Industry flexibility and demand response applying german energy transition lessons in chile_2019

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Energy Research & Social Science
journal homepage: www.elsevier.com/locate/erss
Original research article
Industry, flexibility, and demand response: Applying German energy
transition lessons in Chile
Javier Valdesa,⁎
, Axel Bastián Poque Gonzálezb
, Luis Ramirez Camargoa
, Meylí Valin Fenándezb
,
Yunesky Masip Maciab
, Wolfgang Dornera
a
Institute for Applied Informatics, Technische Hochschule Deggendorf, Freyung, Germany
b
Escuela de Ingeniería Mecánica, Facultad de Ingeniería, Pontificia Universidad Católica de Valparaíso, Quilpué, Chile
A R T I C L E I N F O
Keywords:
Demand side management
Demand response
Renewable energies
Energy transition
A B S T R A C T
Demand side management (DSM) contributes, among its other purposes, to provide stability and flexibility to
energy systems that include a high proportion of variable renewable energy in pioneer countries and those which
recently began their energy transition. Among DSM policies, implementation of measures and mechanisms for a
demand response (DR) is not a trivial matter. This study presents a review and comparative analysis of the major
energy policy developments in Germany and Chile. Based on i) the relevance of the industry sector in both
countries, ii) the difficulty in implementing the regulatory framework and iii) the importance given to the
industrial customers in the German legislation and DR literature, the following analysis will focus on both
medium and large industrial customers. The goals are to review the challenges in untying the full DR potential of
the productive industry and to provide recommendations for the promotion of DR in Chile. Emphasis is placed on
the lessons learned in fitting the wide potential of DR in the German electricity markets. A review of the suc-
cesses and failures of the German experience reveals the potential risk that poor policy implementation can have
in both the short and long term.
1. Introduction
Germany is internationally recognized as one of the first nations to
adopt a sound energy policy aimed at achieving high shares of non-
conventional renewable energy sources (NCRES) in the energy matrix.
It has been following a long path in which regulations, priorities and
technologies have changed considerably. The first law allowing de-
centralized renewable power grid feed-in appeared in 1990 [1], and the
main instrument to promote the adoption of NCRES, the renewable
energy law (“Erneuerbarenenergiengesetz”), was enacted in 2000 [2].
The latter has received four amendments that respond to changes in the
political priorities of the so-called energy transition (“Energiewende”).
This law started out being protective of NCRES adopters, whereas in its
latest version, NCRES generators are left free to find their own places in
the market. At the beginning, it was important to provide warranties for
the adoption of new unconventional technologies. At present, it has
been proven that the technologies do work and that a transition is
possible, so the efforts are more concentrated on making the market
accept a high penetration of NCRES. The positive response to this
regulation, together with the advances in efficiency and cost reduction
of technologies such as photovoltaics (PVs) and wind power, have
allowed Germany to achieve NCRES penetration rates of more than
30% of the yearly electricity demand [3]. These changes are an out-
standing example of the idea that energy transitions are the sum of
small ones and involve a large number of actors and dimensions [4,5].
Due to the intrinsic variability of NCRES, the energy transition re-
quires not only increments in installed NCRES capacities but also
multiple complementary flexibility and reliability measures that allow a
secure and stable energy supply. Demand-side management (DSM),
which is based on mechanisms that encourage consumers to optimize
energy use, is a particularly attractive measure to achieve these goals
due to its theoretically easy implementation and high potential, as it
relies on capacities that already exist. DSM has gained popularity, and
the discussion about its implementation has reached most countries [6].
In Germany, there is controversy about the effectiveness of DSM to
ensure security of supply and to encourage investments [7,8], but there
is considerable research supporting its advantages, and there are sev-
eral DSM promotion mechanisms in effect. These mechanisms include
programs to increase efficiency, reduce energy consumption and im-
plement load shifting. For example, Krzikalla et al. [9] have shown that
compared with most flexibility and reliability measures, industrial DSM
is one of the most cost-effective and easiest strategies to implement. To
https://doi.org/10.1016/j.erss.2019.03.003
Received 7 June 2018; Received in revised form 23 February 2019; Accepted 6 March 2019
⁎
Corresponding author.
E-mail address: javier.valdes@th-deg.de (J. Valdes).
Energy Research & Social Science 54 (2019) 12–25
2214-6296/ © 2019 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/BY-NC-ND/4.0/).
T

make use of this potential, the German government decided to enhance
the implementation of DSM since 2015 through a scheme called Elec-
tricity Market 2.0, based on capacity reserve mechanisms and demand
response (DR) programs [10]. With this recent decision, Germany
confirms its commitment to implement DR after a period of uncertainty
in which DSM was mainly implemented via energy efficiency (EE) and
demand reduction measures but with little progress on DR [11].
Examining the most relevant aspects of DSM in early adopter
countries, such as Germany, can serve to improve the implementation
of DSM measures in countries that are newcomers to the energy tran-
sition but are catching-up in its implementation at an accelerated pace,
such as Chile. A review of the literature in the field of DSM policy de-
sign and implementation reveals that studies have focused on the
challenges and applications of DSM for energy systems [6,12,13], re-
gions [14–16] and countries [17–19]. Nevertheless, few studies have
examined the potential of DSM policy transferability and to the best of
the authors’ knowledge, even fewer have explicitly addressed DR policy
(e.g., see [7,20]). The lack of research contrasts with the contribution
that comparative studies can make to countries that are developing DR
programs. To fill this gap, this study concentrates on the work that has
been performed concerning DSM in Germany and Chile and provides
recommendations for Chile.
Germany and Chile are largely different in their political and eco-
nomic systems, but their energy systems share some commonalities. On
the one hand, Germany has been capable of implementing EE measures
and on-site backup policies. This history of success is largely due to a
mix of voluntary and mandatory policies, financial programs and new
regulations, implemented through a wide number of actors, from cus-
tomers to national and regional institutions. On the other hand, DR
instruments, which are mainly voluntary, exhibit little advancement
and are not expected to take off until deeper market transformations
occur. In the case of Chile, major regulatory changes towards an energy
transition started in 2010, but it is transforming its energy matrix by
leaps and bounds. Similar to Germany, Chile has been successful in
increasing the NCRES shares in the system but is facing complex chal-
lenges related to the flexibility of the electricity system. To solve these
issues and given the increasing demand for energy, recent years have
seen progress in incorporating DSM programs, especially through EE
policies. Additionally, the implementation of new and more complex
DR policies is currently being considered. Since 2010, the Chilean
Energy Efficiency Agency (Agencia Chilena de Eficiencia Energética -
AChEE) has had a fundamental role in DSM, as it is the main institu-
tional agency managing DSM programs across all sectors. This agency
leads programs such as promotion of Combined Heat and Power (CHP),
replacement of streetlights, measures to improve the EE of existing
public buildings (saving 16,086,576 kWh until January 2016) and the
labeling of electrical devices [21]. Nevertheless, much more remains to
be done to accelerate and expand DSM use. In contrast with Germany,
the recent experience shows that in general terms, in Chile, energy
demand continues to increase independently of electricity prices and is
almost exclusively satisfied by increasing the generation capacity. This,
among others, has resulted in a continuous expansion of variable
NCRES. However, this historical opportunity to implement DSM has yet
to be taken advantage of, as it has in other countries, with Germany
being an exemplary case.
Grounded on the idea that energy transitions are the sum of many
small ones, this article shows the importance of DSM policy for energy
transitions through a review and a comparative analysis of the main
developments in the area of DSM policy in Germany and Chile. The aim
of the study is to propose recommendations that meet the challenges of
DSM implementation in the industrial sector, considering both the
Chilean context and the successes and failures of the German case.
To analyze the progress in both countries and to draw lessons from
the German example for Chile, the study on historical comparative
analysis and the most-different systems design is inspired by the
method of structured, focused comparison proposed by George and
Bennett [22], which comprises three phases: development of a research
design strategy, systematic case study research, and synthesis. In the
next section, the objectives, design, and structure of the study are for-
mulated based on the concept of DSM and DSM policy mapping (phase
one). Sections 3 and 4 present the research studies based on this the-
oretical scheme and focus on the main characteristics of each energy
system (phase two). Section 3 introduces the developments in DSM
adoption in the German case, with special emphasis on DR and the EU
context. Section 4 describes the current state and the challenges for the
near future for DSM adoption in Chile. In Section 5 (phase three), the
findings of the case studies are discussed, and the transferability of the
German policy is analyzed. This methodology allows us to assess not
only the impact of the existence or not of a certain regulation but also
their characteristics and particularities as well as their insertion in the
more general context. This type of analysis allows us to identify some of
the main characteristics of the energy policy as well as the narratives
behind the adoption of certain schemas with respect to other options.
