Episode 6: The Business of Being an Aggregator
Jon Slowe, Director, Delta-ee
Alastair Martin, Founder and Chief Strategy Officer, Flexitricity
Jan Aengenvoort, Senior Chief Communications Officer, Next Kraftwerke
Pieter-Jan Mermans, Co-founder and co-CEO, Centrica Business Solutions and REstore
Philippa Hardy, Principal Analyst / Flexibility Research Service Manager, Delta-ee
Jon: Welcome to Talking New Energy, a podcast from Delta-ee, the new energy experts. We will be talking about how the energy transition is developing across Europe with guests who are working at the leading edge of this transition.
In this episode we’re looking at the business of being an aggregator. We’re at a tipping point in how electricity systems are balanced. Traditionally supply and demand have been matched by turning large power plants up and down, with the occasional very large industrial customer, like a steel works, containing its demand to help balance the system. But over the last ten years we’ve seen a new breed of businesses called aggregators bringing together hundreds and even thousands of distributed assets to help the electricity systems stay balanced. Today I’m joined by three aggregators that have played key roles in developing this new and emerging market and our resident expert on the topic here at Delta-ee, Philippa Hardy. So, lets introduce our first guest, Alastair Martin, who’s founder and chief strategy officer at Flexitricity. Hello Alastair and can you give us a few facts and figures and a brief introduction to Flexitricity.
Alastair: [1.23] Certainly, hello. So Flexitricity was born as a company in 2004, operationally live since 2008, we’re a 24/7 demand response business, we’ve got a control room in Edinburgh, we’ve delivered over ten thousand demand response events, mainly to national grids in the GB market, we’re operating around 400 megawatts of customer connected assets ranging from flexible industrial load to combined heat and power generators to standby generation to merchant developments like energy storage large batteries and we’ve been in the business over ten and a half years operationally and in that time we’ve discovered a huge diversity of requirement for demand response and a huge diversity of interest in it from the customer side.
Jon: [2.15] And Alastair, those 400 megawatts, across roughly how many customers are we talking, tens, hundreds, thousands?
Alastair: [2.22] So individual customer sites, in terms of active, real, live connected customer sites operating with us its about a hundred and fifty.
Jon: [2.31] Ok, ok, thanks very much. My second guest is Jan Aengenvoort, chief communications officer at Next Kraftwerke joining us from Cologne. Hello Jan, welcome and can you give us a brief pen portrait of Next Kraftwerke.
Jan: [2.53] Hi Jon, thanks for having me, yeah Next Kraftwerke is a company, is a virtual powerplant that was founded in 2009, initially by two PhD students that met at university and today we are at around hundred fifty people working for us and we have aggregated seven thousand megabytes of mostly generation over the last couple of years. They all come from decentralised assets like solar, wind, but especially dispatchable renewable assets, hydro, biogas and in the last couple of months and years also, couple of electrolysers, batteries, classic demand response customers as well, water pumps etc. So we have a pretty, pretty diverse portfolio of decentralised assets which we use to deliver balance and reserves to several European TSOs in four countries with a prequalified pool of around one thousand five megabytes and the non-dispatchable assets we are, like solar and wind especially, we forecast on an intradaily basis and trade the generated power on different European spot markets, and we as well are the balancing responsible party for those power generators.
Jon: [4.17] And Jan, you mentioned four markets, Germany your initial market, the other three markets?
Jan: [4.22] I mean, there were four markets where we are control reserve party basically where we deliver control reserve to European TSOs, this is Germany, this is Belgium, the Netherlands and Austria. We are also active in Poland and France and Italy but, and Switzerland and we are only traders there, so we don’t have a prequalified pool of, yeah, of decentralised assets there to deliver control reserve to TSOs.
Jon: [4.49] Ok thanks very much. Our third guest is Pieter-Jan Mermans, also co-founder and co-CEO of REstore, which is now part of Centrica Business Solutions. Pieter-Jan, welcome and can you give us a brief introduction to REstore please?
