This report is brought to you by Utility Week Intelligence in association with CGI
Quick wins to activate demand side flex
The gauntlet has been laid down for massive growth in demand side flexibility to enable Clean Power 2030. But is the market ready to step up to the challenge? This was the question on the table at the latest meeting of the Utility Week Flexibility Forum
To hit the national ambition of Clean Power 2030, the National Energy System Operator (NESO) set out in November last year its view that this would require a four- to five-fold increase in the volume of demand flexibility available to the system. Its profile for this growth included a heavy emphasis on increased participation from consumers and domestic 'smart appliances'.
While views on whether the make-up of demand flexibility outlined by the NESO vary, there is no doubt that the challenge it has laid down to all flexibility market stakeholders is a BHAG (Big Hairy Audacious Goal) of the highest order).
At the latest meeting of Utility Week’s Flexibility Forum – which challenged members to consider the deliverability of NESO’s growth target – one of the energy sector’s most prominent advocates for the activation of demand side potential in the energy transition stated: “Out of all of CP30s ambitions, which present some really, really difficult targets … flexibility is the most challenging – because of the number of moving parts, the complexity of it.”
Responding to this challenge, as expert speakers at our event outlined, will require a major mindset shift in the way energy markets are designed. A structural move is required, away from the current market mechanisms – which were designed to attract investment in flexible, fossil-fuelled supply side assets, the economics of which are driven by the marginal cost of generation – towards a model which supports a much more decentralised system. In the latter case, supply side economics should be driven by the recovery of capital investment. Market design must pivot to support a new need for system stability, reliability and security to be sated from dispatchable demand side assets, our leaders stated.
Achieving this kind of fundamental structural shift in market design will require an almighty effort to improve coordination and cooperation across the many stakeholders whose support and engagement will define success for demand flexibility. This must encompass, policy makers and regulators, energy retailers, infrastructure owners, flexibility aggregators, manufacturers of smart devices and distributed energy assets – and more.
But while these significant goals are worked towards, our Flex Forum leaders were emphatic in underlining that market participants cannot sit idle and await a great reinvention of the energy sector. There needs to be a concerted and collaborative movement to grasp every quick win available so that, as longer-burn changes progress, the market is in the best possible position to activate demand side flexibility at scale.
Here are the near term priorities our expert panel – including representation from energy retail, flexibility service provision, the smart devices sector and electricity distribution – said need to be addressed in the next six-12 months to make a “supercharging” of demand side flexibility possible and keep CP30 in sight.
Smart meter acceleration (and MHHS)
As a fundamental tool for understanding demand and consumer behaviour, and the conduit for market wide half hourly settlement, smart meters were pointed to as a critical enabler of growth in demand flexibility. There were therefore some strong statements of frustration issues from speakers and other Flex Forum members about the continued slow pace of the smart meter rollout.
Echoing recent calls from the independent think tank The Energy Geeks, several panelists expressed support for radical action to much more strongly incentivise, or possibly mandate, completion of the smart meter rollout. One influential voice on the topic said a “task and finish group” should be appointed by government to “rapidly reappraise” the delivery approach for smart metering. It should be empowered to “create a plan and drive it out”, they said.
Another panelist representing a major energy supplier said that retailers aspiring to bring energy flexibility products to market should be incentivised to install smart meters in houses containing storage heaters so that the significant potential of these devices to provide flexibility services might be unlocked. A focus on this demographic would help typically fuel-poor customers access the benefits of energy flexibility which are often perceived to favour more affluent consumer groups, they added.
Discussion around driving smarter metering forward was combined with decisive commentary about the importance of embracing market-wide half-hourly settlement and ensuring this programme has no further set-backs. The programme is now set to complete in 2027 after Ofgem approved a change to the timeline in November 2024.
"If you take nothing else away from today,” remarked one panelist, “take out that we absolutely have to do market-wide half-hourly settlement, because otherwise there's no economic incentive [for flexibility].”
Better funding for energy assets
One prominent representative of the smart technologies sector was keen to bring attention to the dramatic increases forecast by NESO in its CP30 advisory document in “smart appliances” in people’s homes - from batteries to heat pumps to white goods and more - with the ability to alter their energy consumption in response to signals.
