The views expressed are those of the author and do not necessarily reflect the position of FORESIGHT Climate & Energy
Demand-side initiatives can strengthen the variety of grids that exist in our power system
The European Union has weathered the energy crisis by diversifying supply and reducing demand but also thanks to a very mild winter. If the warm temperatures may have saved us blackouts, they, unfortunately, did not spare businesses and families from crippling energy bills.
With spring arriving and gas reserves above 60%, the greatest risk is complacency, something the International Energy Agency’s Fatih Birol has repeatedly warned against. The energy crisis is not finished and we still have a long road to meet our 2030 and 2050 decarbonisation goals.
A well-designed electricity market design can accelerate the transition to the electrified, decarbonised, digitalised and decentralised energy system needed to achieve those objectives. Renewables offer us the opportunity to move from an energy trilemma to an energy trifecta (sustainable, resilient, and affordable) if—and only if—they are given the right supporting market.
Most important will be making space for demand-side flexibility. By matching renewable output, it makes end-users more efficient, reducing carbon emissions, reducing peak pressure and reducing the consumers’ bills
But the current energy system is still ill-equipped to do this. Tackling market volatility by crushing the number of hours when gas sets the marginal price will require quantitative and qualitative improvements.
On the quantitative side, we are overdue in the electrification of everything. To meet current objectives, Europe’s electrification rate must double by 2050 and Germany’s must quadruple by 2040.
Only 20% of today’s energy consumption is electrified. Another 30% is fossil-based despite being easy-to-electrify with mature technologies, such as heat pumps or electric vehicles (EVs).
On the qualitative side, we must promote smart energy assets such as combining renewables and flexibility. A home can have solar panels, heat pumps, battery storage, a bidirectional EV charger and a home management system. Uncoordinated, these strain the grid; coordinated, they strengthen it.
This combination of increased local generation capabilities with new and smart digital solutions can improve system efficiency and make a more resilient grid.
Signals for energy savings, energy efficiency and demand-side flexibility should be reinforced for the benefit of consumers. These signals should help consumers enter a virtuous circle: less energy consumed, more capacity to invest in energy savings or energy efficiency.
From this, there are several critical issues for a market redesign. Firstly, flexibility and demand response must be strongly facilitated. Securing supply goes through securing demand, be it load-shifting (flexibility) or load-shedding (efficiency). This means not just protecting consumers but empowering them.
Existing legislation such as the Clean Energy Package and the renewable energy directive (RED II) already laid down the essentials, but implementation is still lacking and could go further. Consumers must have the option to take advantage of demand response and must have the option for time-of-use tariffs.
Dedicated peak-shaving products seem like a useful addition to the toolbox. Much will depend on implementation as the current wording gives transmission operators a lot of leeway as to whether or not they actually use it. The Commission’s proposal on fixed tariffs could be better worded to ensure that it does not clash with the existing time-of-use tariff goal.
Grid operator incentives must be aligned with a smart transition. The current Capex remuneration model tilts operators towards more wires. An Opex-driven incentive would reward better planning, grid digitalisation and better management of local congestion.
Collective self-consumption must become a right. The current frameworks are tailored for tenants in the same buildings (“jointly acting self-consumers”) or for citizens coming together in largely a non-profit manner (“citizen and renewable energy communities”).
We welcome the Commission’s proposal to create a new right to energy sharing but do not understand why it was limited to households and small and medium enterprises.
The greatest growth potential is with commercial and industrial buildings seeking to decarbonise, secure their supply and make savings. Logistically speaking, in order to make a collective work, a portfolio of heterogenous prosumers is needed.
From an adoption perspective, large actors have greater capacity and greater responsibility to lead the way, to serve as the seed core around which their neighbours balance against before others join.
Next, flexibility by design must become systematic. This means massively deploying everything which enables flexibility: on-site solar, heat pumps, building management systems, energy management systems for industry and EV charging stations.
It also means deploying them with the right standards to interact with the overall energy system and with each other. If we do this, they will increase resilience both at end-use—for instance, monitoring temperature in homes this winter—and systemically. Longer term, we must dramatically increase storage capacity.
BALANCE OF SOLUTIONS
Meanwhile, long-term markets for renewables, such as the Commission’s proposal to support Power Purchase Agreements (PPAs), could help stabilise prices. This must not be done to the detriment of demand-side flexibility. Retailers offering fixed prices for the duration of a contract can still also offer time-of-use tariffs.
Guarantees of Origins (GOs) are essential to PPAs, in particular for consumers tracing the sustainability of their electricity production or as tools are set up to ensure a level-playing field of the carbon footprint of industries.
Finally, future subsidies must be conditioned on efforts to energy efficiency, especially for commercial and industrial customers. Members states have spent hundreds of billions of euros to subsidise energy consumption over the past year.
This is money which, instead of supporting the economies of third countries exporting energy to us, could be directed at increasing efficiency at the end-use level, such as support for heat pumps, renovations, energy management systems, etc.
While safeguards were put in place for the Commission’s new proposal for emergency measures, the benefits Member States may collect from Contracts for Difference (CfDs) must be redistributed in an unfair manner: proportional to kWh consumption.
This rewards energy consumption when we could be rewarding energy savings and ignores IEA and the IMF advice, which highlight that the wealthiest consume the most and therefore receive the most aid.
Looking to the future and future reforms, we should aim to help our energy system to rely more on “the grids”—plural. Industries, data centres and buildings will become their own microgrids and be far more resilient for it.
With the central grid providing backup and smoothing, each unit is capable of continuing normal operations even in the event of a catastrophic event elsewhere.
It is unclear today what precisely the path to that desired outcome looks like, but we can confidently say what the first steps are.
In the short term, it means facilitating the deployment of demand response, it means empowering distribution system operators and giving them more responsibilities, it means enabling collective self-consumption for the largest energy users, it means providing clearer market signals for energy efficiency, and it means promoting devices with flexibility designed into them.
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Consumers can play a significant role in the energy transition as distributed energy resources and the electrification of heating and transport increase on the system, says Zsuzsanna Pató from the Regulatory Assistance Project
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CASE STUDY: A new market service rolled out by the UK's electricity network operator in autumn 2020 invites fast-response injections of power or withdrawals of load from generators, electricity storage owners and consumers to help it contain frequency deviations that would otherwise destabilise the power system
With REPowerEU underway, Europe’s energy and climate strategy demands a rapid change of scenery. We must utilise the full palette of solutions available, including household flexibility, says Sophie Yule-Bennett from the Regulatory Assistance Project