Pieter-Jan: [5.10] Yes Jon, thanks for having us. So REstore was founded in 2011, today we have about 1.5 gigawatts of reliable TSR capacity under management and we have, over the past years, established the TSRs techniques in around ten TSO areas.
Jon: [5.34] Ok.
Pieter-Jan: [5.35] So that’s obviously UK and Belgium and have then further extended in Holland, Germany and France, in Europe, and more recently we have added Japan and the United States to the business and in the US that’s specifically [Kyso, Urcup and PJM].
Jon: [5.54] Ok.
Pieter-Jan: [5.56] Our portfolio is about couple of hundreds of CNI consumers maybe and therefore historically we have mainly focused on fixable capacity from pure demand on top of fixable capacity from battery so that’s really a clear, our sweet spot. And last but not least, we have, today, around 40 granted patents in both United States, Asia and Europe.
Jon: [6.28] Ok, and can you remind me the date which you were acquired by Centrica?
Pieter-Jan: [6.36] Yes, so we were acquired late 2017 by Centrica, and that is Centrica Business Solutions more specifically which is the digital and solutions part of the business to be distinguished from the commodities side.
Jon: [6.55] Ok, thanks Pieter-Jan, just on ownership, Alastair, Flexitricity is also part of an energy company if I remember right?
Alastair: [7.05] That’s right, so we’re wholly owned by Alpiq which European energy market watchers will know as the major Swiss utility with a presence in quite a few European economies.
Jon: [7.18] Thanks and Jan your Next Kraftwerke has a number of investors that are still independent, you’re not wholly owned by anyone, is that right?
Jan: [7.29] That’s correct, yes.
Jon: [7.31] Ok, but you count some energy providers amongst your investors. Ok so thanks for the introductions, and three fascinating businesses, looking forward to talking more about what you’re doing, what you’ve learnt and where you’re going. Before that my last but not least, introducing Philippa Hardy, or Pip as you’re known to many people. Pip you’re looking across Europe at this market, how wide spread is the business of aggregation? We’ve got three companies here on the podcast, are we talking several tens, hundreds, thousands of aggregators.
Philippa: [8.09] Hi Jon, thanks for the introduction, we, I mean you’ve heard from one of the very earliest aggregators that established the market in the three we’ve got here today on the show and I think the earliest date we heard there was 2004 so really since, over the last what 15, maybe 20 years aggregators have started the businesses and today aggregators across Europe, we’re looking at around 60, 70, some are more concentrated in certain counties where the markets have been more established for a longer time, for example UK, Germany, France and a number of other Western European markets.
Jon: [8.47] Ok, so a lot of companies active in the space. If we think of the traditional hockey stick curve of growth, where are we on that hockey stick curve in the business of aggregation do you think, are we, have we hit an inflection point yet, are we miles from it, are we past it?
Philippa: [9.08] I think the guys on the line would agree as well, I think we’re still in a really early stage of the market, there’s been significant developments in terms of the businesses, you know, starting from start-ups and really gaining traction in this market, there’s been a lot of changes in business models and so much has happened and so much development is still happening, but I would say we’re still at a really early point in this market when you compare it to the retail model for example, so energy suppliers, those business models have been going on for as long as you can remember so in comparison it’s a relatively immature market still.
Jon: [9.44] Ok so maybe we’ll see, in a minute, if Alastair, Jan and Pieter-Jan agree with you on that. Last introductory question, can you help us to break down the key elements of an aggregator business? What are the, what essentially are the three, four different things that they do?
