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Demand side flexibility is much talked about, and growing in many parts of Europe. In this episode Jon Slowe talks to LCP Delta experts Lucy Murley and Jon Ferris about where it’s at and where it’s headed, using findings from the recently published 4th annual Market Monitor for Demand Side Flexibility.
Welcome to Talking New Energy, a podcast from LCP Delta. The new energy experts. In the podcast, we'll be exploring how the energy transition is unfolding across Europe through conversations with guests from the leading edge of the transition. Hello and welcome to the episode. As renewable generation continues to grow and electrification gathers pace, we are needing more and more flexibility in the energy system. Flexibility, some people might say, is a bit of a buzzword at the moment. Part of this flexibility is going to come from the demand side, but part of it will come from bigger assets that have supplied flexibility in the past, like coal and gas generators, and now big batteries as well. Today we're going to look at how the markets for flexibility are emerging across Europe, where they're at, where they're headed, in particular, looking at the demand side. And it's a perfect time to do this as my LCP Delta colleagues Lucy Murley and Jon Ferris have just published their annual market monitor for demand side flexibility. So, Hello, Lucy.
Hello, Jon.
And hello, Jon.
Hello.
Now, demand side flexibility, I think most listeners will be able to describe it to some degree, but it's certainly one of those topics where if we asked everyone to give a precise definition, people might struggle. Lucy, can you help us with that?
Certainly. I will just read our definition so that we're all on the same page. So, we define demand side flexibility as a deviation to the planned consumption, generation, or use of storage in a response to a price signal. And this could be from a residential or industrial or commercial asset, and it can also be done via an individual asset or a group of aggregated assets.
Okay, to say that in a slightly different way then these assets, be they an electric vehicle (EV), a CCGT (combined cycle gas turbine), a gas generator, a battery, they were going to do something, but because of the price signal, they do something different. Okay, so if I have an electric vehicle and if I'm charging it between midnight and five in the morning because my tariff is cheap, is that demand side flexibility?
Yes, it is demand side flexibility. But I think you've picked the one example where there's obviously a caveat. So, there's a slight difference within demand side flexibility of implicit and explicit flexibility. When we say implicit flexibility, we mean cost savings for the consumer, i.e., That the tariff that you're charging on between twelve and midnight.
I can save money by charging at a cheaper time. And that would be implicit?
Yes.
Okay.
Explicit flexibility is where the consumer gets revenue for that change of consumption or generation. You get paid money rather than saving money.
So, if someone said to me, I will pay you £2 not to charge your EV between 08:00 p.m. and 09:00 p.m. Tonight, that would be explicit flexibility.
Precisely.
Okay. It could be with an EV, could be with a big battery, could be with an industrial process could be with anything. So now we've got a definition clear. Let's look at the market for flexibility. And of course, there is an a market for flexibility. Every European country is different. Jon, can you help us think about how we should be thinking about the markets for flexibility or the markets for demand side flexibility? What's the right way to think about this?
We've seen a huge change in thinking about markets for demand side flexibility over the last five or so years where it started with looking at markets for specific assets for demand side flexibility. So, a couple of examples of that are the electricity demand reduction pilot in the GB (Great Britain), which was a precursor to the capacity market, but explicitly only open to demand side flexibility. So, these markets tend to have regulated prices and are quite small.
So that's like a carve out or will create a special market for demand side flexibility.
Yes. And compared to the potential and growing capacity for demand side flexibility, it really doesn't match the needs. And there's no opportunity for supply of flexibility from the demand side to come into the market and potentially compete with the older, larger assets that have traditionally provided flexibility. So, the trend is very much towards system operators defining what their needs for flexibility are and then opening up their markets to all assets, whether it's the large generators, batteries, big and small, or demand side in order to achieve the lowest cost to the consumer of managing the system.
Okay, so you could think of a playing field analogy. The playing field is level, whether your demand side, whether you're a customer with an electric vehicle like myself or you're a big gas generator. So, there's playing fields got to be level, not got to be, it could be level. And the other playing field analogy in my head. As you were describing that, Jon, there's a main pitch and the big assets have been playing on that main pitch for a while. And then it's like the demand side was starting to play on a little training ground to the side as system operators carved out these special markets. But what we want is everyone playing on the same pitch and the pitch to be nice and level.
