Overcoming Challenges on Energy Flexibility

By Aurelien Guichard
Manager, Arthur D. Little

As we near the close of 2020, companies are under greater pressure to source more energy flexibility to ensure security of supply as renewables and other “green” alternatives shift the energy mix. From board rooms to investors to social media, the decisions companies are making and the approaches they are taking on energy initiatives are critical to success.

As a result, energy suppliers, independent aggregators, software providers and asset manufacturers are preparing themselves for two things simultaneously: being technically capable to get access to the flexibility that distributed assets can provide; and adapting their value propositions to engage customers in a complex technical process where the end user’s credo is simplicity.

In Europe and globally, flexibility as an independent activity is not very lucrative. Profitability remains the biggest challenge. Aggregators are struggling to survive as standalone businesses. This is one of the reasons why many aggregators have been acquired by large retailers, as they themselves were not agile enough to quickly set up or adapt their own virtual power plant (VPP) technical solution internally. And while the situation is more complex for aggregators than for retailers, given their lack of access to the client base, retailers will need to unlock extra budget to imagine new routes to access and convince consumers to participate in this market.

End users (i.e., industrial and commercial companies, households) want to know why this matters. With flexibility, their cost savings will vary according to their inherent power reduction potential. Large industrials will be able to achieve notable savings while others will only save small amounts. That’s why it is important for companies to embrace how their efforts, in addition to some reduction in costs, will result in carbon emission reductions, leading to a more positive image for the brand.

For the residential segment, reaching benefits is more complex due to the costly upfront investment in energy assets. The lack of demand response (DR) market awareness and the smaller nominal cost savings to be achieved is why incentives for households should not solely consist of the potential for cost savings in the energy invoice. Instead, retailers, aggregators and/or equipment manufacturers (for boilers, heat pumps, appliances, etc.) should propose joint investments in the assets. Such a value proposition could look more attractive to end users and ensure a certainty for the aggregator to access the equipment under certain conditions.

Large retailers, most of whom acquired independent aggregators, will have an advantage compared to the rest of the market. Customers are used to “discussing” energy matters with them. With this understanding, it seems clear that the aggregation business needs to be complementary to other services, such as energy supply and trading services. Aggregators will also have to accept renouncing part of their margin and sharing it with the consumers who will expect a more significant return in exchange of flexibility, behavior data and private information.

As competition grows and supply of flexibility rises, there will likely be a decline of some revenues, such as those from ancillary services markets. Here are four things investors, independent aggregators, and energy retailers need to keep in mind:

1. Diversification of the revenue sources. The VPP portfolio of assets should be diversified in order to access as many revenue sources as possiblefrom wholesale markets to capacity markets, to ancillary services—at the local level and markets level.
2. Engage the end user in the journey. This is imperative and it starts at the point of sale for the equipment. For that reason, partnerships along the entire value chain (e.g., with equipment manufacturers) are paramount to be technically capable, to access flexibility and secure contact with customers.
3. Commit to a fixed-cost savings. This will demonstrate a desire to ease end users’ financial burdens, giving them a reason to participate.
4. Consider merger and acquisition strategy. While the most suited player to get access to the end user is the energy retailer, they often lack the enabling technology—which is why acquisitions will be the most efficient and swiftest route for entering the market.

With declining technology cost curves and the growing adoption of solar PV, batteries, and electric vehicles, getting access to end user flexibility, via new retailer/aggregator combinations, will be complex but necessary. The key to success will be agility coupled with creative and transparent business models so the customer understands the concept of energy flexibility and their return on investment.

—Aurelien Guichard is a manager and member of the utilities and alternative energy practice at Arthur D. Little, an international management consultancy that links strategy, innovation and technology to ensure client success.