Philippa: [10.04] Sure, yeah. Hopefully the three people on the line will agree but it probably helpful for us, audience as well given that an aggregator business will be pretty new to everyone, so to make it really, really simple, on one side we have assets, so whether its generation or consuming assets, these are typically aggregated so bought together by an aggregator company, most of which develop their own hardware and software to bring together these assets into a pool that can be traded in a flexible way. So the aggregator will typically find the customer and have that customer relationship, then install the hardware, they’ll use their own software and ultimately they’ll monetise, so make money, out of the flexibility and share that back with the customer. So lots of different parties involved and lots of different interactions going on that they have to manage.
Jon: [10.53] Ok, so a lot to being an aggregator but you could break that down into part of the business based around customers, part of the business are based around aggregating those assets on a platform and part of that business being based around the monetising that the interface between those assets and the electricity markets.
Philippa: [11.11] Yeah, exactly.
Jon: [11.14] So using these three elements as customers platform and electricity market interface, lets come back to the three aggregators, and what I’d like you to do is pick one of those three elements that you consider the most challenging to get right, or looking back over the years where you’ve been helping to create this market, which one of those three elements have you learnt the most lessons in? So asking you, I guess, to share a bit of your secret sauce with us. Lets start with Pieter-Jan from REstore stroke Centrica, Centrica Business Solutions. Pieter-Jan how, of those three elements what have you learnt or what’s the hardest part of that business?
Pieter-Jan: [11.57] Yeah, I think that platform is one of the three elements, and one of the lessons learnt for us is that quite early on we have started to invest a lot in the platform, in the software as such but also in the methods behind the software that we have started to patent. And I must say that certainly between 2010 and 2015 there was a lot of criticism on that among starters from the VC community which initially saw the sector as a sector of intermediaries, aggregators have a simple intermediary between consumers and transmission system operators. However, over the past couple of years with the decentral energy landscape exploding and the complexity of decentralisation people have started to recognise that electro properties, really one of the key drivers.
Jon: [13.08] Ok, so the criticism was around you just being an intermediary but your argument is that it actually, it’s a lot of sophisticated technology to bring together these assets and coordinate them in the right way. Does that mean you would view yourself as a technology business or a software business, or, how would you describe your business in terms of software, hardware, customer brand, traders?
Pieter-Jan: [13.38] Yeah, that’s a good question. I think definitely we have, a big part of our team is our software developers and so-called quants which are PhDs in physics or in mathematics, and who work on the optimisation algorithms so that’s definitely a big chunk of the business where a lot of values created, that’s right.
Jon: [14.02] Ok, Jan lets look at Next Kraftwerke now, in terms of those three elements, customers, platforms and interface with electricity markets, tell us a bit about your experience and where you see the biggest challenges, or where you’re proudest of your biggest achievements.
Jan: [14.24] Yeah, I think it’s a very interesting question because, I mean, when we set out to establish an aggregator business, a virtual powerplant, we were very focused in the beginning, of course, to find a solution to technology issues, I mean, how do you build this platform to optimise thousands of decentralised assets with real life data, every five minutes for example, or even on a live basis. So, and then the other question was what will the, you know, what will the customers say, will they give us in a way, some kind of power over their assets so that we can optimise and steer them, you know, from control, from Cologne, from our central control system from our headquarters. But interestingly enough, I mean, when I now look back at the last eight or nine years since we really went operational, you know, the platform side of things and the asset side of things is something that you can steadily work on, you can improve it, you know, day by day, you work on it, you hire the right people, you solve the equation but you know the other thing, the markets and the monetisation side of things is something that’s prone to very sudden change, so, especially in flexibility markets, so you cannot really trust that the business model that you had last year and which generated a lot of profits will keep on being exactly the same next year and so you have to adapt your business model all the time in a suddenly changing environment, especially then again with the regulatory framework that also is something that new business models, like aggregators, are known to basically so if you go to another country and establish a business model there you sometimes have to wait a little and to see how markets and regulations will evolve and if they will let you enter the market basically.