Finally, conclusions are drawn in Section 6.
2. A comparison of DSM policies in Chile and Germany
As energy transitions involve profound changes in regulatory sys-
tems, policy implications from case studies can be drawn, and lessons
can be learned to avoid the negative effects of path dependence and
technological “lock-in” [23,24]. A growing body of literature on energy
transitions, from different perspectives and disciplines, discusses energy
transition dynamics and evaluates the state of regions or countries in
the transition to a more sustainable energy system process [4,24,25]. In
general terms, authors agree on the need to generate proposals and
solutions to facilitate the task of decision makers. Based on this idea,
the main reason behind this study is to search for solutions that ac-
celerate these transitions in order to avoid the social and environmental
costs associated with fossil fuel and, to explore the transferability of
energy policies based on the experiences of early adopter countries to
late adopters.
As does the work by Ydersbond and Korsnes [26], this study draws
on historical comparative analysis and the most-different systems de-
sign methodology. Under this research design, very different countries
have one common dependent variable, in this case the energy transi-
tion, but different values on most independent variables of relevance to
the outcome except, ideally, for one or very few. As Table 1 shows,
Germany and Chile are very different countries, but they are good ex-
amples of an early and a late adopter country of the energy transition.
Moreover, there are several reasons to compare their respective DSM
policy frameworks. First, the comparative framework between two
countries provides a less abstract storyline than if several countries
were analyzed or if theoretical approaches to DSM were analyzed.
Second, both countries have been globally recognized by their
Table 1
Main characteristics of the German and Chilean energy systems.
Characteristic Germany Chile
Installed capacity 2018 205.97 GW 23.3 GW
Energy generated 2017 549.90 TWh 74.14 TWh
Renewable energy generated (hydropower,
biomass, wind, solar, geothermal) 2017
209.92 TWh 31.69 TWh
38% 43%
Nonrenewable energy generated 2017 339.98 TWh 42.45 TWh
62% 57%
Solar energy generated 2017 39.43 3.90
7% 5%
Wind energy generated 2017 105.69 3.51
19% 5%
DR Access in the Spot Market Yes No
DR Access in capacity mechanism Yes No
DR Access in balancing mechanisms Yes Partially with
Ancillary Services
J. Valdes, et al. Energy Research & Social Science 54 (2019) 12–25
13

developments in the decarbonization of their electricity systems and
have been hailed as success stories, which may allow us to extend the
conclusions of the study to other countries or regions [27–29]. Third,
and most importantly, both countries are pursuing a transition from an
energy system that relied heavily on fossil fuels to a new decentralized
system based on renewable power sources. In addition, the transition in
both countries is characterized by the fast pace in the integration of
NCRES into the energy mix, which is challenging the architecture of the
energy systems due to the long distances between the hot spots of
NCRES generation and the large demand centers [30,31]. In both
countries, the current NCRES penetration in the electrical system is
high, and their long-term energy transition goals are very ambitious. In
Chile, in 2017, renewables (including hydropower) generated 40% of
Chile's electricity demand, with targets to increase this to 60% by 2035
and 70% by 2050 [32]. In Germany, since the first nuclear reactor shut
down in 2003, electricity from renewables has continuously increased
to 36% in 2017 and is expected to reach 65% by 2030 [31,33]. All these
factors are positively correlated with the success of DR programs [34].
Given this context, if both countries want to pursue their energy tran-
sitions and integrate a large share of NCRES, the flexibility of their
power sectors must be increased. For that to occur, more transmission
infrastructure, storage, and demand-side response are needed.
2.1. Demand-side management and demand response as flexibility measures
Electricity consumption in Germany decreased by 5% from
621 TW h in 2007 to 595 TW h in 2017, and final energy consumption is
slightly below the 2020 fin. l energy consumption target [33,35]. This is
due to EE, which is one of the DSM policies, and some other causes.
DSM is a broader and complex concept that has been defined by
multiple authors and whose definition has varied over time and also
includes DR [36]. As EE measures have been relatively successful in
recent years, the current discussion about DSM in Europe has focused
on DR (i.e., load shifting rather than EE). To analyze how DR policies
operate, DR can be understood as an implicit and explicit mechanism.
DR acts as an implicit mechanism when customers adjust their con-
sumption in response to variable market price signals. This type of DR
can include or be combined with EE or energy saving/conservation
measures, developed to reduce energy consumption in peak hours.
Therefore, this type of DR is very difficult to measure or ordered in
advance and depends heavily on customer behavior. Implementation of
implicit DR programs is possible thanks to the liberalization of energy
markets and the development of information and communication
technologies (ICT), which have created the possibility to offer dynamic
retail prices and allow consumers to adjust their consumption via either
personal choices or automated processes. From the point of view of
consumers, the real feasibility of the application of dynamic prices
depends on a number of factors: the availability of cheap but efficient
technology, well-educated and supportive customers and regulators,
and well-designed pricing schemes with proper identification of market
segments [37].
Explicit DR is a type of DSM explicitly sold and usually used as
capacity or energy to balance the system directly or via an aggregator
(balancing markets), but it can also involve other ancillary services
(AS). The main idea behind balancing markets is that the consumer sells
a specific amount of flexibility (downwards or upwards) at a certain
time and is paid in the same manner as a generator. Due to the tradi-
tional structure of energy markets, it requires profound market re-
structuring and new regulations, as it must be subject to specific mea-
surement and verification processes. Various types of DSM serve
Fig. 1. Management of energy demand and its components (own realization based on [38–40]).
14

different purposes, and therefore, no particular form of DSM is ne-
cessarily a replacement for another. Many participants engage in ex-
plicit DR through an aggregator or directly, and at the same time, they
also participate in an implicit DR program through dynamic tariffs,
such as a day/night tariff, and implement EE measures. The require-
ments and benefits of each DSM type are different, are activated at
different times and serve different purposes within the markets. They
are also valued differently: whereas consumers will typically receive
indirect compensation for their participation in EE and implicit DR
activities as it lowers their bills, they will receive direct payments for
participating in an explicit DR program.
When complex processes such as DSM are studied, it is necessary to
develop an approach that facilitates a systematic framework for the
analysis. To do that, one possibility is policy mapping to identify the
key actors (organizations) and processes to produce a policy process
map. Fig. 1 shows a policy map scheme that reflects the complexity of
DSM policies and its classification into fundamental and broader con-
cepts. This figure adopts the general framework proposed by Warren
[38] and is complemented with key elements related to market-based
and voluntary policies for the adoption of DSM by the productive in-
dustry extracted from [39,40]. In this scheme, the mapping of the dif-
ferent DSM mechanisms begins with the differentiation among DSM
categories, based on technological options (blue), inclusion of EE, on-
site generation support and DR. These categories are subdivided again
into broader fields of action that cannot be addressed in a unidirec-
tional manner. Instead, they are implemented at different levels not
only on the demand side (small customers, industry or the public
sector), but also in the generation, transmission and distribution sec-
tors, depending on multiple factors. For example, smart grid technology
may involve establishing and maintaining a more efficient transmission
and distribution grid and new mechanisms for generator participation
in the market.
Due to the complexity of transformation in the energy system,
which requires the engagement of a wide range of institutions, DSM
mechanisms can also be classified based on the functions of the actors
or implementers (gray) involved. These include regulatory bodies,
distribution companies, network operators and all types of energy
consumers. Finally, historical developments have shown that a varied
set of policies is necessary to enable different categories of DSM. These
policies (orange) can be classified as voluntary, regulatory, financial
and market based. Regulatory measures obligate distribution compa-
nies to comply with certain levels of energy conservation, e.g., using
efficiency standards for appliances. Voluntary policies include in-
formation campaigns and voluntary measures for users regarding en-
ergy management certifications, the use of new technologies or EE.
Market-based instruments include all the policy instruments that foster
liberal markets and their use. Finally, financial policies are those that
provide financial support to the development of activities related to
DSM ranging from loans and subsidies for new technologies to funding
of R&D programs.
