This report is brought to you by Utility Week Intelligence in association with CGI
Energy flexibility – what do we want?
Flexibility may be essential to our future energy system – but can the industry agree on what success looks like for operations of flexibility markets? At the first meeting of Utility Week’s Flexibility Forum, consensus was elusive. Meanwhile uncertainty reigned over consumer consent and risk allocation. Read on to find out more…
The race for net zero carbon is driving exponential growth in low carbon technologies including electric vehicles, distributed renewable generation assets, battery storage, heat pumps, and more. These things are pouring additional load onto increasingly strained power networks – especially at local levels.
Without rapid development of new markets designed to manage constraints and optimise the use of clean power as and when it is abundant on the system there is a real risk that our response to climate change and our pursuit of a more sustainable future will come at the expense of reliability and security of energy supplies. In turn this would bring additional transition cost implications for companies and consumers, exacerbating an energy cost crisis.
Enter energy flexibility, the white knight of the energy transition, which promises to bring balance to decarbonisation by using price incentives to match supply and demand and encourage thrifty storage of energy to avoid network congestion. According to the Climate Change Committee, the value of energy flexibility, through better use of low-carbon generation in the run-up to 2030 should be between £3-4 billion a year, rising to £16 billion a year by 2050. Other estimates from respected academic institutions are even higher.
But while this theoretical value of energy flexibility is now widely recognised, there is limited consensus in the energy market around how well we are doing at realising it or what good looks like in terms of a well-functioning flexible energy system.
This was a key conclusion and driver for discussion at Utility Week’s inaugural meeting of its Flexibility Forum (Flex Forum) in January. This community, established by Utility Week in association with CGI, is designed to foster whole-industry collaboration on breaking down barriers to flexibility growth and provide an independent forum, including stakeholders from across the energy value chain, for sense-checking the direction of travel in flexibility market governance and regulation.
This article summarises some of the key thoughts shared by the founding participants of Utility Week’s Flex Forum. These have been loosely grouped into the following categories:
Concluding remarks are also offered by Rich Hampshire, vice president digital utilities, CGI
Our Flex Forum meeting was held under the Chatham House Rule to encourage frank exchanges of views and opinions between participants. As such, participating organisations and individuals have not been identified in this article.
A lack of shared vision
Our founding Flex Forum participants were enthusiastic about recent strides that have been made to incorporate energy flexibility services in the day to day operation of our energy system. It was generally agreed that 2023 had been a “special year” for flexibility, most notably thanks to the establishment of the Electricity System Operator’s Demand Flexibility Service (DFS). Other advances at distribution level, including record volumes of flexibility being tendered and contracted to alleviate local network capacity constraints were also cited as signs of positive development for flexibility services.
Notwithstanding this progress, there was a general consensus that market development lacks a sense of common focus and purpose. One influential technology and regulatory expert at the meeting suggested that “flexibility is still viewed as a nice to have” and that there is no clear idea about what goals we should be working towards to track progress in flexibility market development.
“There’s no shared sense of what we need to measure to understand our progress – no shared dashboard.”
Head of flexibility markets at a distribution system operator.
Others agreed, adding that while the introduction of DFS had been a milestone moment for the industry it was still a “frustratingly analogue service in what should be a digital-by-design world” and that “DFS should have moved on further” in its second winter. There was unanimous agreement that the winter of 2023-2024 should be the last year in which DFS can operate with “exclusivity”. In other words a privileged ability to call on the flexibility of those signed up to participate in the DFS, since this is blocking greater flexibility action at local level. These views echo the sentiments of contributors to Utility Week’s report Demand side flexibility: the state of play, published at the end of 2023 in association with CGI.