Jon: [16.13] So Jan, effectively you’re saying the technology and the customers, you have to get right but you have an element of control over that. The monetisation of that flexibility is less within your control because that’s down to the market structures and regulations, so, yeah, how do you manage that because your revenue then, your costs and your customer base is fairly fixed, but your revenue is quite uncertain I guess.
Jan: [16.48] Yeah I think one thing that we’ve learnt, definitely, is what, that you need something what we call flexible flexibility, sounds like a pun but there was something deeper behind it so you have aggregated this, you know, a couple of hundred, a couple of thousands of megabytes of flexible, of dispatch let’s say, and now what you’re going to do with it, and now you have those changing conditions that I mentioned earlier, sudden changes, and so you have to find a way that you, that your organisation and your traders, and also your platform itself will be able to dispatch that flexibility to different markets where it is most valuable at the moment, under the given circumstances, and for, this is what we mean with flexible flexibility. Another thing is, so, I mean, to put it into a nutshell if, you know, if prices on control reserve markets for negative secondary reserves are collapsing or whatever, you will find a new way in intraday trading, in optimising schedules for intraday delivery and spot markets for example. Another thing is…
Jon: [17.47] So you’ve got to stay pretty nimble then and you’ve got to be able to respond to those changes. I’ll come back to that in a minute, lets turn to Alastair at Flexitricity. Alastair, customers, platforms, interface of electricity markets, challenges and achievements, what would you highlight?
Alastair: [18.09] Yeah I would a hundred percent agree with Jan’s several comments there, the phrase flexible flexibility is a key one for the future going forward. I probably would, sort of trying to cut between the two different descriptions the importance of platforms there between Jan and Pieter-Jan. It’s probably true to say that you will see in the market the full spectrum of high tech and low tech, it is possible that it has been done I believe to start a demand response business with a telephone, and its not a nice way to do it and I don’t recommend it but it’s been done. Another company started something a bit like a demand response business by moving a caravan onto a site and living in it. So you know there are lots of low tech ways that this has been done, none of them are nice and so you do have to move into the technically competent platform pretty soon and you’re going to, you’re never going to stop improving that and yes you have to be adaptable to regulatory changes, that means your platform has to be as well, but there are two things that are, I would say are more important than that. One of them is an aspect of platforms and that’s about settlement, when your TSO or your DSO pays you for a service that you’ve delivered, using a number of customer assets, how do you actually work out what all of those customers are due to be paid? That turns out to be a phenomenally complex puzzle that you have to work out for every minute of every day and the creation of a system or that aspect of the platform that works that out is mandatory and it is quite easy for a company to choke on a project like that, so that’s crucial. But the other side of it, which is your first point, is customers, if you don’t understand the customer sites, and every customer site is different, they will not stay with you. If you can’t tell the difference between a data centre and a tomato farmer and a water treatment works then your customers are not going to stick with you, so customer interaction, getting that understanding right and teaching your system to behave in the appropriate way for each customer type, that to me, is the most important aspect of success.
Jon: [20.27] Because on one hand the proposition for the customer is really nice, you’re going to give them some money or share some value for them, in theory, without interrupting their business or their operations. But on the other hand there’s a lot of trust involved there, effectively you’re saying, let us as an aggregator despatch, influence, run, turn on, turn off certain assets and in return for that, well give you a bit more money.
Alastair: [21.00] I think that, sorry Jon, I think that’s crucial and I think that you have to embed that within your operational culture, within the 24/7 controls room and so forth, but you also have to be able to teach your platform how to distinguish between the needs of different sites. If you have a district heating site that is at risk of heat dumping then that site doesn’t want to participate today and your system needs to know that and opt it out. These things are site specific and you have to catch them.
Jon: [21.28] Yeah, ok, and you’ve all got large numbers of customers and megawatts, even gigawatts on your platform so that needs to be automated I guess. Would any of you like to comment on automation and how much of this, once you’ve got the customer load connected, is manual or are we talking a hundred percent automation now?