Based on i) the relevance of the industry sector in both countries, ii)
the difficulty in implementing the regulatory framework, and iii) the
importance given to the industrial customers in the German legislation
and DR literature, the following analysis will focus on both medium and
large industrial customers. DSM programs based on EE mechanisms are
relatively easier to implement, as they are mainly instrumentalized
through regulatory policies and may be used as a first step towards DR
implementation. These EE programs are good for increasing awareness
and building capacity for other DSM programs because they can reach a
considerable number of participants, especially if participation is
mandatory. Regarding DR, it is estimated that the use by residential
users has great potential but also relatively high costs and requires
cultural changes, as users will have to adjust their energy consumption
patterns [37]. Moreover, current research shows that enrolment and
average response levels vary between different types of demand re-
sponse programmes, and the expected impact of DR in future scenarios
is in some cases optimistic [41]. Due to barriers to engage and the
technical design of the DR programs, DR from residential consumers
usually has a subordinate role with respect to DR from the industry [9].
The adaptation of the required infrastructure in the industry sector is
cheaper relative to the volumes of energy that are handled, and mod-
ifications to the productive processes can be achieved if there are
economic incentives to do them.
These aspects are of particular relevance for the Chilean and
German electricity systems, in which electricity consumption is con-
centrated in energy-intensive industries (EII). Nevertheless, the im-
plementation of EE and DR programs for industry is not free of diffi-
culties. To ensure the success of DSM programs, voluntary programs are
not sufficient unless an environment that creates economic incentives
exists, especially for programs based on market mechanism. For that
reason, voluntary programs must be complemented with mandatory
policies and mechanisms to finance investments and verify compliance.
Based on these challenges, the DR practices in Chile and Germany are
classified as shown in Fig. 1. The measures analyzed that can contribute
to motivating the productive industry to apply DSM can be distributed
into five types of policies: implementation of energy management sys-
tems (EnMS), such as ISO 50001; dissemination of best practices; direct
financing of pilot programs; generation and simplification of the con-
ditions for the participation of industries in the energy markets; and
implementation of tariff schemes, such as the definition of real-time
electricity prices [39,40].
3. German markets for demand response: current status
As the European Commission has demanded continuous effort from
EU member states to introduce DSM in electricity markets in recent
years, the analysis of the development of DSM in Germany should be
framed in the European context. In 2009, the European Electricity
Directive or Third Energy Package [42] established common rules for
the generation, transmission, distribution and supply of electricity, to-
gether with consumer protection provisions.1
It represented a major
institutional change for EU energy systems, as it is one of the corner-
stones of the liberalization of the European energy markets. In 2012,
the European Energy Efficiency Directive [43] constituted a new sig-
nificant step towards the development of DR with the specific aim of
creating a common framework for DSM implementation. With this di-
rective, the EU Commission acts as a guarantor of DSM programs by
monitoring their implementation and has the authority to sanction in
case of contravention. In particular, it ensures compliance to the Na-
tional Energy Efficiency Action Plans with the EU directive and EU
competition law. This leading role of the Commission increases reg-
ulatory security and decreases uncertainty by setting the operational
rules for the EU electricity markets. In the last evaluation of the status
of DSM policies in EU member states, performed in 2016, the Com-
mission judged that the implementation of Art. 15.8, which contains
dedicated provisions for effective relationships between different sta-
keholders, including aggregators alongside suppliers in wholesale and
retail markets was insufficient [44]. Thus, the Commission ensures that
National Regulatory Authorities can guarantee that DR can take part in
balancing the market and in other ancillary services.
These directives entail the creation of new business models and new
rules, as well as regulatory standards and operating principles for the
gas and electric network industries. For this reason, some authors
consider this a” Europeanization” process for energy and climate policy,
in the case of NCRES and DSM modifying the rules of the game by using
the competition law to force shifts in national support schemes [45]. A
closer look at the review process of the Commission can better explain
1
A "directive" is a legislative act that sets out a goal that all EU countries must
achieve. However, it is up to the individual countries to devise their own laws
on how to reach these goals.
15

how the EU uses the competition law as an instrument to force changes
in national regulations. In 2016, the modification of the German Energy
Industry Act (“Energiewirtschaftsgesetz”), which established and reg-
ulates the provision of a network reserve by the German transmission
system operators, was considered to be in conflict with Art. 15.8, dis-
torting competition in the Single Market.2
The Commission, however,
approved the scheme as a temporary measure valid until June 2020.
Moreover, in 2017, the Commission opened an investigation to assess
whether the German electricity capacity reserve also distorts competi-
tion and favors power plant operators over DR operators [46]. In 2018,
the Commission concluded that the measures are in line with EU state
aid rules and approved the mechanism considering that the strategic
reserves are open to all types of capacity providers, including DR [47].
However, as in the case of the network reserve, these reserves are ap-
proved temporarily and must be removed when the underlying market
issue is solved.
Fig. 2 shows the timeline of the EU legislative framework and the
subsequent German implementation that is analyzed in the next two
sections. This figure shows how the German energy transition in terms
of DSM has been led by the EU directives since 2009 (in blue). The line
at the bottom represents the share of NCRES of total electricity con-
sumption and illustrates how their increase is associated with a higher
level of legislative effort (German milestones are represented by the
green columns). The legislative activity of Germany can be divided into
two phases, one focused on EE measures that started in 2010 with the
Energy Concept and is still in development and a second phase char-
acterized by a commitment to developing more explicit DR mechanisms
with Electricity Market 2.0. Finally, the roadmap shows the expected
implementation programs for the period of 2016–2025 classified by the
type of policy adopted and the main milestones, among which the ex-
pected nuclear phase out in 2020 stands out.
3.1. Energy efficiency: DSM for small and medium enterprises
Most of the DSM measures targeting small and medium enterprises
(SMEs) currently in effect in Germany have arisen after the Energy
Efficiency Directive and have therefore been enacted by the National
Energy Efficiency Action Plan. Among them, the program for funding
highly efficient cross-cutting technologies, implemented in the period
of 2012–2015 and revised in 2016, stands out, which may be related to
the role of Germany as an exporter of innovative technologies. This
program is, however, just a sample of the most recent measures im-
plemented to increase EE in SMEs. Moreover, the Federal Ministry for
Economic Affairs also has programs for the promotion of electricity
conservation within competitive auctioning schemes (the “STEP up!”
program), funding energy audits for SMEs, funding advisory services
regarding energy-efficiency contracting, the SME Initiative for Energy
Reforms and Climate Protection, funding for EnMS and funding for
energy-efficient green production processes [48].
As participation in DR programs is lower than in EE, it has been
argued that Germany lacks a comprehensive strategy to enable greater
load aggregation and response for SMEs [11]. Nevertheless, although
SMEs (and residential) explicit DR remains untapped, this situation is
expected to change. In its Third Electricity Package, the EU committed
member states to an (electrical) smart meter roll out target of 80% by
2020 [42]. The actual installation and expected installation targets in
Europe are unequal, and Germany is among the countries with lower
smart meter penetration and targets. Germany started to implement the
EU Directives in 2017 after a complex and complicated legislative
process and decided to stick to the 80% penetration limit.
According to the Act on the Digitization of the Energy Transition
enacted in 2016, Germany implements the EU Directives 2009/72/EG
and 2009/73/EG into German law. The Act introduces specific and
detailed requirements, both for the design of smart meter devices and
for the transmission of data, a subject of great controversy due to the
necessity of solving data protection issues. The overall goal of the new
law is not only the introduction of dynamic pricing but also gradually
achieving a total digital transformation of the German energy market
while ensuring a high standard regarding data protection [48].
Due to the main role that data transmission plays in DSM and the
implications and business opportunities it opens, it is important to
understand how Germany has structured its smart meter roll out.
According to the Smart Meters Operation Act, the responsibility con-
nected with the roll out of the ‘Meter Operator’ initially rests with the
energy Transmission System Operators. Nevertheless, to speed up the
process and open new business opportunities, a special public pro-
curement procedure allows them to transfer this position to a third-
party service provider. In principle, the Smart Meters Operation Act
does not target SMEs and households; instead, it requires equipping
consumers with more than 6000 kW h yearly consumption and plant
operators with an installed capacity of more than 7 kW with smart
meters. Below these thresholds, installation is optional [49].