Extensive discussion around what useful targets of milestones for flexibility growth might look like highlighted the variety of views in the market around how flexibility value should be recognised and measured. Various permutations of targets which would set expectations around, for example, the proportion of EV customers connected to flex markets or the value of deferred infrastructure investment/generation were knocked around, all meeting objections from different stakeholders for their potential to drive unintended consequences. The conversation was indicative of a immature market ecosystem in which stakeholders with varied interests are struggling to find consensus on the best ways to incentivise “good” outcomes.
One senior representative from a major energy supplier expressed deep concern about the idea of “regulating entities to meet a target when instead we should have suitable incentives which encourage participation”.
Nevertheless, a “shared sense of what we need to measure” which could be tracked via a “shared dashboard” was agreed to be desirable. It was also generally felt that the creation of this should lie with the new Market Facilitator entity, shortly to be announced by Ofgem following competitive bids for the role from the ESO and Elexon, which runs balancing and settlement for the electricity market.
Consumer consent challenges
While the idea of setting goals and targets for future flexibility market development raised some tensions among our Flex Forum participants, it was unanimously agreed that increasing the numbers of consumers engaging with flexibility products – such as time of use tariffs and managed smart home services – is critical in any version of “flexibility success”.
It was worrying therefore to hear the low level of confidence expressed by multiple energy retailers within the forum about their ability to grow engagement with their flexibility offerings. A key barrier being felt by several supplier representatives was current regulation around marketing and the requirement for explicit consent to be given by consumers for receipt of news on new products and services.
“Opt-in rules are limiting the ability of suppliers to reach out to customers.”
Head of energy strategy at a large energy retailer.
“We are seeing a step change in understanding across the market about the power of consumers in this energy transition,” reflected one strategy director at a large energy retailer. However, they added that for this to translate into a step change in engagement or participation from consumers, marketing consent rules need to change.
“This is an area of concern for us,” they emphasised. “Opt-in rules are limiting the ability of suppliers to reach out to customers.” If consumers are not aware or informed about their options, it will be very hard to substantially grow flexibility market participation from consumers, resulting in the flexible potential of growing volumes of domestic assets – such as EVs – being left untapped, they concluded.
Another senior energy retail figure with responsibility for proposition development agreed with these sentiments. They added that the success of new propositions relies heavily on effective customer segmentation – “We need to be crystal clear about who, when and why [when we go to market],” they said. “We need to be granular about the way we communicate consumer offerings”. However, at the moment consent rules are a barrier to this kind of methodical go-to-market approach.
It was notable that among those retailers for who marketing consent rules were a concern, there was also a high degree of frustration around the activities of some leading energy suppliers who are considered to have leading market positions on the provision of flexibility services but who are not, in the estimation of their peers, adhering to the letter or even the spirit of regulation on marketing.
Hope was expressed that the issue of marketing consent might be reviewed by the regulator in advance of Market-wide Half-Hourly Settlement going live in 2025/26 – a market milestone which is also anticipated to substantially increase opportunities to offer smart and flexible energy services to consumers.
In lieu of any clear action on marketing rules however, there was also widespread consensus that other actions need to be taken to promote consumer awareness about the benefits to be gained through enrolling their assets in flexible markets – for themselves and the system.
Echoing sentiments which have already been widely aired, numerous Flex Forum participants called for better consumer information, advice and protection processes to be established. A clear role was seen here for bodies such as the Energy Ombudsman and Citizens Advice.
Ambiguous Risk Allocation
A clear prerequisite for consumer confidence in energy flexibility markets – and therefore for growth in participation – was agreed to be a clear message on who takes the risk of exposure to more dynamic pricing and ensuring the availability of assets in times of system need.
This thorny issue has long been a bone of contention in developing flexibility markets, but our Flex Forum participants felt markets are now reaching a tipping point at which ambiguity about risk allocation could become a serious blocker to increased participation – or a source of bad press in the event consumers become exposed to risks they did not fully appreciate or are able to manage.
“Who is in a position to take on the risk for participation?”
Energy propositions manager at a large energy retailer.
