remuneration is more

complex as BESS are really expensive. Small loads are more available but are really capex

intensive.

2) The role of Terna and whoever decides the technical requirements is to decide which

parameters are needed to qualify. For fast response: required installation of very

expensive devices with the possibility of remote control by the TSO. With this many small

assets are excluded. The regulators should work on defining requirements that can have

impact on all the available assets.

Remuneration for 2020: 30k euro per MW per year + MWh


111

3) Incentives through GSE and other methods. No direct involvement. The government has

an impact on the establishment of goals and plans like by 2030 there needs to be X DR

service in place. Energy communities: the government should promote. The incentives

should arrive: when the regulator intervene is because the government has indirectly

intervened before.

4) Informative campaign at all level. A theme that seems to be working in terms of value

proposition offered by the aggregator is the possibility to involve the consumer into a

community. Go beyond the financial measures, and tell to share their energy, inject it in

the grid and do self-consumption.

5) The grid is going through digitalization, the DSO will have a capacity of monitoring and

controlling much more capillary over the grid. The question is, what will he do with this

capacity? Depends a lot from the regulatory framework. His role will be more and more

crucial, technically it could be managed and balance portion of the grid always smaller and

more local.

Inverse trend: increase in independency from the DSO of energy district, with a private

and isolated grid. Who wins? Will go in parallel for the next decade.

6) Implicit is already somehow in place. The profitability of the aggregator depends on the

specific case: B2B and B2C, with contracts with other businesses and residentials, there is

opportunity to offer more value on top of only financial profit.

7) On the perception not really. On the development yes: additional push towards

renewables. Potential, not verified, correlation between pollution and pandemic.

Generally, more renewables = more demand response.

8) Better not, to avoid HR approvals.

Filippo Cantelmi - NEXT Kraftwerk Italia – Business Development Manager – 12/06/2020

1) Italian market: pilot projects of Terna on UVAM and fast reserve. The reaction and results

of these projects are positive, especially with the UVAM. In particular because Terna gives

an incentive 30k Euro per MW per year plus provision per MWh. There are difficulties in

the deployment as the thematic is not well known in the production and neither it is in the

consumption. There is a need of a new figure in the industry who knows how to analyze

the potentiality of flexibility.

In the future, after 2021 there will be no fixed incentive, as such many UVAM will be not

be participating anymore because they will not be competitive anymore.

On the production side the service has not been accepted a lot, especially for the up

response due to the nature of RES.

2) Terna since 2019 has an auction for a capacity of 1GW. There is an intention to add 500

MW this year and 500 more next year for a total of 2000 MW. This demonstrate that

Terna believes in it. Terna must have the reserve, and is shifting them from conventional

towards UVAM. This is reflected in the energy bill, as the UVAM should make Terna pay

less in respect to the past.


112

However, Terna is not really calling the UVAM, but rather keeps them as last resort in its

reserve. The UVAM go in the market with and in the same way as the others.

3) The contractual premium of 30k per MW per year should remain. This 30k are going to the

BSP (aggregator) and then split among the aggregates.

4) The biggest obstacle is the cost of activation. For an industry is often the case that for

them is more expensive to stop, for example, a furnace than having the compensation for

the flexibility provided. There is no analysis of potential flexibility within an industry.

5) Local energy community projects with production and consumption. The DSO has to

intervene and define its position. New ARERA project with BSP and BRP: TIDE, in which

there is a redefinition of the markets.

6) Aggregator + BSP: role of ancillary services. As of today, the regulatory framework does

not really allow the activities of implicit DR. as it has to present itself with single loads and

not aggregates of loads, it is difficult to manage the portfolio.

7) Yes, as an accelerator for the production of RES. Maybe not in the immediate, but the RES

is creating unbalances and congestion. Would be interesting to know how much Terna has

called the UVAM in the period of pandemic.

8) Yes, it’s good.

Montse Mussons – km0 – Project manager innovation and markets – 15/06/2020

1) There are several barriers. The two main ones are regulation and remuneration. There is

regulatory uncertainty and lack of definition for the participation of the services. Rede

Electrica is providing new regulation, but there are no clear definitions. From a business

perspective this creates a lot of uncertainty that slows down the business.

The technical aspects are not a major barrier because it is possible to kind of copy existing

technologies.

Economically the BM is not established as it is foggy how the remuneration for DR works.