3.2. Demand response
In general, for small energy clients, the basic requirements to par-
ticipate in DR programs are the installation of smart meters or other
enablers of data collection and transmission, but in the case of industry,
the installation of such equipment is insufficient due to the complexity
of the energy requirements of industry subprocesses. The ISO 50001
certification gives companies a complete analysis of the potential effi-
ciency gains that DR programs can provide and facilitates data collec-
tion. Germany had more than 90,000 certified companies in 2016 [50].
The large number of ISO 50001 certifications offers considerable po-
tential for the introduction of more sophisticated DR mechanisms that
have not yet been explored. In clear opposition to the EE policies dis-
cussed before, these certifications are not a consequence of an EU Di-
rective.
The EU Energy Efficiency Directive required member states to take
concrete action regarding EnMS and their implementation into national
law by member states by June 2014. The Directive sets out the terms of
reference for the definition of national EE goals, including mandatory
energy audits for large companies. However, in Germany, the govern-
ment decided to proffer ISO 50001 and EMAS certifications instead of
an energy audit. Thanks to that option, data collection is mainly per-
formed by means of ISO 50001 certifications. Moreover, a number of
financial and voluntary policies are implemented with the aim of in-
creasing the number of certifications of SMEs through tax exemptions of
as much as 99% of energy taxes [51,52]. More precisely, public funding
schemes in place to support businesses in implementing EnMS include i)
initial certification of an EnMS according to DIN EN ISO 50001; ii)
external consultancy for the development, implementation and main-
tenance of the EnMS; iii) training of employees as Energy Management
Representatives; iv) purchase of measuring, metering and sensor tech-
nology for EnMS; and v) purchase of EnMS software [55]. However,
there are other public funding schemes in place to support businesses in
implementing EnMS [52].
Large energy-intensive customers usually have controllable power
generation units (such as combined heat and power generation plants)
that, if connected to the grid, would allow high flexibility. Paulus &
Borggrefe [53] estimated that alone, the five industrial processes with
the highest potential (cement, chemicals, aluminum, paper and me-
tallurgy) could offer up to 2660 MW of balance power to the system, if
for example market-based policies would incentivize it. Nevertheless,
the quantity of DSM participation is still low (see Table 2), in part due
to market characteristics. The DSM balance potential already partici-
pates in three different markets: a) the spot market (traded in blocks of
2
The network reserve is created with the aim of secure energy supply in the
event of threats to or disruptions caused by supply/demand imbalances in the
electricity markets, is formed via a public tender and is foreseen for four years.
16

15 min) in the modalities of a day ahead and intraday, b) the primary
(with response times less than 30 s), secondary (with response times
less than 5 min) and tertiary (with response times less than 15 min)
reserve markets and c) the market created by the interruptible charges
ordinance (AbLav) with multiple participation options.
The spot market, in its two modalities, was designed in times of
centralized conventional generation, so the actual options of partici-
pation of DR are limited. The participation of industry is reduced to
cases in which plants are equipped with their own controllable gen-
eration sources and their use is efficient in terms of cost, which implies
tremendous economies of scale. The primary and secondary reserve
markets, in their actual configurations, also present difficulties for DR
integration because they require reaction times that are rarely achiev-
able in productive processes, and the procurement is carried out
weekly. Although there are companies that participate in these two
latter markets, most of the participation has been historically con-
centrated in the tertiary reserves market, with more flexible participa-
tion requirements. In this tertiary reserve, the prequalified capacity is
higher, thanks to the reduced lower response times and daily pro-
curement. Other characteristics that make the tertiary market more
suitable for DR are the separate bidding for negative and positive
power. Additionally, to increase participation, DR resources with lim-
ited availability can participate through an aggregator. As a result, the
chemical industry, since 2009, has provided potential balance in the
tertiary reserves market totaling 660 MW [55]. Nevertheless, when
compared to the total prequalified capacity in the tertiary market, DSM
accounts for only a small part of the total (2%) [54].
The signaled aggregation activity is based on the installation of
remote access equipment that connects the electrical installation in the
plant with the aggregator, allowing managing the power demand of the
plant remotely. The business models of the aggregators operating in
Germany can be classified according to the services offered. Thus, a
basic differentiation can be made between aggregators with an in-
dependent role and aggregators with a combined role, with it being
possible for the same aggregator to offer both services. Independent
aggregators are those acting independently of the usual electricity
supplier and the provider responsible for the balance service. In cases in
which the aggregators have a combined role, they also act as electricity
suppliers, reducing the complexity of the service [56]. In addition to the
advantages of participating in the DSM mechanisms, aggregation en-
tails an economic advantage in itself because the installation of these
devices generates savings in terms of the cost of the contracted power.
Finally, with the objective of reducing the impact of wind energy
and increasing the safety of the system, the market created by the in-
terruptible loads ordinance was launched in 2012. AbLaV considers
interruptible loads units of consumption that can reduce the demand in
a programmed and safe way at the request of the transmission system
operator. The ordinance regulates the conditions under which EII can
reduce their level of demand for short periods of time (quarters of an
hour) in exchange for financial compensation. As of 2016, only 6
contracts with 4 companies were concluded; in 2016, the ordinance was
modified to reduce participation requirements and provide more flex-
ibility. Among these changes are the reduction of the minimum avail-
able load from 50 MW to 5 MW, the reduction of the maximum price of
Fig. 2. DSM in Germany: overview of the main policies and measures in the period of2009–2025.
Table 2
DSM participation in German markets and ancillary services in 2018 [54].
Market (ENTSO-E´s terminology) German terminology DSM prequalified capacity DSM access or participation
Spot Market Sport market N/A Yes
FCR Primary control reserve PCR +/- 80 MW Yes
aFRR Secondary control reserve SCR + 540 MW Yes
SCR - 660 MW Yes
mFRR Minute Reserve MR + 880 MW Yes
MR- 840 MW Yes
Interruptible loads AblaV N/A Yes
Redispatch, voltage control Winter reserve No
Capacity Mechanism Capacity Reserve N/A Yes
Distribution network services Market does not exist only bilateral deals N/A Yes
17

the capacity from 2500 EUR / MW per month to 500 EUR / MW per
week, weekly calls for bids (previously monthly), and the reduction of
the minimum requirements for connection to the network from 110 kV
to 20 kV [57].
4. DSM challenges in Chile
As highlighted in Section 2, the German energy transition and
Chilean energy transition are very context-specific: Germany is strongly
influenced by the EU, and Chile’s energy system is characterized by its
fragmentation and lack of international connections. The electricity
system is fragmented into four systems throughout the country. These
are practically independent and operate in isolation, except for the
Interconectado del Norte Grande (SING) and “Sistema Interconectado
Central” (SIC), which were interconnected by a 500-kW high-tension
line at the end of 2017, creating the new “Sistema Eléctrico Nacional”.
This feature has historically limited the exploitation of the advantages
of a large internal market, and the situation does not improve in the
international context. Chile has borders with three countries (Peru,
Bolivia and Argentina), but there is only one cross-border connection
that connects the SING and Argentina. This line, in service since 2016,
has mainly been used to export energy generated from NCRES con-
centrated in the Antofagasta region. To increase flexibility and end the
isolation of the system, it has been proposed to build interconnections
with the Andine Interconnexion Electrical system and with other South
American countries, particularly with the members of the South
American trade bloc MERCOSUR [32].
As in Germany, the electric system in Chile has been liberalized
since the 1980s, and the country is among the ten countries with the
largest amount of private investment in this sector [58]. In fact, a
combination of quotas for NCRES and technology-neutral auctions for
long-term power-purchase agreements has emerged in the last decade
as the key drivers to increase NCRES penetration rates, as they allow
securing investment returns. Under this scheme, the objectives of
NCRES penetration in the energy matrix have been achieved in a re-
latively short period of time. In 2004, and 2005, Ley Corta I (N°19.940)
[59] and Ley Corta II (N° 20.018) [60] entered into law, adopting for
the first time the definition and promotion of NCRS.3
In 2008, the NCRS
Law (No. 20.257) was promulgated [61]. This law introduced a quota
system, which obliged companies that withdrew energy from electric
systems and with installed capacity greater than 200 MW to ensure that
at least 5% of that energy was generated by NCRSs. This percentage was
expected to increase by 0.5% every year from 2015 and reach 10% in
2024. Subsequently, in 2013, NCRS Law 20.257 was modified, with the
aim of 20% of the energy withdrawals being provided by NCRSs in the
year 2025 [62]. As a result of the reforms introduced and the large
renewable potential, in March 2018, the installed capacity of the Chi-
lean electrical systems reached 22,517 MW, of which 4119 MW corre-
sponded to NCRS. Of this 1837 MW corresponded to PV, and 1305 MW
corresponded to wind systems, which helped to reduce the costs of
electricity supply in Chile. Finally, new NCRS installations are currently
under development, and more projects are already planned. The pro-
jects under construction and in testing phases account for approxi-
mately 1125 MW of PV and wind energy, which may be complemented
with another 25,017 MW from projects that have already received the
compulsory environmental certification [21].
