Right now, energy system costs are driven by generation capacity, infrastructure upgrades, network reinforcements, curtailment and constraint payments, and imbalance costs. What’s missing is the investment in a raft of demand side management assets that are ready to go but are not part of the market, therefore not rewarded, and therefore not being invested in. Laura Sandys at Energy Systems Catapult, writing for WEF, explains why flexibility must be recognised for the positive impact it has on the whole system. The first step must therefore be the creation of all-encompassing whole system costings. Done right, it will attract investment into demand side assets, reduce whole system costs, and delivery resilience and stability. The overwhelming focus on supply must end, says Sandys. Buildings efficiency, behind-the-meter storage, and EV battery storage are just some of the solutions that urgently need policy focus and integration into the market price.
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- The current energy crisis is focused on supply and overlooks the critical role demand-side actions can play in adding value to the energy system.
- Harnessing the true value of demand can improve system flexibility and reliability, energy security and resiliency, and reward consumers.
- Policymakers need to adopt whole system costs that balance supply and demand when it comes to planning and investment in energy transition.
With global focus on energy security and some ambitious and exciting strategies emerging across the world on how to increase the supply of energy, primarily through renewable investment, we must not forget that demand-side measures and storage assets could also provide energy security and improve system resiliency.
Led by the World Economic Forum, Accenture and Challenging Ideas we hosted a top-level roundtable with representation from the private sector, government and academia to highlight the importance of demand actions and its value to the system. The seminar, stimulated by the World Economic Forum’s System value framework and some great modelling work ReCosting Energy have done with Frontier Economics to show how to optimise the whole system costs by unlocking value throughout the system, revealed that demand is equal to supply, not in scale but in value. Here are four key ways that demand-side actions can deliver value.
1. Secure energy system flexibility and reliability
The ReCosting Energy modelling informed us that demand actions and assets could improve system flexibility and reliability while simultaneously avoiding system upgrades. The weather doesn’t take price signals and with the very welcome proliferation of renewables planned for the energy system we need to ensure that markets value demand and storage as an integral part of the system stability planning.
The Electricity System Operator (ESO) and the Distribution Network Operators (DNOs) have been focusing very heavily on how to unlock flexibility throughout the system. However, the full value of flexibility is not recognised currently and is mainly rewarded through the arbitrage of the wholesale price. Using whole system costings, flexibility that will be crucial for the system to operate would be rewarded for the whole job that they are doing.
Providing flexibility and ancillary services to the energy system should be rewarded for the whole system value to unlock the investment required in providing stability.
2. Deliver energy security
Demand actions, assets and storage can also improve energy security, e.g. improving the efficiency standard of buildings will reduce the peaks, which would impact the capacity reserve calculation, adding behind-the-meter (BTM) batteries to residential homes and buildings could provide that same type of energy security that hospitals with back-up generators have. Similar to refrigeration in the food sector, demand and storage extends the life of every electron, ensuring that waste is reduced and can be ready to be utilised at times of need. Energy security is at its most vulnerable at peak times and the interventions of demand and storage can dampen the peak significantly and reduce overall costs to consumers. For example, by 2035 it is calculated that the number of electric vehicle (EV) car batteries on the energy system will be equivalent to two to three nuclear power stations – this is a “back-up” resource that needs to be recognized.
Therefore, demand side assets and actions must be seen as an integral part of the policy around energy security – and not left as an afterthought.
3. Reflect the true value of demand side assets and actions
With flexibility only being rewarded for the commodity cost arbitrage, the value of flexibility is not being adequately remunerated. With energy systems costs rising from network reinforcements, curtailment and constraint payments, and imbalance costs, flexibility needs to be recognised for the positive impact it has on the whole system. Appropriate whole system costings are not truly represented in the wholesale market or the balancing markets, while networks are not incentivised to enable greater deployment of demand side assets on their networks.
Without proper pricing of the energy system, we will end up with growing pockets of value locked between the current silo price and costing methodology. Additionally, when considering energy security or system resiliency investments (e.g. sizing the capacity reserve, other energy system restore measures), demand-side measures that would reduce peak demand or provide back-up power during unforeseen events should be equally considered.
Policy, investment and support mechanisms, and regulation must incorporate whole system costings as the norm to ensure that we are getting value for money from what is primarily a centrally procured set of investment mechanisms.
4. Reward consumers
Our new system must be designed around consumers’ needs. While weather is not flexible, consumers could be if the energy system is shaped around their requirements and capabilities. Through greater focus on demand-side assets and actions, and rewarding customers with the whole system cost reductions, policy and markets will deliver greater investment on the demand side while also reducing the costs for all voters, not just those that can behave flexibly.
ReCosting Energy modelling work with Frontier Economics shows very clearly that demand side assets have a significant impact on the whole energy system cost reductions for all of society – and the public purse. More directly by rewarding appropriately those that can use energy flexibly, greater investment will be unlocked on the demand side building greater overall system resilience and explicitly delivering a decarbonisation dividend to voters.
Policy, investment decisions and regulation must design their planning recognising that properly rewarded demand side assets on the energy system will deliver customer value and whole system cost reductions, benefiting all. In addition, the retail sector must be shaped around the potential role that customers can play and benefit from.
Energy transition needs to balance supply and demand
The overall message from the roundtable was that the energy system needs to adopt whole system costs as the base for its policy, planning and investment regimes, to deliver security, stability, cost reduction and consumer benefits. Voters must be confident that we are designing the energy system to drive out waste, and unlock flexibility and storage to ensure that every penny they are investing in the transition is appropriately allocated between supply and demand assets.
The UK government and the regulator are currently undertaking substantial market and retail reforms and it is crucial that the Cinderella of the sector is brought in as a central player in our new world of renewable energy.
The views expressed in this article are those of the authors alone and not the World Economic Forum.
This article is republished in accordance with the Creative Commons Attribution-Non Commercial-No Derivatives 4.0 International Public License