“Without 20 times more assets in people’s homes that are electric and flexible, we are going to come in well under [NESO’s expectations],” they emphasized. “It is only an asset that can be flexible…these are the things we need in people homes now – or going forward in quite a rapid state – to get us to any of these targets. And in my view, that requires different business models.”
Crucially, these new business models must address the affordability gap which faces the vast majority of consumers when considering installation of smart energy technologies, our whole panel agreed.
While electric vehicle growth is hitting exponential rates with dramatically reducing costs year-on-year and good financing models emerging to make EV’s ever more accessible to the mass market, other technologies are not so well served, our panel agreed.
Finding ways to wrap financing into offers which support heat pumps or, even more ideally, the installation of bundled, complimentary technologies such as heat pumps, solar PV and home batteries, is crucial, said our experts.
This needn’t be hard, they added. Models exist for attracting the necessary financing to make adoption of these technologies much easier and accessible to consumers, it was argued. For example, one panelist pointed to the Contracts for Difference mechanism and argued that the CfD model could be applied to bank roll uptake of heat pumps at scale. They said they had floated this idea with the Low Carbon Contracts Company who had raised no technical barriers and that preliminary conversations with a large pension fund had proved there would be investor interest in the proposition. “Why are we not unlocking our markets to actually deliver customers; advantages, opportunities, assets and decarbonisation?” they asked plaintively.
Another speaker pointed to examples of collaboration between an energy supplier, a local energy alliance and housing developers which aims to generate a standard contract to return benefits to developers for installing smart energy technologies in new homes, principally through managed participation of those assets in balancing market services.
“It won’t be right first time,” said our speaker, “but it will come back with a really interesting business model."
Remove final consumption levies
Our debate included numerous references to ways in which current market design is failing to adjust to recognise the value of demand side activity. A primary example of this was highlighted in final consumption levies (FCLs).
“Because we used to have a system where the flexibility came from fossil fuels, we loaded lots of costs on to demand … all of the policy costs sit on demand,” commented one speaker.
Elaborating, they pointed to FCLs as a problem. FCL’s are the mechanism currently used to recover the costs or schemes like Contracts for Difference from consumers. They currently account for around a third of the retail cost of energy, charging consumers around £60/MWh at off peak times, and more during peak demand periods due to the Capacity Market Levy.
Our speaker was forthright in putting forward their view that FCLs disincentivise participation in demand turn-up flexibility services, and are preventing reduction in the cost of operation for a decarbonised power system.
Giving an example, they said: “Instead of curtailing wind, I could turn on storage heaters and bid-in at zero – lower than the cost of wind. But today, I have to pay 80 quid a megawatt hour [during peak periods] in these final consumption levies.”
This speaker’s primary ask for short term action to enable flexibility growth was to remove final consumption levies on “all demand turn-up” and “smear” the lost payments value over other parts of the system, primarily fossil fuel generation. “We must fix the underlying economics of the system,” they emphasized.
Another flexibility service provider on the panel agreed with this proposal.
“Because we used to have a system where the flexibility came from fossil fuels, we loaded lots of costs on to demand … all of the policy costs sit on demand.”
Accelerate customer-centric system digitalisation
A fundamental enabler of mass-market engagement in demand side flexibility is the establishment of secure and reliable digital systems which are intuitive for customers to interface with, noted several experts.
Noting the recommendations put forward by the Energy Data and subsequent Energy Digitalisation Taskforces, one speaker said they are “very worried” about the progress that has been made on implementation. They added that the development of digital customer journeys for engaging in flexibility is confused, and expects too much of the customer in terms of seeking out multiple touch points for actions like asset registration and provision of consent for asset control.
Elaborating on this theme, they said: “Nobody is designing these digital systems to be absolutely one-stop-shop and focused on my journey – the customer journey. Not the energy systems journey, and not the digital asset journey. This is not difficult, but because we've been creating this from a systems point of view, rather than from a customer point of view, we're going to lose out very quickly.”