“Who is in a position to take on the risk for participation?” asked one Flex Forum participant. They added that unless we establish a clearer view on this – as well as “where value accrues and for who” – we leave the door open for unintended consequences and suboptimal outcomes in flexibility markets. “There is the potential for flexibility markets to become risk avoidance markets rather than constraint management markets,” they suggested.
A senior figure from one of the newly established distribution system operators agreed with this view, adding that there was a pressing need to recognise an imbalance in the value currently accruing to flexibility services at a system level versus those aimed at alleviating local network constraints.
There was a strong feeling that the government’s Review of Electricity Market Arrangements (REMA) ought to be taking a closer look at questions of risk allocation in a flexible energy system. A suggestion that the current approach to REMA is “too incremental” and is missing opportunities to instigate more transformational change to the energy market which would support flexible system operation, met with general agreement from the assembled group.
As a broader point, it was agreed that a future energy system which includes dynamic matching of supply and demand will inherently include far higher degrees of complexity. As one Flex Forum participant noted: “This will drive a need for a systemwide shift in attitudes to risk – but we need to recognise these attitudes are set by the regulatory framework.”
As a final point, it was noted that better appreciation of the flows of risk and reward in an energy system where energy flexibility plays a prominent role in the day to day operation of networks and markets is dependent on significant development of underpinning digital infrastructure.
It was acknowledged that Ofgem, in close collaboration with industry, is currently deeply engaged in refining the shape and nature of this infrastructure with its initial focus on getting a common smart asset register established being broadly welcomed. However, some noted that it should not have fallen on the regulator to take the initiative on development of the Flexibility Digital Infrastructure and that there has been a failure in market ownership for this.
Nevertheless, there was optimism that with the appointment of a Market Facilitator and creation of a long-anticipated common asset register, there will soon be more latitude for coordination of markets and flexibility opportunities which will make the flows of value and risk between parties easier to identify.
Concluding remarks
Rich Hampshire, vice president digital utilities at CGI – Utility Week’s strategic partner for its Flexibility Forum, offers reflections on the community’s first meeting
The inaugural meeting of Utility Week’s Flexibility Forum brought together leaders from across the entire flexibility market landscape. This report of the forum’s discussions surfaces differences in the perspectives and interests of organisations from across the energy system.
The commitment of the forum members to creating well-functioning, liquid markets for flexibility was clear, however the lack of consensus about what this should look like was equally apparent. Establishing a consensus on where the markets are headed will enable other insights from the discussion to be addressed, such as implementing appropriate incentives and how progress should be tracked. One point of broad agreement was that this was an issue and should be addressed; and people are eyeing the new Market Facilitator role as the delivery vehicle.
The shifts in market power towards the consumer and the associated reshaping of the risk landscape will undoubtedly be an important consideration in securing consumers’ trust to allow control of their flexible devices – who is best placed to take and effectively manage the different risks? The need for a cultural shift in attitudes to risk and the role of regulation in incentivising appropriate risk behaviours was identified in a previous collaboration by Utility Week and CGI, Paving the way to net zero.
Another area where differences of views were expressed was the regulator’s role in the development of the Flexibility Digital Infrastructure. Addressing market failures would seem to be a core role of any regulator. It shouldn’t therefore be a surprise that Ofgem chose to act when it identified four market failures inhibiting the development of flexibility markets in its Call for Input on the Future of Distributed Flexibility.
Next steps:
Utility Week’s Flexibility Forum will take forward insights and suggestions from this initial meeting to shape a series of relevant briefing and discussion events for Flex Forum members. A follow-up report to our December publication Demand side flexibility: the state of play is also planned for the summer. Our aim is that these events and content will sustain focus and momentum around tackling key challenges to flexibility market growth and help accelerate realisation of the value energy flexibility should bring to a sustainable, affordable energy system.
We are open to enquiries for new participation in the Flexibility Forum. Please contact Jane Gray at: janegray@fav-house.com, content director Utility Week, if you would like to join future meetings.