- The current energy crisis focuses on the supply side 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 resilience, and reward consumers.
- Policy makers need to embrace full system costs that balance supply and demand when planning and investing in the energy transition.
With the global focus on energy security and some ambitious and exciting strategies emerging across the world on how to increase energy supply, primarily through renewable investments, we must not forget that the measures of the demand side and storage assets could also provide energy security and improve the system. elasticity.
Led by the World Economic Forum, Accenture and Challenging Ideas, we hosted a high-level roundtable with representatives from the private sector, government and academia to highlight the importance of demand actions and its value to the system. The seminar, spurred by the World Economic Forum’s System Value Framework and excellent modeling work that ReCosting Energy has done with Frontier Economics to show how to optimize total system costs by unlocking value throughout the system, revealed that demand equals supply, not in scale but in value. Here are four key ways demand-side equities can add value.
1. Flexibility and reliability of the secure energy system
ReCosting Energy’s modeling informed us that demand actions and assets could improve system flexibility and reliability while simultaneously avoiding system upgrades. The weather is not picking up price signals and with the very welcome proliferation of renewables predicted for the energy system, we need to ensure markets value demand and storage as part of system stability planning. .
The Electricity System Operator (ESO) and Distribution Network Operators (DNOs) have focused very heavily on how to unlock flexibility across the system. However, the full value of flexibility is currently not recognized and is primarily rewarded through wholesale price arbitrage. The use of system-wide cost flexibility that will be crucial to the functioning of the system would be rewarded for all the work they do.
The provision of flexibility and ancillary services to the energy system must be rewarded for the overall value of the system in order to unlock the investments needed to ensure stability.
2. Ensure energy security
Demand actions, assets and storage can also improve energy security, for example improving the building efficiency standard will reduce peaks, which would impact the capacity reserve calculation, the Adding batteries behind the meter (BTM) to homes and residential buildings could provide the same kind of energy security that hospitals with backup generators have. Similar to refrigeration in the food sector, demand and storage extends the life of each electron, ensuring that waste is reduced and can be ready for use when needed. Energy security is most vulnerable during peak times and demand and storage interventions can significantly mitigate the peak and reduce overall costs for consumers. For example, by 2035 it is calculated that the number of electric vehicle (EV) batteries on the energy system will be equivalent to two to three nuclear power plants – this is a “standby” resource that needs to be recognized.
Therefore, demand-side assets and actions should be seen as an integral part of energy security policy – not an afterthought.
3. Reflect the true value of assets and equities on the demand side
Since flexibility is only rewarded for the arbitrage of the cost of raw materials, the value of flexibility is not sufficiently remunerated. With energy system costs rising due to grid reinforcements, curtailment and constraint payments, and imbalance costs, flexibility must be recognized for the positive impact it has on the overall system. Appropriate system-wide costs are not truly represented in the wholesale market or balancing markets, while networks have no incentive to allow greater deployment of demand-side assets on their networks .
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Without proper energy system pricing, we will end up with growing pockets of value trapped between the current silo price and the costing methodology. Additionally, when considering investments in energy security or system resilience (e.g. capacity reserve sizing, other energy system restoration measures), demand-side measures that would reduce peak demand or provide backup power during unforeseen events should also be considered.
Policy, investment and support mechanisms and regulation must incorporate whole system costs as a standard to ensure that we get the best value for money from what is primarily a set of centrally procured investment mechanisms .
4. Reward consumers
Our new system must be designed around consumer needs. Although the weather is not flexible, consumers could be if the energy system is shaped according to their needs and abilities. By placing greater emphasis on demand-side assets and actions and rewarding customers with system-wide cost reductions, policy and markets will enable more demand-side investment while reducing costs for all voters, not just those who can behave flexibly.
ReCosting Energy’s modeling work with Frontier Economics shows very clearly that demand-side assets have a significant impact on overall energy system cost reductions for society as a whole – and the public purse. More directly, by appropriately rewarding those who can use energy flexibly, greater investment will be unlocked on the demand side, building overall system resilience and explicitly delivering a decarbonization dividend to voters.
Policy, investment decisions, and regulation must design their planning with the recognition that properly rewarded demand-side assets on the energy system will deliver customer value and whole-system cost reductions, to the benefit of all. Additionally, the retail industry must be shaped around the potential role that customers can play and benefit from.
The energy transition must balance supply and demand
The general message of the round table was that the energy system must adopt the whole system costs as the basis of its policy, planning and investment regimes, in order to ensure security, stability, reduction costs and benefits for consumers. Voters need to be convinced that we are designing the energy system to eliminate waste and free up flexibility and storage to ensure that every penny they invest in the transition is properly allocated between supply and demand assets.
The UK government and regulator are currently undertaking major market and retail reforms and it is crucial that the Cinderella of the sector becomes a central player in our new world of renewable energy.