The high NCRS growth forecast in Chile are possible thanks to the
great potential it offers and to government engagement to modernize
the energy system. Nevertheless, the increasing share of NCRSs is lim-
ited to the capacity to accommodate it. One of the main challenges
faced by variable NCRES integration in Chile is the need for greater
flexibility due to their intermittency, including not only the capacity to
balance the market in a timely manner but also the development of new
transmission and distribution network infrastructure capable of trans-
porting energy from surplus zones to deficit zones. Fig. 3 shows the
timeline of the Chilean legislative framework and the main measures
analyzed in the next two sections. The renewable energy policy efforts
of the last two decades can be happened in two phases. The first focused
on measures to enable and facilitate the use of NCRSs in the country.
This phase included education and promotion measures, the creation of
a more solid regulatory framework for transmission and simplification
of the NCRES commercialization processes. Then, in the second phase,
starting with the Energía 2050 agenda and the new transmission system
law, efforts have been oriented to modernize the regulatory framework
and propose long-term goals for a more sustainable system, im-
plementing, for example, the participation of energy storage systems
and opening the door for the incorporation of DSM in the AS; in par-
allel, programs to promote EE continue to be developed, and the po-
licies implemented in the first stage continue to be developed.
4.1. Energy efficiency: the lack of authority
To reduce the energy needs of the country, Chile made substantial
improvements in its EE policy during the last decade in the residential
and commercial sectors. This has been achieved thanks to the im-
plementation of regulations on energy labels, codes and standards for
buildings, appliances and equipment. The starting point for the Chilean
energy transition coincides with the energy crisis caused by a combi-
nation of factors around the year 2008, when Chile decided to create a
specific Ministry for Energy. Since then, the country has advanced in
the development of EE measures through the establishment of the
AChEE. This agency has developed specific programs for both private
and public users. These programs are mainly implemented as part of the
2010 National Energy Efficiency Action Plan 2020 (PAEE20), which
established the roadmap for EE in industry by means of the following
specific measures: promotion of the implementation of EnMS, promo-
tion and encouragement of CHP, promotion of technical assistance to
EE projects, and integration of EE technologies. Nevertheless, no major
DSM programs are currently in place in Chile, and there is little pro-
gress in terms of EE and DR in the industrial sector. The country is
therefore at a critical stage of development in the integration of DSM
services into the market.
In 2012, the National Energy Strategy 2012–2030 was published,
which is a government initiative proposing long-term energy policy
solutions. This initiative incorporated for the first time specific mea-
sures to reach the 12% reduction targets for 2020 and includes diverse
concrete programs, such as the so-called “Fostering CHP program”,
which was designed to increase efficient CHP use in the country, an on-
site power generation technology widely adopted in Germany. This
program has as its main mechanisms the funding of pilot projects, the
development of project feasibility studies and the raising awareness of
CHP. The advances in CHP include a new regulation enforced in 2015
that establishes the requirements to classify CHP plants as efficient CHP
plants. The latter are defined as those plants that produce heat and
electricity in a single process and for which the capacity to inject power
is less than 20 MW [63]. The regulation rewards the owners of these
CHP systems with favorable conditions, priority to dispatch electricity
surplus and exemption of payments for the transmission system.
To increase awareness and foster EnMSs, in 2013, the AChEE in-
troduced the Energy Efficiency Seal. Participation in the program is
voluntary and aimed to recognize enterprises that established an EE
policy through initiatives and targets. In 2017, the Ministry launched a
more ambitious package of actions, including a reconfiguration of the
Seal into three categories, special credit lines for EE projects directed at
SMEs, the co-financing of ISO 50001, and the co-financing of energy
audits and EnMSs. All these policies are based on voluntary participa-
tion, and their impact has been low, as evidenced by the limited impact
on the energy intensity of the economy, which remained at 0.10 toe/
3
The NCRES under the Chilean law are biomass, hydroelectric power with
installed capacity less than 20 MW, geothermal, solar, wind, and tidal power.
18

USD in the period of 2007–2015 [58].
A closer look at the policies explains the lack of engagement in these
voluntary programs during the period of 2010-2017. For example, the
Energy Efficiency Seal programs offer limited advantages to the parti-
cipants. In its highest category (Gold), it grants a trophy and diploma,
dissemination of the case in seminars and the license to use the Energy
Efficiency Seal. A new configuration of DSM policies is now in devel-
opment and will have as its main challenge the facilitation of partici-
pation. These policies will be framed in the context of Energía 2050
[32], a new roadmap published in 2015 by the Ministry of Energy. With
the aim of ensuring the security and quality of supply, Energía 2050
proposes decentralization of generation and active demand manage-
ment. Along the same lines, Energía 2050 sets as a target exploiting the
full potential of DSM, whereas by 2035, the electrical system should be
equipped with all the ICT requirements necessary to manage all energy
flows at the generation, transmission and distribution levels. The first
step might be to develop implicit DR based on price signals, those
mechanisms have not yet been applied; however, all policies are aiming
to have an adequate system to enable it in the next decades.
4.2. Demand response: the importance of the first steps
In the actual configuration of the Chilean market and according to
the German experience, there are three possible markets for in-
corporating DR: the capacity market, the spot market and the balancing
market. The first two are currently designed to only allow the partici-
pation of generators. Operations related to the balancing matters take
place with AS with mainly reactive or active reserve capacities. AS are
at least the: Primary Frequency Control, Secondary Frequency Control,
Tertiary Frequency Control, Interruptible Loads, Fast Frequency
Control, Automatic Load Disconnection and Manual Load
Disconnection. These control mechanisms are defined and assigned
annually by the electric system operator and the CNE and are mainly
provided by generators, although distributors may also be given the
concession. In all these mechanisms, providers face a penalty if they
cannot fulfill the contracted obligations [64].
Demand aggregation to integrate the technical resources for the
operation and flexibility of the electric system has not yet been devel-
oped because of the actual configuration of the market, in which con-
sumers are divided between regulated and free customers. The latter
are large energy customers, with a demand that accounts for almost half
of the total country’s electricity demand [65]. Due to their consumption
profiles, free clients are allowed to establish long-term supply contracts
directly with generators. The potential of participation of the industry
and other large electricity consumers in explicit DR through ag-
gregators in Chile is linked to the existence of open balancing markets
and other AS for them, which are currently inexistent.
This configuration shows that market design has been focused on
the supply side and the importance of having a market structure or-
iented to the integration of the demand. Nevertheless, the beginning of
a new paradigm emerged in 2016, where the transmission segment was
situated at the core of the electrical system configuration. The law for
the establishment of a new electric transmission system and the crea-
tion of a new independent coordination body for the national electric
system may open the possibility to integrate the role of aggregators (Ley
N° 20.936) [66]. The new legislation prompted the creation of a new
regulatory framework for the customers that offers technical resources
to the AS with the aim of improving the security of the system. In ad-
dition, the role of energy storage systems was officially defined for the
first time. This reform therefore allows the possibility of incorporating
new sources of flexibility into the system via installation of energy
storage facilities, thus paving the way for the development of future
business models based on the installation of storage systems via third
parties. Nevertheless, they have not been directly considered or fore-
seen.
Currently, it is expected that a new regulation regarding AS that
complements the Ley N° 20.936 will enter into law, which should de-
termine the capacity and terms that final clients can provide associated
with increases or reduction of demand, as is already the case in
Germany. It will complement the Ley N° 20.936, from 2016, that al-
ready established the criteria and methodological aspects in the de-
velopment of the transmission and distribution system. These changes
are needed to establish new DR programs and ensure the quality of lines
and substations. Although there are no studies regarding the technical
potential contribution of final customers to such a DSM mechanism, the
free clients have declared the availability of at least 739 MW of inter-
ruptible loads, whereas the regulated customers account for 950 MW, a
figure very close to the current size of the German AbLav Market for
Interruptible Loads. Nevertheless, these figures may increase as long as
a significant number of clients are still not included in the database of
Fig. 3. DSM in Chile: main policies and measures overview for the period of2007–2050.
