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Energy & Grid Management
Ahmad Faruqui
Ahmad Faruqui
 · Posted in Energy & Grid Management

Flexible Demand in Norway: A conversation with Matthias Hofmann

Matthias Hofmann is a Senior Advisor with the Power System Operator Statnett in Norway. He combines his work with writing a PhD dissertation at the Norwegian University of Science and Technology and has been doing some really interesting work on flexible demand in Norway. I had a chance to ask him some questions about demand flexibility in Norway. Here is what he said.

 

  1. Why did Norway reform its electricity industry?

The reform of the electricity industry represents a focus away from expanding the power system toward enhancing cost efficiency by optimizing the power system. Hydro power plants still produce almost all the electricity in Norway but they are weather dependent. It was expected that a market driven electricity price setting would lead to a more efficient utilization of the power system, since demand could respond with varying prices, which were fixed before the reform.

 

  1. When did the reform take place?

Norway reformed its electricity industry in 1991.

 

  1. What were the highlights of the reform?

The highlights of the reform were the sector unbundling and the introduction of an electricity market.  Sector unbundling divided power system operations into electricity transmission, which is a natural monopoly, and electricity production and sale, which were subjected to competition. In addition, a wholesale market for electricity with fluctuating prices was introduced together with a retail market where consumers could choose their electricity supplier.

 

  1. When were smart meters introduced?

All Norwegian electricity consumers have had a smart meter since 2019 and all electricity demand readings are collected in a national datahub.

 

  1. Why was “flexible demand” introduced in the market place?

Demand (electricity suppliers for small consumers or large consumers) can put bids for given volumes and prices in the wholesale market which should represent the flexibility of the demand in response to the prices.

 

  1. What role did dynamic pricing play in flexible demand?

Dynamic pricing incentivizes flexible demand and should lead to lower electricity bills. However, only consumers with smart meters can be billed based on their hourly consumption. In Norway, 100 % of the customers are on smart meters today as it is a legal requirement. Since dynamic pricing of electricity was available before the smart meter roll-out, one could argue that it gave a push to install smart meters for all costumers which occurred later.

 

  1. What does the typical electric bill for households look like?

The typical bill consists of three parts: electricity costs, grid fee and taxes. Each of the three parts stands for approximately a third of the final electricity bill in a normal year. Households receive either two bills, one from the electricity supplier and one from their grid company, or one bill from the electricity supplier which includes the grid fee which is then passed to the grid company.

The typical grid fee is computed based on the electricity usage in the three hours with the highest customer demand each month. In addition, a fee per kWh exists which is higher in daylight hours on working days. No charges are based on income.

 

  1. Is there a fixed charge in the bill and what does it cover?

The typical bill from the electricity supplier includes a monthly fixed charge which primarily covers the operational cost of the electricity supplier such as salaries, marketing, IT-systems and others. Historically, it had the same value across months. However, this fixed charge is now based on the electricity demand during the three hours with the highest consumption each month. It is essentially a demand charge based on the customer’s individual highest consumption. For example, if the customer’s average consumption in these three hours in the capital of Oslo in a month are below 2 kW, the customer is charged USD 12. The next level is 2 – 5 kW with USD 19, then 5 -10 kW with USD 30 and so on.

 

  1. How are transmission and distribution costs recovered and who provides these services?

Grid costs are recovered by grid fees which are regulated by the energy authority. Norway has around 100 distribution grid companies and one transmission grid company.

 

  1. How are generation (or energy) costs recovered and who provides energy service?

Electricity producers sell their production via the electricity market or direct agreements with large consumers. Energy services can be provided by specialized companies or are part of the selling strategy of electricity suppliers / retailers to their customers.