Pieter-Jan [21.50] Yeah Jon, I’d like to step in here, it is Pieter-Jan speaking, there is one element here on the interface between what Jan said then Alastair which is interesting. Both on the understanding of verticals of different industries within CNI consumers as well as there is quite some possibility on asset reserves this market. So what we have found out is that there are a lot of economies of scale of growing internationally because many of these issues are fixed cost related i.e. you have to invest to obtain a certain level of knowhow into the steel industry, into the chemical industry when you’re talking about CNI sites. But also regulation, yes it’s a bit different from UK versus Germany versus France but yes there is also a lot of commonalities, and so one of the ways forward for us has been to grow that geographic scope.
Jon: [22.04] Yep, ok so if you understand a sector, if you broadly understand how to interface with the markets then you can scale that internationally. Let’s look now in the last part of the discussion about where this industry’s going. So bringing out the Talking New Energy crystal ball as we always do at this time in the podcast. I’m interested in how you think about what type of companies you’ll become and, I guess, Alastair and Pieter-Jan, you’re already part of a traditional energy company, do you think that aggregators will continue to exist as standalone businesses, or will aggregation just become a function of every energy company in the future, what do your futures look like? Let’s start with Jan from Next Kraftwerke.
Jan: [24.02] Yeah, it’s also a very interesting question and I think, I mean basically, my answer is yes and yes. I think both will be there. We will still see independent aggregators, either in niches, basically, where you have a small but highly complicated, lets say, customer base that needs to be, or that wants to be, aggregated and needs access to market and where, you know, an independent aggregator that is very focused on that customer group is perfect. On the other hand and especially in liberalised energy markets because as we are all talking from a vantage point of liberalised energy markets we see a lot of liberalised and small, independent aggregators in Europe. But we have also, you know, taken the road to other continents now and look outside of Europe and we will of course see that not all markets are liberalised and sometimes even the role of an aggregator is not something that is possible, mainly, of an independent aggregator in other market structures. So it will become a function of most energy companies and utilities I’m very sure in liberalised markers but also in non-liberalised markets and why? Because, I mean, all utilities have the same problem, how to deal with the variety of solar and wind in terms of forecasting, trading, balancing, whatever, and the VPP is just a technical solution, an aggregator is just a technical solution to that question, one solution, there will be others of course to go along, and that regardless of the good level that we are talking about, is it DSO level TSO level, both need flexibility. So I think in some instances independent aggregators will take over the role of balancing the fluctuations, in other instances utilities will do that. So this is one reason why we for example have also seen that we will not probably not become an independent aggregator in all of the countries of the world so we also, you know, become a software and services providers and give our platforms basically to utilities, license out our platform to utilities that want to build up their own virtual powerplant.
Jon: [26.10] Ok, so you’ll have, you’ve got a foot in both camps, a foot of being an aggregator and a foot of helping utilities become an aggregator.
Jan: [26.17] I think so, yeah.
Jon: [26.19] Pieter-Jan from well originally REstore, now Centrica Business Solutions, now I’m guessing you might think this will be a function of every energy company rather than independent aggregators but share your thoughts with us.
Pieter-Jan: [26.35] Yes, so, obviously we have made a choice by the end of 2017 in joining Centrica Business Solutions and one of the main arguments behind the choice, was that we think that there’s going to be this tendency towards creating a one stop shop across different types of digital energy solutions to, for example, CNI consumers. And one specific example there is, the conversions of the battery world and the demand side response world were, we think that industrial consumers, after a couple of years of discovering a niche, increasingly now want to talk to parties that offer a slightly bigger portfolio of services. So that’s one element, the second element is that we start to see these days a lot of utilities as well as large oil companies making acquisitions in this space, with, for example, Shell buying Limejump recently and Shell buying Sonnen and etc. etc. There are other examples too, so there is quite a lot of movement in the sector, but that’s not to say that, a successful independent VC backed, venture capital backed or private equity backed growth company cannot be, no longer be successful on the contrary, so I think we will have a landscape of different types of players in the near future.