19

the National Electrical Coordinator [67].
4.3. Demand response: opportunities, potential benefits and DSM measures
implemented in Chile
As highlighted in Sections 2 and 3, there are two key instruments to
disseminate and incorporate DR into the industry: demand aggregation
and implementation of EnMS. In Chile, the AChEE has a dedicated
program to support analyses and implementation plans for EnMSs
based on the ISO 50001 standard, support during the certification
process, and monitoring of energy performance operation and impact of
the EnMSs. By April 2017, 27 enterprises with more than 50 industrial
installations had a certified ISO 50001 system. As the ISO 50001 cer-
tification program started in 2012, the success of the policy is relatively
modest, most likely due to the lack of ambition of the program. Until
2018, the three sectors with the highest annual gains derived from the
ISO 50001 certification are the metal manufacturing industry (12.5%),
the water, electricity and gas distribution sector (8.9%), and the mines,
quarries and oil sector (5.4%) [68].
Regarding demand aggregation, it does not exist as it is conceived
by DR in Germany, but there was a first experience from 2014 to 2017,
when 13 free clients aggregated their demand in the Bio-Bio region with
the aim of reducing electricity prices between free clients and gen-
erators. The participants achieved a 40% reduction in their electricity
bills, with 46 generation companies participating in the tender and
offering more than 12 times the energy required [69]. As the electricity
demand from free consumers was 49% of the total in 2016, there was a
large amount of room for maneuvering to continue replicating demand
aggregation exercises in industry, which would enable learning more
about individual consumption patterns and further developing ag-
gregation programs in the industrial sector. Both experiences, the im-
plementation of EnMSs and demand aggregation exercises- made pro-
gress in the development of an adequate system and market to
implement DSM in the Chilean industrial sector and, at the same time,
demonstrated opportunities.
An important market-based policy is the Net Billing Law (20.571)
published in 2014, which opened the possibility for those consumers
that produce energy in the residential sector to sell energy to the grid.
In March 2018, there were 2285 installations of Net Billing systems
throughout Chile, which totaled 14,524 kW of capacity [70]. The
quantity doubled in one year, in march 2017 there were 921 installa-
tions with a total capacity of 6576 kW [71]. These numbers show both
the potential for DR mechanisms and the risk of congestion on the
electricity network. The restructuring and modernization of the trans-
mission and distribution network will be of paramount importance and
will prove the effectiveness of the new Transmission Law. A regulation
is expected that will offer an opportunity to promote and set up an AS
market which is open to the demand side. For that, the new framework
for AS (in progress) should define how the participation of aggregators
and the storage systems [72] will be structured.
5. Discussion
Following the categorization depicted in Fig. 1, the analysis of the
German and Chilean policy effort reveals a mix of successes and fail-
ures. These experiences show a number of common characteristics that
strongly influence the success of DSM policy development and im-
plementation related to the four policy key areas presented in Fig. 1:
market regulation, simplification of participation, DR market design
and the study of the potential for the calibration of voluntary/manda-
tory programs. To achieve these, following Stone [73], this study bor-
rows the concept of ‘negative lesson-drawing’, which embraces learning
not just “what to do” but “what not to do” based on the results of both
the German and Chilean experience. This concept has been barely
discussed and inadequately addressed in the literature on transfer
processes. The negative lesson-drawing concept is very interesting for
the energy transitions literature, especially for countries in different
states of the energy transitions that are considering market transfor-
mations that may impact the long-term pace of the transformation and
has also been applied by Grubler [25]. Moreover, to account for the
necessary alignment of policies, the coherence and consistency among
the policy and objectives is also analyzed, and the main challenges for
the future are highlighted.
5.1. Market regulation
It is commonly accepted that to realize the full potential of DR,
wholesale energy markets should be opened to the demand side, in-
cluding creating new markets for AS, which also applies to the case of
Chile, but liberalization is not the only requirement. In Germany, where
balance markets are open to DR, participation in DR shows that the
current regulatory framework only offers limited benefits to partici-
pants, and price signals that reveal the value of flexibility for the energy
system are also needed (e.g., see [74]). To increase the effectiveness of
market-based instruments, policy-makers in Chile must introduce reg-
ulation designed to avoid distortions to competition and increase par-
ticipation. For example, regarding grid regulation, it is especially re-
levant to set specific grid charges to increase grid expansion and
facilitate DR entering AS markets. To that end, transparency and in-
clusion of investment costs in grid charges can improve the investment
environment. Among other solutions, Eid et al. [75] recommend a price
structure formed by “permanent” signals for capital cost categories and
“transient” signals for operational distribution and energy costs.
Moreover, to increase investments and reduce uncertainty, the in-
centives can be set ex ante rather than tied to real-time costs (through,
for example, a TOU price). In that manner, DR in Chile can be in-
centivized to participate in the accomplishment of long-term objectives
associated with generation and grid capacity constraints [76].
As the introduction of DSM challenges the architecture of energy
systems, it also requires a high degree of liberalization of the retail
sector. In the generation sector, the Chilean and German cases de-
monstrate the advantages of unbundling the grid from generation and
distribution. Nevertheless, at the retail level, there are differences be-
tween the two countries; importantly, in Chile, the distribution sector is
not open to competition. This difference may affect the deployment of
smart technologies to improve the flexibility in electricity pricing with
dynamic pricing policies, as the electricity market may be dominated by
retailers with dominant market positions [6]. Distribution sector lib-
eralization is not an imperative for the implementation of DR in the
Chilean industry because many industrial customers are free clients.
Nevertheless, the German experience shows that as AS are currently
offered only by distribution system operators, restructuring of the dis-
tribution and AS markets is desirable to increase DR penetration and
develop new business models as aggregators [6,76,77] .
The independent aggregators analyzed in the German case could
increase competition in the Chilean market. Nevertheless, the lack of a
clear framework that regulates the role of aggregators and the re-
lationships between aggregators, the provider responsible for the bal-
ance service and energy suppliers, makes aggregator business models
very difficult to implement even in Germany. De Zotti et al. [78]
identified three alternatives proposed in the recent literature that seek
to improve and address the problems associated with aggregators and
AS. These are Transactive Energy (TE), peer-to-peer (P2P) networks and
the control-based approach (CBA). TE proposes a market-based solution
for the administration of small distributed energy resources, storage
services and other frequency reserves at the distribution level. P2P is an
emerging model based on the collaborative economy that allows agents
to directly market their resources without the intervention of the
system operator. Finally, CBA considers the grouping of "prosumers"
through sub aggregators, who offer resources to an "aggregator" (an
independent entity that coordinates the frequency reserves with the
wholesale energy market). In addition, De Zotti et al. [78] propose a
20

new mechanism called Ancillary Services 4.0, which is based on two
basic principles: first, each "prosumer" is controlled by a small local
administrator, and second, the handling of the operation problems of
the of the system occurs in a disaggregated manner in terms of time
spans. The German experience shows that business models based on
CBA or Ancillary Services 4.0 aggregators with a combined role could
be more compatible with the design of the Chilean market, for example,
by allowing distribution companies to act as aggregators and having
responsible for the balance service. This may require that the regula-
tions for free clients be modified, taking power away from the gen-
eration companies.
5.2. Simplification and facilitation of participation
Despite all the reported progress regarding EE, a modern regulatory
framework that promotes and encourages the application of broader
DSM policies is still needed in Chile, especially in the EII. It is also
necessary to establish incentives, duties and exemplary sanctions for
those who do not comply with these measures. A high number of
companies with high DR potential do not participate in voluntary DSM
programs due to their worries about the technical risks associated with
a disruption in production [79]. Information campaigns and voluntary
programs, such as the ISO 50001 certification, can increase their in-
volvement thus affecting decision-making processes and facilitating
sustainable long-term business trajectories. As highlighted above, one
of the basic requirements to make use of DR is the installation of smart
meters and data collection systems. The German case reveals the ad-
vantages of combining voluntary and mandatory programs, as exten-
sions of up to 99% of the taxes related to energy consumption were
implemented targeting SMEs, with the aim of increasing the number of
certifications and potential DR users [52].
