Flexible homes, smarter grid: How can demand response work in practice?

Demand response means adjusting when and how much we use electricity. Instead of consuming electricity whenever we need it, consumption is shifted to times when it is cheaper or when the grid needs it most.

This is particularly relevant for electrically heated homes, where space heating and domestic hot water typically make up roughly two-thirds of their electricity use. With automation, some of this consumption can be moved to cheaper hours without major investments or impacts on comfort. In practice, this might mean heating slightly earlier or storing heat for later use.

As more wind and solar power enter the energy system, this kind of flexibility becomes increasingly valuable. Renewable energy can lower average electricity prices, but because it depends on the weather, it also makes prices more volatile. Cold, still days can lead to high demand and low supply simultaneously, causing price spikes. Demand response helps smooth out these imbalances and generate cost savings for both consumers and the broader energy system.

For years, demand response has mainly been used by large industrial consumers. Now, attention is turning to households, where the combined potential is significant but still largely untapped.

One of the central questions is whether demand response should prioritise the individual household or the wider energy system. We investigated the pros and cons of these options in Finnish residential buildings in a recent VTT research study, part of the FlexiB project funded by the Research Council of Finland.

In a resident-focused approach, households optimise their electricity use based on day-ahead prices. This is relatively easy to implement with automated systems and can deliver clear savings.  However, if a large share of  households react to the same price signals, this can create new demand peaks and increase overall system costs. According to our models, a highly resident-focus optimised system may raise electricity peak prices to compensate the stress put on the system. This will consequently cause higher expenses to all consumers of electricity. 

A system-focused approach takes a broader view. Instead of following day-ahead price signals, consumption is continuously adjusted to the grid’s needs. This improves system efficiency and reduces peak prices, even when many households participate. The drawback is that it requires continuous interaction with the surrounding energy system and more advanced solutions, making it harder to implement in practice.

The study results show that a system-focused approach can deliver significantly greater overall savings for the energy system. Households still benefit, especially when participation levels are moderate. However, as more households join, the benefits for each decrease as the system's need for flexibility is shared between a larger pool of buildings.

While price-based demand response is attractive because of its simplicity, it also has clear limitations. As consumption responds to day-ahead prices, price forecasting becomes more difficult. Another challenge is that households may not be motivated to participate in demand response unless the economic savings are significant and the solutions easy to adopt. There are, however, possible solutions for alleviating these issues.

1. Smarter market access: We could allow households, or their automated systems, to participate more directly in short-term electricity markets, where prices update more frequently and reflect real-time conditions. This could better align household behaviour with system needs, but current market structures do not yet fully support this. Opening the participation to flexibility market provision, such as FinFlex, would be an important step forward to enhance home flexibility.
2. Aggregators as a middle layer: We can also start using so-called aggregators. These actors manage the flexibility of many households at once and optimise it for the market and the grid. Aggregators can also serve as governing bodies for household energy communities. For consumers, this means less effort, as the aggregator acts as a buffer between the homes and the wholesale market. However, relying on aggregators can also introduce additional costs and raise questions around autonomy and privacy
3. More flexibility per home: It would also be important to focus not just on the number of participating homes but also on the flexibility each home offers. The focus should be on buildings with good heat storage capacity, electric vehicles and other flexible loads that can significantly increase the overall impact.
4. Open source software solutions: To support households in managing their demand response, open source software solutions can lower costs and improve accessibility, making participation easier for a wider range of consumers. VTT is actively developing such tools to advance emerging demand response markets both in Finland and across the EU.

Ultimately, the goal is a system that benefits households by lowering costs while also supporting a more stable and efficient energy system.

For demand response to become widely adopted, it needs to be simple, affordable and reliable. Ideally, it should run automatically in the background, without requiring constant user attention. At the same time, it must respect comfort, privacy and individual preferences.