That's a good analogy, although it might extend it a little bit further that it was even worse than that. The big generators and the system operators were involved in backroom deals, bilateral contracts that weren't transparent, that weren't even happening on the pitch at all. So, the first step, and it's been driven by particularly the clean energy package and the European balancing guidelines, has been to move away from those bilateral opaque contracts to a pitch where people can see what's going on.
A proper market.
A proper market. And gradually the requirements have changed to allow all types of assets to be able to participate in those markets, to be able to play on the same pitch rather than a separate carve out.
Yeah. Okay. And where the analogy breaks down is probably there's a number of pictures because there's a system operator responsible for the national system. Then you've got markets in the wholesale market, the intraday market for example, or balancing mechanisms. You've got distribution system operators (DSOs) starting to look for flexibility.
It is, but I think the need to stack value and what's happening in optimising assets is probably a topic for a whole podcast on itself.
Okay, we won't go down that particular route further right now. So, let's come back to the market monitor for demand side flexibility. And in a minute, Lucy, I'll ask you to draw out the top three takeaways, or your top three takeaways from that. But first of all, what is it the market monitor for the demand side flexibility.
So, as you mentioned, Jon, we've we've recently published what, what's now? The fourth annual assessment that we've produced, assessing progress across the whole of Europe in developing flexibility markets and opening them up to demand side flexibility. So, this is a report that we produce with smartEN, which is the European Association for Smart Energy, and we focus on assessing progress in a number of key areas. So regulatory progress, implementing the clean energy package, and the mix of regulations and directives to allow demand side flexibility into open markets. We look at how big the markets are, so how much TSOs (Transmission System Operators) are spending on flexibility and increasingly how much distribution networks are spending too, looking at the emergence of local markets and local energy. And it's not a static snapshot of where countries are now, but we also look to the future and try to assess future implementation and development of flexibility where we know markets are emerging and have plans to open to flexibility.
Okay. Thanks, Jon. So, I think a summary is available on the LCP Delta and smartEN websites if people are intrigued to have a look. Lucy, it's been your life for a few months, putting that together with Jon and with others. Now it's published. What's your top three takeaways for where we're at with the questions Jon just described?
Potentially my favourite question as well, I'd be admissed to not mention sort of the biggest takeaway, which is the increase in spend. So, part of what we do for the market monitor is we tally up how much these TSOs are spending on flexibility. Specifically, flexibility, not necessarily just the demand side flexibility that you mentioned at the beginning, but the key takeaway is spend is now at about 16 billion. And to put that into context, last year the spend was about half of that to 8 billion. So, we've seen a 50% increase in the past twelve months in 2022.
Okay.
This is primarily driven through the wholesale costs and the increase, which again is probably another podcast episode in itself, but part of the renewal of flexibility is utilisation payments. So, it's the payment assets get for providing that flexibility. And they're linked to the wholesale prices a lot of the time. That's why we're seeing this big increase.
But those are then becoming more and more valuable markets, more exciting playing fields for people to play on, because there's just a lot more well, how much of it is more need for flexibility and how much of it is what? You said that the payments are higher because the market prices are just higher.
Again, that's almost the perfect question in the sense that you hit the nail on the head. The volume that was procured didn't change significantly. Okay, there was a small fluctuation, yes, but overall, the need for flexibility wasn't significantly different, it was just the payment from the TSOs. And because that's linked to the wholesale prices, looking forward, there's no certainty that we're going to see the same increases next year, any increase at all. So, it's quite volatile at the moment. For all we know, we could be reporting next year that the prices have gone down.
Okay, so funding sorry, Jon, sorry.
It's worth noting that what we're focusing on in the report are the markets that are meant to be open to demand side flexibility, but we're also seeing huge increases in costs in spend that is not open to flexibility, let alone demand side flexibility. So, some examples of that are the GB system operator spending over £2 billion last year on constraint payments, where it's having to turn down wind or coal generators in one part of the country and turn them up in another. In Germany, the figure is even higher. So, the famous redispatch, which as a principle is more about control and the networks having control over assets rather than making it a market, means that the spend has increased into the billions of euros just by itself. And it's a market that demand side flexibility could help reduce the costs if it were opened up to a wider range of assets and as a market.