The importance of the combination of mandatory and voluntary
policies devoted to incentives has been recently recognized by the
Chilean authorities, and as a result, currently, a new AChEE program to
finance ISO 50001 certifications for large electricity customers is in
effect. The program is voluntary and designed has the objective of in-
creasing the number of participants through the engagement of the
certifying enterprises. To that end, the regulation stipulates that 70% of
the costs linked to the certification activity should be paid directly to
the certifiers, thus increasing the certifiers’ incentives to actively in-
volve new potential customers [80]. Moreover, the Energy Efficiency
Law, an initiative that was entered in the Senate of the Republic on
September 03, 2018, is expected to impose mandatory audits or ISO
50001 certifications on large energy consumers (EIIs with final con-
sumption of greater than 50 tera-calories per year) [72].
The challenge for further DR policies is immense, given that there is
a lack of a market that clearly allows final customers to lend their
technical resources to support the balance of the system. Along this line,
a fundamental aspect is the entry into law of the new regulation asso-
ciated with ASs, which should include end customers in this matter. The
German experience demonstrates that these laws should set sufficient
incentives to compensate participants for being available to reduce or
increase their loads. Naturally, this would contribute to the opening of a
new market in which the operation of new aggregating agents could
facilitate the task. A similar issue occurs with the storage systems and
the future enforcement of the regulation associated with operation of
the national electric system, an instrument that should articulate a new
framework for the operation of storage systems. Until the im-
plementation of these new laws, the challenge ahead for Chile is to
build up DR capacity to increase future participation.
As the German experience shows, after having solved the regulatory
barriers to entering the market, DR providers such as aggregators may
face further difficulties in participating in balancing markets due to
barriers to technical optimization and remuneration. Borne et al. [81]
have evaluated such barriers for four countries, (Denmark, Germany,
France and the United Kingdom) and determined that there is no
solution that fits everyone and that there are still multiple measures to
be taken to facilitate participation of aggregators. In general, appro-
priate participation conditions for aggregators are guaranteed if inter-
operability among DSOs is provided and telemetry is possible (the ag-
gregators can combine bids and power flows. It allows them to manage
and optimize the dispatching). Furthermore, modifications of the rules
defining the products in the market, such as reductions of the minimum
bid, auctions held daily, and flexible definition of delivery periods, will
broaden the spectrum of participants in the markets.
5.3. DR market design
To overcome the challenges imposed by the Chilean electricity
sector, among the lessons that can be learned from the German case is
the need for a regulatory framework that allows the participation of all
industrial consumers that can implement DSM, with clear rules and real
incentives, either directly or through third parties. The German case
shows that is not enough to have markets with the option for the in-
dustries offering their DSM potential, but rather it is necessary that
these markets have space for industries whose main business is not the
generation of energy. The spot market and the reserve market were
created with energy generating companies in mind, and if a process of
accompaniment to the productive industry is not performed, it cannot
be expected that these companies will decide to participate massively in
these markets. Laxer rules for the productive industry will allow it to
offer its DR potential during the process of transition to greater pene-
tration of NCRSs, not just a few decades later, when conventional power
generation plants are decommissioned.
The creation of a market for peer competition, such as the one
created by AbLaV in Germany, would be an important step to bring the
DSM potential of the Chilean industry to the electricity system.
However, if it is expected to conceive of such a market, it is important
to think about rules that allow productive industries with high DSM
potentials to participate, not only a few large industries. A proper de-
sign for this market requires detailed studies of technical aspects of the
industries because these can vary considerably depending on the
equipment used and the processes that are conducted. These differences
include the level of reduction of the minimum load, the frequency of the
calls for bids and the minimum requirements for connection to the
network. With the aim of adapting the legislative framework to the
reality of the Chilean economy, shorter periods of review of regulations
are also needed (in the German case, it took 4 years to correct a norm
that was not producing any results), and in general, it must be de-
monstrated that this truly offers better alternatives than the tertiary
reserves market. If these conditions do not exist, it would be worth
concentrating on a reserve market that is more binding for the pro-
ductive industry.
In the case of regulated customers, it is imperative to modify the
way the payments to the distribution enterprises are determined.
Currently, they receive more money if they sell more energy; thus, they
will promote neither EE nor DSM. Thus, a new framework must in-
corporate an EE component when determining the payments to the
distribution enterprises, such as the CCTP proposed in 2011.
Finally, based on the European experience, it is still not clear which
is the best remuneration scheme to motivate the participation of ag-
gregators and that is beneficial for the entire electrical system. Borne
et al. [81] identified three possible schemes. First regulated tariffs
where the selection of providers is made based on an administrative
rule that does not necessarily consider the market value of electricity
generation. Under this scheme, it is difficult for the regulator to know
what the costs of the reserve providers are because there are no in-
centives for the providers to reveal them. Second, the paid-as-bid
scheme where providers make a bid and expect it to be low enough so
that their service is contracted and high enough to maximize their
revenues. In this case, older market players have an advantage in set-
ting their optimal bid, while new players, such as aggregators, have
21

higher risk setting bids. These might be too high and leave them out of
the market or two low so that they lose potential revenue. The latter
contributes, however, to decrease the total costs for the entire electrical
system. Third is uniform pricing. In this case, every accepted bidder is
remunerated at the price of the highest bid. This generates incentives
for providers to make bids close to their marginal costs, but it is a
scheme sensitive to strategic gaming, such as capacity retention. Based
on the experiences in the four countries, pay-as-bid is a better option
than regulated tariffs to increase the participation of aggregators, and
uniform pricing seems to be the best alternative to motivate balancing
capacity providers to make bids closer to their marginal costs, which is
beneficial for the whole electrical system. Considering the historical
Chilean market development analyzed historically and the current
context characterized by a decline in electricity prices, it is possible that
the uniform pricing would be the more attractive option for the
country.
5.4. Potential
The development of a DR policy strategy also requires research in-
vestments. In Germany, the preference given to EE programs is reflected
in the considerable literature regarding demand reduction both at the
sectoral and national levels [82,83]. In the case of DR, the number of
available studies is significantly lower, with most of them focusing on
the potential for Germany [84–86], and only few studies evaluating
German DR policy strategies [20,87]. Imperative is the development of
robust evidence-based studies for participation potential in different DR
strategies. In Chile, there are no public studies regarding DR potential,
which contrasts with Germany, where in recent years, both in-
dependent research and funded projects have analyzed the DR potential
at the regional and national levels. Due to advancements in data
availability and system modeling, current research in Germany includes
DR potential forecasts depending on weather conditions and time of day
[88]. In a context determined by the effects of climate change and fast
technological transformation, studies of DR potential in Chile are
needed to evaluate under which conditions particular technologies
would participate in DR programs and how to maximize the partici-
pation potential. Moreover, such studies allow identification of the
most appropriate market design and financial policies and anticipation
of the impact of DR on the system. Moreover, it is necessary to assess
whether the current tender system for large customers may impact fu-
ture DR programs and market competition. Under its current config-
uration, the tenders lock distribution companies into long-term con-
tracts and deter competition thus excluding consumer choice and
hindering competition for additional services by retailers. Im-
plementing this market design can be justified from the security of
supply perspective in the short and medium term, but they may affect
the resilience of the system in the long term.
As occurred in the German case, the implementation of EnMSs, such
as ISO 50001, in energy-intensive industries would allow obtaining a
valuable input to estimate the potential of DSM in Chile, at least in the
industry sector. In this sense, the Energy Efficiency Law could con-
tribute in two aspects. The first is to mandate the use of EnMSs for
companies that consume more than 50 tera-calories. Second, it is ne-
cessary to impose annual reporting obligations regarding consumption,
opportunities and EE measures to the Ministry of Energy and the
Superintendence of Electricity and Fuels. Together, these measures
would enable generating a public database to estimate the DSM po-
tential in the industry sector. Moreover, these studies can serve as a
basis for future research regarding not only the characterization of
demand and evaluation of potentials but also the potential for the de-
ployment of ICT, a fundamental tool to pave the way for full use of DR
in the Chilean industry. For that, it is necessary to remove the barriers
to develop successful management structures including continuous
operational and financial support in public funded current CHP projects
[89].
5.5. Consistency, coherence, and credibility
In general, all the actors involved in the energy sector agree that
Chile has experienced a revolution during the last decade and this has
been evidenced by the permanent adjustments that the regulatory fra-
mework has undergone, in addition to the elaboration of new energy
policies, especially regarding variable NCRES deployment.