There was common support for the idea of reassessing the digital experience being offered around flexibility, and ensuring that this at least matches the experience of consumers in others settings. A consumer should be able to operate a single platform for asset registration – which should ideally automatically recognise new smart devices being added to a household – managing their consent settings and monitoring their rewards for participation in flexibility services, it was agreed. Designing the systems to support this kind of experience needs urgent attention.
In related discussion, another short term focus should be the creation of a common standard for all Distribution System Operators (DSOs) for the way in which information about local area energy plans, distributed energy assets, housing stock and network capacity and constraints are captured, collated and shared.
A senior DSO leader participating in the session said this is essential to the creation of a clear “bottom up” appreciation of when and where investment will be required at local level to facilitate clean power ambitions. This would include clarifying how flexibility can usefully be applied across local networks, both to sequence and prioritise investment in network expansion and to provide resilience to supplies.
The same speaker noted that planning for CP30 has so far been dominated by “top down” thinking “which is really focused on generation”. This is “old fashioned thinking” which is leading to “missed opportunities” for demand flexibility, they added.
Concluding remarks
Rich Hampshire, VP digital utilities at CGI, offers reflections on the latest Flexibility Forum meeting and the role of demand flexibility in delivering our CP30 mission.
As the Flexibility Forum entered its second year it was informed by the government’s action plan in response to NESO’s advice on the deliverability of the Clean Power 2030 mission. The Forum’s discussion brought together the themes discussed throughout last year to explore what it will take to “supercharge” demand flexibility and to deliver propositions that truly engage and reward us for allowing our dispatchable devices to be flexed.
The much-discussed headline figure of a 4-5 times increase in flexibility from the demand side hides the true scale of the challenge. That is, >80% of the required growth comes from the demand side and smart charging – which means 800% growth in flexibility from residential demand response and smart charging. And that will require not just the adoption of no-and-low carbon technologies, but consumers being willing to, and rewarded for, allowing those smart devices to provide flexibility services.
No surprise then that the Flexibility Forum discussion majored on the enablers required for the value to flow to flexibility services. These include completion of the smart meter roll-out, delivering market-wide half-hourly settlement and sorting out the data exchange mechanisms to enable coordination of the use of flexibility between market actors. The Forum also highlighted a need to address the market arrangements and ensure that the approach to levies doesn’t unintentionally act as a brake to delivering the wider policy objectives and CP30.
Bringing these themes together, it was about ensuring that the value created from demand flexibility can be accessed and, ultimately, flow to the consumer.
Subsequent to the Forum meeting, Ofgem has confirmed that the Market Facilitaor will deliver and operate Flexibility Market Asset Registration and that it should, ideally, be operational ahead of MHHS in 2027. This clarity should begin to address some of the points identified by the Forum.
I keep coming back to NESO’s first key message in its advice to government, that to deliver CP30 “Several elements must deliver at the limit of what is feasible: a key challenge will be making sure all deliver simultaneously, in full and at maximum pace…”. The challenge of getting new generation built and connected cannot be underestimated and the role of demand-side flexibility could well provide some mitigation to any delays in meeting those targets. But securing consumers’ trust to allow their devices to participate in the provision of flexibility and ensuring the markets for flexibility enable value to be accessed will be essential to attracting service providers into the market and ‘super-charging’ the choices we all have to meet our energy needs.
Also from the UW Flex Forum…
High stakes for flex markets in 2025
Flex leaders set out their list or priorities for 2025
There's no Clean Power 2030 without flex - call it out
There is mounting frustration with blockers to the flex market.
Dos and don’ts for the market facilitator
A guide to industry expectations of the new entity
Consent – the make or break of energy flexibility
What will convince consumers to use their homes for flexibility services?
Energy flexibility: What do we want?
What does success look like for GB flexibility markets?
Demand side flexibility: The state of play
Why are recognised barriers to flexibility taking so long to break down?
About the Flexibility Forum
Utility Week’s Flexibility Forum, created in association with CGI, is a community for all stakeholders in the development of energy flexibility markets and services in GB. Through running regular events which promote discussion and learning on topical issues, and publishing insights into these meetings, it is our ambition that the Flexibility Forum will encourage consensus and understanding about how to tackle market challenges and 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.
This report is brought to you by Utility Week Intelligence in association with CGI