Yeah. Okay, so what you described there, Jon, was bigger underlying needs for flexibility and the level playing field, and everyone on a single pitch will mean the most efficient market, which will mean we meet those needs at the lowest cost, which will make for ultimately a lower cost energy transition.
Exactly, yeah.
And yeah, those are big numbers, I guess, as a question, to contextualise them against other big numbers in the energy transition. But that's probably a different podcast as well, Lucy, where you got as far as your first takeaway increase in spend. Takeaway number two.
Takeaway number two is largely linked to the clean energy package. So, part of the clean energy package is the idea that these ancillary services or these value streams should be open and accessible. And we've seen a very positive growth in these value streams being open and accessible to demand side flexibility. Loops back to the level playing field. The more accessible the market, the lower cost and the better system that we can provide. In the past twelve months, we've seen just as off the top of my head, Greece, Slovenia, Romania sort of the Southern and Eastern European countries have opened their markets to flexibility in a slightly different way than you'd say, Germany or GB or France have done. They've almost leapfrogged. They've gone from pretty much closed to almost entirely open, rather than it taking a decade to get there.
So, using that analogy I described earlier, some of the markets like GB, Germany had Jon's shady background deals and then a pitch for the big people and the demand side was playing on a training pitch and they gradually come together. Whereas those countries you just talked about, Greece, Slovenia, and Romania are going from probably the I'm generalising here. So, shady backroom deals to a pitch where everyone can play on that's quite level. Is that a way to describe it?
Yes, in, in Practise that that is what's happening. In, in reality, again, going back to that big 16 billion, there's still questions on the activation of these demand side flexibility assets. How much are they actually getting of that 16 billion?
Okay.
it's technically open and accessible, which is definitely a positive. But the next question is now they're open, how many of these assets are going to pre-qualify? How many are the TSOs going to call upon to provide that flexibility?
So conjugate, they might be substitutes in the team, but then they're not getting on the pitch as much as they could.
Or in theory the pitch is level, but in Practise it's only level for we can go down rabbit holes. With this analogy. I started okay, takeaway number three.
Takeaway number three is ups and downs. So yes, we look at the TSO flexibility, but we also look at distribution flexibility. So, the more low voltage regional flexibility, on the one hand, it's positive that we're even talking about it because it does address a need in the energy transition and the flexibility space, but it's only really emerging in GB and in the Netherlands. So, there's pockets of innovation and there's pockets of activity. But if we were to say, how is GSO flex progressing across Europe? It's disjointed and at times quite stagnated. So, there's definitely more to be done to increase liquidity, lower barriers, venturi and make the low voltage flexibility more accessible.
So, a DSO will distribution system operator will procure flexibility because they've got particular problems on their network generally.
Yes, it's constraint driven, primarily.
And the counterfactual to procuring flexibility would be invest in traditional network assets.
Yes, precisely. Build put more copper in the ground. So there's generally an option that's not flexibility in order to solve the issue.
Yeah. So, question to both of you then. The reason that Great Britain and the Netherlands are doing more or the DSOs in GB and Netherlands are doing more with flexibility and other countries are not. How much of that do you think is because other countries don't have those big challenges or those challenges on their distribution networks, they don't have the constraints, the problems to solve or how much is it? They're quite understandably doing what they've always done to solve these problems, which is invest in traditional network assets.
So, it's worth considering the two aspects of congestion on the local network. On the one hand, you've got the traditional demand driven congestion where distribution networks have been incentivized to ensure that they can meet peak demand. That's changing, particularly in the built-up areas. So, we're seeing that in the UK, in the Netherlands, to some extent in Sweden, where we're seeing trials in the cities of demand flexibility, where demand is increasing, we're seeing more electrification of heat, more EVs, and we're putting demand into areas where it's hard to build out the network and alternative solutions are increasingly needed. The other side of that is where we're seeing distribution connected generation. So traditionally the big power plants were located on the transmission network, on the power system. We're now seeing generation renewables in particular on the distribution network, and that's causing congestion where there's more power being generated that can be consumed, where the network's not being built to accommodate it and flexibility can allow more renewables to be connected.
I was looking at Poland recently, actually Frontex for solar energy and it's had a staggering growth in residential rooftop solar and there's potentially going to be very fast growth in utility scale solar. But the DSOs there are coped with the solar boom of residential solar, but it's causing them some challenges. If they used flexibility, that would be another tool in their toolkit to cope with the sort of challenge you just described. Jon.