Nevertheless, cutting edge technological advances and recent global
energy market alterations have rendered the legislative and regulatory
processes of the Chilean energy sector indefinitely delayed. In parti-
cular, long discussions and delayed execution and entry into law pre-
vent the regulatory framework from adapting to current and expected
changes in the global energy market, advanced technology, and even
climatic conditions. Thus, regulatory barriers are one of the most im-
portant obstacles to energy system transformation [81].
This permanent delay and long regulatory processes generate un-
certainty, thereby affecting the credibility and commitment of the
government to adopt sound DSM programs [90]. As in the German case,
in Chile, since 2007, the emphasis has been placed on providing a
framework that allows the incorporation of NCRES potential, and it has
been successful, but the concept of DSM has been almost absent. In the
German case, DR programs have only considered a real solution to
system flexibility after the announcement of Electricity Market 2.0. In
Chile, the process has been even slower, and although the revision of
the energy policy of 2008 emphasizes the need to promote EE, prior to
2010, institutions that allowed executing new DSM programs had not
been created. Only in 2015 were clear long-term DSM goals set. Re-
garding DR policies, only the Transmission Law of 2016 incorporates a
definition of storage systems and contemplates a new regulation for AS.
With this law, the opening of a new market for all final customers is
expected to provide their facilities for the balancing and operation of
the system, but the law does not explicitly address it.
Coherence and consistency of policy making and implementation
shape companies’ perceptions of policy credibility [91,92]. A study
related to DR implementation demonstrated that “credibility is fragile”,
which means that it is difficult to generate credibility, and once gen-
erated, credibility is very easy to lose. Compared to Germany, where
many institutions are involved, and DSM programs have followed
variable NCRES deployment, Chile exhibits an inconsistent DSM policy
path with respect to its interests in modernizing the energy system. The
main DSM policies are not successful due to the lack of incentives to
participate [93], which may be caused by a lack of credibility. The new
envisaged reforms should have as their main aims integration of DSM
policies and increasing the consistency of the regulatory framework.
For this purpose, a major turning point for Chile will be the im-
plementation of the Energy Efficiency Law, which calls for the energy-
intensive sector to implement EnMS,4
and the new law regarding AS,
which is currently under discussion and should determine the capacity
and terms under which final clients can provide AS.
Finally, to increase the coherence and credibility of the programs,
political entities that articulate a common energy program for Latin
America are fundamental. Such institutions would contribute to over-
coming the lack of debate and to joining efforts towards energy systems
with higher flexibility. This would encourage greater incorporation of
NCRES and use of natural resources, and the elaboration of plans that
urge the different countries to implement EE measures, among other
initiatives. The case of Germany and the European Union is a clear
example that demonstrates that the presence of a supranational orga-
nization that leads the processes of modernization and implementation
of policies is an essential issue. Germany not only ascribes to the
4
A total of 130 EII firms represent more than 30% of the country's total en-
ergy consumption, according to Balance Sheet Energy 2015, and have the
technical and economic capacity to manage the efficient use of energy sources
[81].
22

policies of the European Union but also makes them its own and in-
ternalizes them in its own regulatory framework. This point has been a
core issue in the implementation of DSM, as happened with the direc-
tives 2009/72/EC [42] and 2012/27/EU [43].
5.6. Chile: challenges and a proposal to the future
The main challenges to the implementation of DSM in Chile are
related to three areas: education, adaptation of the regulatory frame-
work and the development of financial and market-based incentives. In
general, it is important that the industry conceives EE as a benefit to the
production process, especially the largest energy consumers, such as the
mining and chemical industries. Once the most cost-effective solution to
decrease energy consumption has been implemented, it might be pos-
sible to explore new business opportunities associated with DR in the
different energy markets. This point is of paramount importance. Even
in the presence of well-designed DR mechanisms, the final consumer
will always be more prone to implement EE measures, that in many
cases are simpler, require lower investments and are more cost effective
than DR.
Regarding the adaptation of the regulatory framework, the main
challenge is the creation of a framework for EE combining both in-
centives and obligations and the opening of the markets for the parti-
cipation in the demand side (at least in the balance market). This will
imply a profound change in the energy market conception as so far, the
liberal approach that dominates the implementation of EE and DR po-
licies has led to a framework where mostly voluntary policies have been
implemented. The new framework will therefore imply an increase
authority, in line with the transmission law of 2016.
The third topic covers the promotion and incentivization of EnMS,
EE and modernization of energy systems. The German experience
shows again that combining both incentives and obligations may be a
first step is in implementing EnMS. In Chile, it can be applied through a
national plan, by mandatory policies or by offering incentives, and the
current context indicates that EE Law will be the way to drive it. That
would allow evaluating the incorporation of industrial sector in implicit
DR, and at the same time, how energy consumers might offer their
resources in a new balancing market. A second step is the creation of a
balancing market open to DSM. It is expected that such a market will be
included in the forthcoming framework for AS, which will enter into
law within the next years. In this sense, the incorporation of a market
with the characteristics of the AbLaV or the current configuration of the
tertiary control reserve would be a good way to start too.
6. Conclusions
As the dramatic ascent of oil at the start of the previous century can
also be interpreted as a series of small nonlinear changes, the trans-
formation to low carbon energy systems based on NCRES can be in-
terpreted as a series of smaller changes, including DSM policies. This
study analyzed the role that DSM plays in the transitions to low carbon
energy systems from the perspective of two countries in a different
phase of the energy transition. This study reviews the historical de-
velopment and basic concepts of DSM, presenting the regulatory and
organizational advances of the markets in terms of DR in Germany and
Chile. The comparative analysis highlights the challenges of integrating
an increasing amount of NCRSs, self-consumption and loading of ve-
hicles. The ability of both systems to adapt to new challenges involves
the development of demand management systems that reduce the in-
flexibility of the system, thus increasing the levels of efficiency and
competitiveness. A review of the successes and failures of the German
experience shows the potential of DSM and how it is essential to un-
derstand the nature of the challenges.
After analyzing the integration of DSM in the industry, the existing
difficulties in fitting the wide potential of DSM in both the Chilean and
German markets are evident. DR development in Germany has been
shaped by the regulatory framework and practical approaches for
EnMSs. The absence of a true regulation that allows not only the par-
ticipation of industries with DR potential but also the ability to establish
rules and mechanisms that integrate the specific characteristics of these
has been revealed as the main barrier to DR development. Additionally,
the analysis of the German case shows the need to reduce the com-
plexity of the regulatory framework with the aim of facilitating the
entry of new actors that stimulate the market, either directly or through
third parties. The German experience reveals that DR in Chile can only
take off if two conditions are satisfied: first, there should be a clear state
policy and regulation enabling DR for potential participants with
variable technological characteristics, and second, markets should be
able to provide an environment that fosters competition between tra-
ditional generators and productive industries, aiming at offering flex-
ibility capacities for the electric system.
The German case shows the potential risk that poor policy im-
plementation can have in both the short and long terms and the im-
portance of combining DR with EE policies. Due to the complexity of
DR mechanisms, the creation of credible policies that foster the en-
gagement of different actors in energy systems is especially important.
In this regard, the capacity of new legislation to engage key players in
generation transmission and distribution sectors will play a key role in
avoiding the existence of trade-offs among investment opportunities
and market solutions. A critical first step in the formulation of DR po-
licies is a detailed examination of the compatibility between planned
market mechanisms and incentives and the technical and economic
feasibility of DR at the company level. This step will avoid wasting time
and resources in implementing unsuccessful policies. Moreover, the
creation of legal mechanisms capable of adapting the certification
procedures and the technical regulations for new technologies and
business model integration is essential, as the transition to digitalized
energy systems is based on ICT, some of which is still in development.
Finally, for this change to be possible, it is important that the aca-
demic community also contributes concrete figures regarding the DSM
potential of industry in the Chilean case. Academics can also contribute
by identifying the incentives necessary for the national productive in-
dustry to be linked to the AS market or by developing an adaptation of
the German AbLaV, which could be implemented in Chile. Additionally,
it is important to aid industry so that it understands the advantages of
offering its DSM potential and to encourages industry to offer this
through aggregators.
Acknowledgement
The study was conducted within the project INCREASE “Increasing
renewable energy penetration in industrial production and grid in-
tegration through optimized CHP energy dispatch scheduling and de-
mand side management” (grant number BMBF150075) funded by the
German Federal Ministry of Education and Research (BMBF) and the
Chilean National Commission for Scientific Research and Technology
(CONICYT).
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