Demystifying Demand Flexibility Service (DFS) Pricing

Eamon Bell, Senior Flexibility Specialist at SMS, delves into the intricate pricing structure of National Grid ESO’s Demand Flexibility Service (DFS) events, offering clarity to energy suppliers and clean tech businesses seeking to understand the mechanisms behind compensation in grid balancing efforts.

For the last two winters, the National Grid Electricity System Operator (NGESO) has invited energy suppliers, clean tech organisations, and aggregators to engage in its Demand Flexibility Service (DFS), which incentivises any consumer with an electric smart meter installed to reduce their energy consumption during peak hours.

By offering DFS services to their customers, Approved Providers of the scheme play a vital role in balancing the grid by facilitating reduced electricity demand at designated times, receiving revenues proportional to their contribution, which can in turn be passed on to consumers in the form of rewards.

Understanding Demand Flexibility Dispatch and Utilisation

Before we delve into how pricing for the scheme works, it’s important to recognise DFS events encompass two categories:

1. Test Events: Scheduled 12 times throughout the DFS Year to provide revenue certainty to participants.
2. Live Events: Activated based on system conditions, serving as a responsive measure.

Typically lasting between 30 to 90 minutes, DFS events occur at least a dozen times annually from November to March.

DFS serves as an additional tool for the NGESO control room during periods of severe system stress. While the balance between electricity supply and demand is typically managed by the Balancing Mechanism (BM) and Balancing Services, DFS offers a final lever for the NGESO control room to utilise when necessary.

How Demand Flexibility Service pricing works

The revenue that any given customer can expect from DFS is established based on two primary factors:

1. The extent to which that customers can reduce their demand during DFS events.
2. The pricing structure of each DFS event’s market auction.

Operated as a Pay-as-Bid auction, NGESO specifies the date, time, and target MW volume for each event. Participants submit bids for a ‘DFS Unit’, indicating the volume of MW they can reduce and the corresponding price.

During the 2022/23 DFS event period, NGESO employed a “Guaranteed Acceptance Price” (GAP) to establish a fixed price per MWh delivered for Test events.

However, in the subsequent 2023/24 DFS programme, the GAP was applicable only to the initial six Test events, after which market forces determined pricing. Live Events are consistently priced by market dynamics, without a GAP.

With the GAP in effect, customers could reliably assess the value of reducing their consumption. However, in its absence, the value proposition becomes more uncertain, influenced by market fluctuations.

For instance, with a GAP of £3,000/MWh, Approved Provider received £3/kWh for their customers’ actions, whereas a market price of £1,000/MWh translated to £1/kWh compensation.

How SMS helps customers get the best DFS price

Through providing expertise in aggregation, settlement, baselining, bidding (SMS pricing models based on market analysis and proxy data points), and forecasting of weekly and day-ahead volumes and pricing, our FlexiGrid team aim to secure the max price for our customers, therefore ensuring high levels of consumer engagement and participation in this essential service.

That’s why more than a third of the DFS programme’s total of 32 Approved Providers are currently using SMS’s turnkey, end-to-end DFS solutions, and why we were recently recognised by the Utility Week Awards 2023 for our outstanding contribution towards unlocking domestic demand flexibility in Britain.