It is. So far, we've been talking about distribution network flexibility and the procurement of that flexibility in order to help manage the network for their purposes. I think there's a flip side to that that we highlighted in the market monitor that in Northern Europe we're seeing that model of network operators procuring flexibility to resolve local issues. In Southern Europe we're seeing much more growth in local energy communities and the right to share energy. And that's quite a different approach to incentivizing local balancing where there is a growth of renewables. It might be that there's a lot of rooftops solar, but the inhabitants of those houses are not in at that time. How can you incentivise their neighbours to consume energy at that time instead of sending that power all the way up the grid? And that's, that's, something that we're seeing slowly emerging. But we have seen a leak of the proposed electricity market design amendments that were expected to be published next week, where the need to incentivize and enable energy sharing both from communities and self-consuming self-consumption is a key factor that's being introduced. So, the right to share energy, the ability for peer-to-peer trading to be facilitated is likely to be a new part of the Electricity Directive.
That would be quite controversial in some circles, I think. Jon. Not bad, but I think markets are not set up for that in a big way today, are they?
No. And it's interesting that that forms part of the update to the Electricity Directive, which means that the member state, each country, is going to be in a position of implementing that directive as they see fit, as opposed to a regulation where you would see a standard approach that's mandatory across all countries. So, I think we're going to see it emerging more quickly in some countries. We're going to see a lot of innovation. However, the fact that it's now a formal part of the clean energy package, I think we're going to see that advance much more quickly than we have in the last few years.
Yeah. Okay. So just coming back, Lucy, to your third takeaway, not much activity with GSOs procuring flexibility outside of Great Britain and the Netherlands. Whereas, now, I'll ask you a slightly forward-looking question, both of you. How much do you think that will change in the next years? And Jon, to your point about local energy communities and energy sharing peer to peer, will that become important part of the overall European flexibility markets?
I guess to answer the first bit, will it change? I think the short answer is yes. It's a bit of a chicken and egg situation. The more low voltage assets that we put on the system that can provide flexibility, that means there's more constraint, but those are the very assets that can help solve the constraint. So, there's definitely going to be a need for these flexibility markets. But that also presents bigger questions that I don't necessarily think we have answers for, such as sort of the if you have in Germany 400 DSOs, 600 DSOs, do you have a standardised process? How does that work? How do you coordinate your distribution flexibility with your transmission flexibility? Who wins if a single asset needs to provide both at the same time?
So, these are quite big questions that aren't going to be answered overnight. These markets aren't going to summary, it.
Went up right there. They're key considerations now that if we say in the future there's more distribution flexibility, these questions need to have at least an inkling of an answer before the distribution flexibility becomes widespread.
At the moment, we're seeing trials, experiments, tests, but not necessarily answers to those big questions.
If we're going back to sports analogies, how do you get over the last hurdle of making it commercial?
Yeah. Okay. I'm going to ask one more question before we bring up the talking new energy crystal ball. So, in demand side flexibility is a subset of flexibility. Or markets for flexibility can be served by demand side assets. But those demand side assets can take many forms from the electric vehicle in my driveway through to a commercial building that can turn its HVAC (Heating, Ventilation, and Air Conditioning) system up and down through to a big industrial process. Can one of you give our listeners a feeling for the balance in activity between maybe those three categories residential, commercial, or small industrial and big industrial assets that altogether comprise demand side?
It's probably worth thinking about implicit and explicit flexibility separately at the moment. For residential assets, the cost and complexity of aggregating many thousands of assets to meet the minimum volume required to participate in markets is generally prohibitive.
Not much of that at the moment.
There's not much of that. But we are seeing the emergence of dynamic tariffs and price signals that consumers and assets can respond to in order to provide a relatively low-cost system flexibility that's really facilitated by the emergence of smart metres. So, you don't need to install specific metering equipment in order to reward this behaviour.
An example of that, Jon, will be I think I was looking at our electric vehicle driver survey last year and in some markets, half or more than half of EV drivers are on a smart tariff. So that's, I guess, an example of where implicit can emerge.
Exactly. These tariffs can change the baseline against which the system operators are looking to procure flexibility services.