2) The role of the regulators is to transpose the European directives into the country. It has

to do it in a such a way that competition is promoted so to favor the rise of new actors in

the market. Ultimately regulation has to be clear and transparent.

3) Totally yes. The ministry of energy should step up. Policy support would also work as a

market signal. Perhaps it is not a necessary condition, but it is very good for promoting

competition. The supportive schemes are to be in order to involve different pilots of

different scales so not to give them all to the big players.

4) It is critical to show the profitability of the business, especially when you talk with

industrial consumers. The industrial consumers are the first to be involved. To be

attractive the business case has to be clear and simple to understand.

5) The DSO will evolve as much as the regulation does. The DSOs are remunerated for

upgrading and investing in infrastructure. Right now, the DSO has no incentive to engage

with smart grids. The DSO has to become an active player in the energy management of

the grid, also in smaller portion with energy communities. A point of development is to

increase observability on the LV lines. Generally, DSO are super conservative. They are


113

quite part of the old generation. No big changes in the short term, but with the right

regulation and incentives it will develop.

6) Km0 always tackled DR from explicit point of view, as to provide the grid with support and

ancillary services pay more. Generally, it depends on the type of aggregator. An

independent aggregator would mainly do explicit, whether an ESCO would be keener to do

implicit initially as it is easier to implement, and they are already familiar with the spot

market. Retailers may not have a clue of what DR is, they often do not have the know-

how. The independent aggregator is basing its core business on it, so it might still have

competitive advantage.

7) Pushback for couple of months, but no real effect on the development goals.

8) Yes, no problem.

Giuseppe Mastropieri – European Commission – IEC Innovation European Council Expert

evaluator for Horizon 2020 IEC accelerator, REM Srl Reliable Energy management – President –

15/06/2020

1) The current market design poses barriers in the dispensation of these services. Many of the

services were traditionally not remunerated, since 2017 the market rules have changed.

Takes time to adapt. The energy intensive consumers may find more benefits in

interruptibility services which is well paid and might be reluctant to change it. For a total

work of DR many actors are to be defined and involved.

2) The regulations are very different in every member state and so is the structure of the

market. There is the necessity for effective DR to take place for a big and uniform market. A

large market with many GW capacities. From one side there are models with performance

based incentives. Alternatively, there are qualifying markets, where you are paid to

participate but not necessary requested to perform. Regulatory design: flat fee auctions (of

longer length), duration of the service. Work more like a utility environment. Remuneration

models based of the performance. TSO and regulators need to be able to quantify the

performance.

3) The aggregator is so when aggregates multiple loads and bid as if it was one (2 or more

loads). However, it is possible that the aggregator bids with a single load. There is a need of

a stable aggregation to guarantee an organizational structure and with short term contracts

is difficult. Longer contracts that cannot be broken for like 5 years would be advisable.

4) Privacy, safety and activation costs are traditional obstacles. More obstacles in the industry

world; small medium enterprises have small loads. Even though there might be a discount

on the energy bill and the awareness of green energy has increased, energy is still perceived

as a cost and not as an opportunity. Also, new and small entrants are not well seen, more

trust is given to big and established utilities. Moreover, an industry, when it comes to

energy, makes choices for the short term, as energy is not the core business, so they lose or

have little interest in the topic.

5) The TSO has developed a lot. The distribution system is in a profound phase of change. The

coming three four years will be crucial as they are upgrading a lot all the substations and


114

rolling out lots of smart meters. As such the DSO will be more ready to manage flexibility

and distributed resources. The largest potential of DR is on MV lines, managed by the DSO.

With the presence of EVs and DER, it will be a strategic factor to develop and transform the

market.

6) As of today: fast reserve has a generous remuneration. On the explicit there will a lot of

request in the future. The TIDE still perceives DR as an experiment in a test period. However,

it seems that there is the willingness to go in this direction. There is not a clear legislative

framework.

For what regards implicit, it seems there is not really a market for it. Implicit has to be seen

more as a way to avoid curtailment of RES rather than a service to make money.

7) The pandemic has had strong effects on the traditional sources, as they are very vulnerable

to volatility prices. DR goes along as a byproduct of the energy transition. There is a lack of

infrastructure to have an overall view of DR, for instance there are not big enough BESS to

test their actual potential contribution.

8) Yes, no problem.

demand response integration and remuneration in the

Documents