Jon: [28.17] Ok, thanks very much and last but not least, Alastair, your views, independent, part of utilities or energy companies or a mix of both?
Alastair: [28.28] Well every time I look at the large suppliers active in the UK, I ask myself when there’s going to be core activity in demand response, and the answer sometimes they’re going to go in and out and obviously Centrica buying REstore has essentially said well somebody’s already doing it, we’ll have that. The large energy companies developing and involvement in this space themselves have done very poorly, I can only think of one example where its worked, where they inhouse developed their own aggregation outfit and they did that by essentially tracing a little village within that company that they essentially labelled as a separate demand response outfit, that worked for a while, while they were doing it. Otherwise I think its probably true that aggregators inside large utilities probably still see themselves, in many ways, like independent business units, and that is necessary because one of the features of this is that you have to avoid competing with your own customers. It is essential, in order to represent those customers megawatts into the power markets, that you’re representing those customers megawatts and not your own megawatts. So this is crucial to everybody. On the one stop shop side I think that there are certainly some customers who want that approach, there are other customers who want nothing of it and what you’ll find there is there will be a spread of style of demand response participation that reaches all the way from, I’m going to get it all in one place to I’m a sophisticated customer, I’m going to make my own choices about each individual element. And finally what we’ll see, we’re still seeing, is little start-ups appearing and some of them gaining traction, they’re addressing very specific element of the package. There’s an interesting move, very recently in domestic scale frequency response that’s come into the market, none of the people on call were involved in that particular venture and you know every time you take your eye off this someone else will pop up with a new idea, so there is, it is absolutely not the end of small start-ups coming up with new ideas.
Jon: [30.45] So coming back, well before I come back to you Pip, I guess one comment there Alastair to pick up on is that, it depends in a way what customers want and who customers want to deal with to some degree. Pip, your characterisation was that we’ve still got a long way to go to in terms of the sector developing, its emerged, we’ve got three sizable companies on the call, they’re established, been doing business for several years. When you look in the crystal ball, what do you see in the next years Pip, what, do you want to pick out one or two.
Philippa: [31.18] Yeah, sure. I think Alastair’s last comment on there’s more start-ups, you know, we’re seeing them all the time, that’s precisely what our research shows us as well, we’re constantly learning about new players, this market is extremely dynamic and there’s start-ups popping up left, right and centre. A few other things I can see from our research is that it’s not just people new start-ups but there’s lots of movement within the current, existing companies, so we’re seeing partnerships, whether informal or formal, lots of investments, like a lot of investments, especially with oil and gas companies, energy companies, yeah, venture capitals etc. and acquisition as well, and I typically see four types of companies and I think these exist today, and they’ll probably exist in the future as well, so we have energy utilities, or energy suppliers, their either doing it themselves, and as Alastair mentioned, probably not as well as aggregators, but they’re also buying aggregators so that they can have this function. Energy service companies are becoming more interested, so we’ve seen some buying aggregators, some partnering and some new start-ups being like a new energy services or energy management company offering software. Others trying to be technology providers, so offering software as a service, so they don’t want to be aggregators they just want to provide the technology to whoever wants it, and then last but not least aggregators. So at the moment I see all four, some are more nascent than others and I think that space is just going to keep blossoming, more people are going to be coming out, there’s going to keep being much more movement within that as well.
Jon: [32.53] Ok, so lots more to see in the sector then, I think we’re past the tipping point of this being a distinct sector in the energy market, it certainly is, and lots more action and development over the next years, and we haven’t even touched on the topic of demand response from residential customers today or only very briefly, so thank you to my three guests, thank you Alastair, thanks Jan, thanks Pieter-Jan, thank you to Pip and thank you for listening. We look forward to seeing you, or talking to you on the next episode. Good bye.