Supply-side solutions to grid stability are few in number, and expensive. More baseload generation, electricity networks, capacity markets that pay power plants all year round to be available for dispatch during a few peak hours. Demand-side solutions are usually smaller, and multitudinous: building fabric improvements, equipment upgrades, customer behaviour interventions, and more. So, for grid stability, the principle of “Efficiency First” – already embedded in EU Electricity Regulations – must be used to drive forward and expand the demand-side sector, say Filippos Anagnostopoulos at the IEECP and Samuel Thomas at RAP. They run through the issues, and make particular reference to innovative pay-for-performance efficiency programmes in the U.S., which they want to see in the EU. The authors warn efficiency solutions must be ramped up before they are crowded out by long-term investment in expensive and unnecessary supply-side measures, subsidised by consumers and taxpayers.

What if you, as an electricity consumer, could get compensated fairly for the energy you did not consume? In the U.S., participants in pay-for-performance schemes are being paid incentives to improve the energy efficiency of their buildings.

Driven by the limited capacity of electricity networks and a willingness to innovate in order to get better value for money for bill payers, energy efficiency measures are being mobilised in residential and commercial buildings to improve grid reliability. The Horizon 2020 SENSEI project is working to develop the pay-for-performance model in the EU.

The usual supply-side solutions aren’t enough

In Europe, as in the U.S., governments, energy regulators and system operators place considerable value on reliable and adequate supplies of electricity. Faced with the new, but manageable challenge posed by the growing penetration of variable renewable generation and the electrification of transport and heating, European governments have reached for the familiarity of the heavy artillery in the energy policy arsenal.

That has meant favouring a small set of options at the expense of more cost-effective solutions.  Witness the guaranteed electricity price of over 100 EUR/MWh given to the Hinkley Point nuclear reactor in the UK, the raft of capacity mechanisms springing up across Europe and the increased levels of investment needed in electricity networks.

To the extent that these interventions improve power system reliability, they do so almost exclusively through supply-side technologies and network infrastructure investments. A more sensible approach would better utilise more cost-effective opportunities presented by the demand side of the power system, including energy efficiency.

A reliance on the supply side sees us, the energy users, losing out twice: First we miss out on the opportunity of getting paid for the role we can play in ensuring a reliable power system; and second we all end up paying higher prices for policies that favour incumbents and exclude potential competitors.

Comparing supply- and demand-side solutions

Let’s compare the two approaches, that of supply-side and demand-side measures. A new nuclear power plant serves baseload demand; a portfolio of energy efficiency improvements reduces baseload demand.

A capacity mechanism pays power plants year-round to be available for dispatch during a few peak hours; efficiency improvements to building fabric and heating and cooling systems reduce peak consumption and are dispatched automatically.

Grid investments strengthen networks where they are under stress from new load; locally targeted energy efficiency actions reduce network stress and defer costly investments in wires and substations.

It becomes clear in each case that, from the electricity system’s perspective, both are meeting the same need. National regulators need to ensure that energy efficiency is able to compete on a level playing field for the provision of those services.

EU Electricity Regulation principle: Efficiency First

Energy efficiency of course will not solve the problems facing electricity systems on its own, but it can play a much bigger role than is currently the case. The principle of Efficiency First is already embedded in the Electricity Regulation, which establishes four important requirements.

First, capacity mechanisms are recognised as a second-best solution and market reform plans are required to phase them out. Oversupply in generation capacity crowds out more cost-effective demand-side measures that are ignored by, or excluded from, mechanisms designed around traditional supply-side solutions.

Second, where they exist, capacity mechanisms must be open to the participation of all resources that are capable of providing the required technical performance.

Third, transmission system operators are required to explore alternatives to system expansion; and fourth, distribution system operators are required to include the use of energy efficiency and other resources as an alternative to system expansion.

Change now, before long-term investments crowd out the alternatives

Job done then? Absolutely not. EU Electricity Regulation principles are one thing, but implementation at Member State level is another matter. Regulators and system operators can provide a huge service to the energy transition by changing their approach to electricity system planning. If cost-effective demand-side potential is not embedded in forward projections, it will be crowded out by long-term investment in expensive and unnecessary supply-side measures, subsidised by consumers and taxpayers where this is mandated by a capacity mechanism.

Energy Efficiency sector needs to change, too

Simultaneously, the energy efficiency industry needs to prove that it is capable of providing the required technical performance. That means delivering energy savings, when and where they are needed, with a high degree of certainty. That means a shift in mindset for many involved in buildings energy efficiency projects which, according to a special report of the EU Court of Auditors, are rarely driven by cost-effectiveness considerations. It means a movement away from simply paying for the installation of energy efficiency measures, regardless of the results. Instead, payment for performance is a results-based business.

Pay-for-performance, not just delivery

The pay-for-performance concept is being piloted in a number of locations in the U.S., as summarised in the recent publication of the Horizon 2020-funded project SENSEI. Take, for example, the District of Columbia, where the Sustainable Energy Utility runs a pay-for-performance programme for large commercial buildings. Rewards are provided to building owners, or their chosen third-party contractors, for the achievement of energy savings one year after the installation of measures.

Even more innovative, the pay-for-performance programme of PG&E — the largest Californian energy supplier — involves third-party aggregators for energy savings in homes. Aggregators can use behavioural interventions, equipment upgrades and building fabric improvements in whichever combination works most effectively and get paid on a monthly basis, based on savings measured and verified through SaaS, software as a service.

It is time for EU policymakers, regulators and utilities to pick up the baton from their U.S. peers and start piloting pay-for-performance schemes. Starting now will enable energy efficiency to reach its potential as a resource for grid stability in the energy transition.

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Filippos Anagnostopoulos is a senior associate at the Institute for European Energy and Climate Policy

Samuel Thomas is a senior advisor at RAP

This article was written for the European Council for an Energy Efficient Economy and is published with permission