 

  1. What pricing designs are offered by retailers to households?

Three different designs are usually offered:

  • Fixed price contracts (fixed for at least 3 months and up to one year or even longer)
  • Variable price contracts (price changes each 14 days)
  • Spot price contracts (price changes hourly and follows the spot price from the day-ahead market)

 

  1. How many households are on time-varying rates?

At the time being, around 96 % of the households are on time-varying rates with 92 % on spot price contracts and 4 % on variable price contracts. The share of time-varying rates has been high for a longer time, since “all” entities (for example, the consumer protection agency) promote them to the customers as the cheapest contracts over time. In addition, the electricity retailers prefer spot price contracts since it is very low risk for them with a guaranteed profit since customer must pay the spot price plus a small fee. For fixed price contracts, the customer must pay extra for the “insurance” which is included in the price whereas this is not necessary in spot price contracts. It is difficult to assess how much the customers save on spot price contracts versus fixed price since it depends on the year. According to historical statistics one could save up to 30 % in the best year, but they would have had to pay 80 % extra in the worst year (since electricity prices can vary substantially across years).

 

  1. What is the predominant form of time-varying rate?

Hourly changing rates which are tied to the spot price from the day-ahead market with a fixed surcharge per kWh so that the retailers can earn money.

 

  1. What portion of the typical household bill varies with time and what portion does not?

Electricity costs vary typically with time, whereas the grid fee may vary with time if the respective grid company has introduced a time-of-use tariff. The major grid companies have tariffs with a time-of-use part which covers around 50 % of the grid fee. Together with the value added tax of 25 %, the time varying portion should be around 60 % of the final bill in a year with "normal" electricity prices.

 

  1. What is the share of taxes in the bill?

Around 1/3 of the bill goes towards state taxes. That may seem  high but that is because electricity prices are quite low in Norway. On average, the customer pays  around US$0.10/kWh for electricity including grid fee and taxes. The electricity tax is US$0.014/kWh. Together with the value added tax of 25 % which is paid both on electricity costs and grid fee, the share of taxes sums up to be around 1/3.

 

  1. Have households changed their load shapes in response to the time-varying rates and, if so, by how much?

My research shows little evidence that the average household has changed their load shape even after the electricity prices fluctuated extremely intraday when the energy crisis started in Autumn 2021 (https://www.sciencedirect.com/science/article/pii/S2666955223000357). However, I could see a shift in load patterns among some highly engaged household groups, who actively monitor hourly prices several times per week or who employ automatic smart charging of their electric cars. Even if people do not shift load, they choose time-varying rates since there are convinced that these contracts are the cheapest in the long run. This is due to the effort of the consumer protection agency and others that give unbiased advice to customers which promote time-varying rates as the best/cheapest power contracts.

 

  1. It appears that price response in Norway is less than in the data we have collected in Arcturus. See the chart below. Why is that the case, given that Norway has so many EVs?

First of all, it is important to be state that the results in the chart are from a pricing experiment with Norwegian households in winter (https://www.sciencedirect.com/science/article/pii/S0301421523004068). Our results showed that households with EVs shifted their charging away from the peak price hours. However, I think the low results can be partly explained by the base effect. The households had quite a high electricity consumption of 2.8 kWh/h in the peak hours since heating is primarily electrical in Norway. Consequently, the percentage change is lower than in other studies with households with lower electricity consumption. In addition, we used a peak rebate scheme which typically leads to a lower response since people did not face higher costs but had the opportunity to earn a rebate. In my view, people are usually more eager to avoid higher costs than to gain a rebate, also known as loss aversion in behavioral economics. And a third hypothesis for the low results is that the winter was quite cold, thus limiting the demand flexibility from electrical heating since it had to be on all times to keep the house at a comfortable temperature. We had a smaller pilot with the same price signals the winter before, which was warmer. There the response was approximately twice as high than in these results (https://ieeexplore.ieee.org/document/9639976).

 

  1. What changes are likely to happen in the future?

I think that automatic smart charging of EVs at the cheapest hours of the day (which are typically at night) will be the standard, at least at home. People usually do not charge their cars at public charging stations, at least for day-to-day errands since the batteries last until they can be at home. Also, automatic in-house control of electrical water boilers and electrical space heating according to the fluctuating electricity prices should be more widespread. Thus, customers can reduce their electricity bills and in consequence electricity demand would be more flexible, and this flexibility could also be used for other purposes such as balancing.

Not all parking lots have charging stands, but there are many with charging stands which are reserved for electric cars. However, people usually charge at home or a shared garage in apartment complexes. On longer trips fast charging is available along the main roads.

 

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