So, that was a residential sort of implicit explicit split of the other two types of commercial buildings, small industrial and big industrial. Are we seeing more from the is it most of the demand side steel from big industrial processes turning up and down, or are we starting to see larger numbers of commercial, small industrial, maybe? Again, thinking of explicit rather than implicit.
We think of it explicit. We're still going to see them. There's always going to be always going to be a place for those assets. Again, I think the question around there goes more towards if you have your CNI (Critical National Infrastructure) asset or industrial asset, it has a primary purpose. I think that's where the consideration sorry, needs to come in. If you're a bricklaying factory, your primary purpose is to lay bricks or make bricks. So, it's how do we fit a system, how do we fit flexibility around that primary purpose? Is it through aggregation, incentives, data transparency, all of these different elements? Definitely a role. It's just that there's lots of pieces to fit together for it to be accessible.
And that's the way challenge the challenge.
For demand side flexibility now is that we're seeing that the rapid emergence of big batteries on the system, that their sole purpose is to trade in the markets to provide flexibility. And they are dominating the emergence of the faster acting, explicit flexibility markets in a way that demand side can't compete. However, coming back to your question about the local markets, the big assets tend to be connected in areas where they can't resolve these local congestion issues. So, there is an opportunity, as we see local and DSO markets emerging for demand side to meet those needs and find a niche in the flexibility system.
I think we're starting to unpack some of the myriad of complexities and detail in this area. But I think overall, the more of a level playing field we have, and the more barriers are reduced, then the more efficient market will have and the more the market will determine the balance between different types of assets, our customers providing different types of flexibility services. But we're certainly on the journey towards that perfectly level, fair playing field. It sounds like there's quite a long way to go together. Let's bring out the talk in your energy crystal ball now. And I'll set the dial today to five years’ time, so 2028 and ask you to give a headline for the market monitor for demand side flexibility that you're right. In five years’, time, 2028. What would the headline or takeaway be? And one each or a couple of each if you want. Lucy, do you want to go first?
I'll use the analogy that we've gone throughout this podcast. I think it's a level playing field for all assets, not that every asset would do every value stream because that's not in the system's need, but the expectation that there are options. So, if you're a residential EV, there are multiple options for you to gain revenue and benefit. Similarly, CNI big batteries. So, it's not necessarily that one is better than the rest, it's just the options are available.
So, we'll be playing on a pretty level playing field in five years’ time.
So, the cheapest overall system is going to be one that's optimised at all levels. So, in five years’ time I think we're going to see the growing emergence of home energy management optimising within a building, going to see the growth of distribution level optimisation and markets and we're going to see the continued evolution of national markets. But my perhaps controversial headline for five years ‘time is that while we're seeing increased market coupling within the EU and that's emerging over the next few years, in five years’ time I think the GB market is going to be more closely aligned and integrated into the wider European market for energy flexibility.
So, does that mean more of a common European approach? Well, we have a common European approach in some ways, Jon, but we'll have more of a common structure for flexibility markets across the EU and GP as well.
So, it's a common structure, simplified standardised products that enables companies to work across Europe, but also from a national level. If they can access their needs from different countries, then that will also lower overall costs to the consumers. Say if it's very windy in northern Europe but not in southern Europe, then the needs for flexibility differ. And if you can meet those needs from a wider area is going to reduce overall costs.
And that optimisation. I think of that optimisation you described at the home and then gradually at higher levels to a national level almost as bottom-up optimisation, is that the right way to think of it or is it just the fact not bottom up or top down, you've just got optimisation at multiple levels of the system.
You do, I think that's probably the sort of other headline that at the moment we're seeing both at the extremes, the two need to meet, they need to come together and be coordinated.
Which was, Lucy, that was your point about conflicting signals, maybe from a national system operator and a local distribution system operator. How do you resolve that? Which definitely that's not a question for now, Lucy, don't worry. Well, we've got another few podcasts in the making from this one, but I think we'll leave that there for today. Lucy, Jon, thanks so much for your time and sharing the takeaways and all of your insights on flexibility markets and the role of demand side in those markets. Hope that everyone enjoyed listening to the episode learnt something new and let's try and get to that level playing field that Lucy wants us to have predicts us to have maybe, maybe predicts is too strong in five years’ time for the most efficient markets and the best path forward for the energy transition. Thanks everyone and goodbye.
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