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Flexibility Markets & Demand Side Response are a game changer for UKFlexibility Markets & Demand Side Response are a game changer for UK

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Flexibility Markets & Demand Side Response are a game changer for UK energy security – are we ready?

25th Jul, 2022

Principal Consultant, Gavin Beresford highlights the key takeaways from the launch of National Grid Electricity System Operator’s (ESO) Future Energy Scenarios 2022.


The rapid advance of Flexibility Markets and Demand Side Response: Taking the time to get it right, quick.

In July 2022, the National Grid ESO launched it’s annual Future Energy Scenarios (FES). The four key messages of ‘Policy & Delivery’, ‘Consumer & Digitalisation’, ‘Markets & Flexibility’, ‘Infrastructure and Whole Energy Systems’ present a much-needed point of reference for the UK to beat a path towards a sustainable future, a stable market and a secure energy system, underpinned by Flexible Energy Markets and Demand Side Response (DSR).

However, Flexible Energy Markets (backed by what could be the World’s first national scale Whole energy system) are arguably one of the most digitally & socially complex endeavours in the history of UK infrastructure. The pace of technology change, the pattern of supply and demand, and the critical need for stable, regulated and fair markets, are moving at lightning speed. We must get it right!

Flexible Markets and DSR are exciting for the Energy industry. They offer local and consumer-orientated solutions to balancing our national grid in a way that can drive us towards Net Zero, whilst engaging consumers in energy efficiency and putting value directly back into the businesses, communities and households participating. They are the necessary components in addressing the UK’s crippling clear-and-present risk of geopolitical events, fossil fuel reliance (domestically and globally), and the (unprecedented) forecasted growth and demand for electricity across all sectors. Particularly as electricity is increasingly the viable solution for enabling heating and transport.

Are Flexible Markets & DSR about increasing energy production, availability, security and balancing, or turning the tide toward a culture of saving energy?

The answer is resounding. It is both. The ability to leverage small-scale generation and storage within Industrial & Commercial settings, and small businesses (even the domestic arena) is a game changer for bolstering the energy available to the UK’s networks. With rapidly developing technologies, digitalisation, data management and fresh business models, we can now viably establish and grow a secure, decentralised and dynamic electricity grid. It will draw on a diverse array of independent generators (to their economic benefit) to balance demand and supply in near real-time.

It is also about saving energy. It drives forward a market, with the financial and environmental opportunities from Flexible Energy, engendering energy efficient and energy conscious culture at all levels of that market – from Domestic, up through to major local & national infrastructure initiatives. Flexible Markets (supported by DSR tools, products, services and business models) will promote a more considered approach to the consumption of energy, and help consumers make choices on how they can adapt their energy profile. That said, there remains the sizable hurdle of addressing cash liquidity for the participants in DSR services. Local generation, local storage, the electrification of heat and transport, as well as the rapid emergence of connected devices, represents a sizable long-term investment in both the business and domestic arenas.

What does the UK Energy Industry, need to do to successfully create Flexible Markets and Demand Side Response capabilities?

Drive a top-down approach

The UK Energy System is orientated around large-scale generation assets (inclusive of renewables). DSR is not new to the system, but it is far from mass-market ready. For Flexible Markets and DSR to thrive, we must focus our efforts on the ‘small’ whilst managing the ‘big’. This is the embodiment of the ‘whole system’ approach and therefore, we must avoid working in silos. The Government has a significant role to play in driving this ‘top-down’ approach. In these early days, we are at risk of proliferation of Flexible Markets and inconsistent DSR products & services. Much like the innovative, yet distinctly localised emergence of electricity distribution and electrical product design in the late 19th Century, there are now (in the 2020s) great opportunities for innovation, creative digital systems and differentiating pricing models. The call for a ‘top-down’ approach is needed to balance enabling competition and creativity across Flexible Markets, whilst protecting market participants from such things as bad investments, surge pricing or a possible lack of physical and digital interoperability.

Focus on the consumer

The large-scale adoption and success of Flexible Markets and DSR rely on new consumer models. The consumer (whether Domestic, Business, or Industrial & Commercial) becomes both a customer and a producer – a prosumer – within the Whole Energy System. Prosumers must be provided the financial direction and viable commercial agreements, clearly and consistently across markets to ensure that the issue of cash liquidity is addressed and enable confidence in the widespread adoption of DSR products and services. Prosumers must also be able to access digital tools & infrastructure that achieve interoperability between products, services and networks, enabling them to interact seamlessly through their DSR capability. And those prosumers need confidence that they are protected and rewarded, both in maintaining their assets and navigating away from financial dis-benefits or anti-market behaviours. Further, we must also drive the message of energy efficiency. The cheapest energy is the energy not needed in the first place, and a more energy efficient Populus under-writes our national energy security.

Enabling Market feedback

UK Government and the UK Energy Industry must allow the development and evolution of Flexible Markets to be influenced (safely) by the DSR asset and capacity holders. Industrial & Commercial entities will have a big part to play in improving the mechanics of the Flexibility Market. The ability to access grid connections more rapidly or attain planning permissions for flexible assets, for example, is currently being heard loud and clear in the Forums and Conference Halls. Domestic Consumers also must be engaged and enabled to influence through their collective buying power and feedback.

Balancing short term pain against the long game

Flexibility and Energy Security are hot topics for good reasons. The cost of energy has risen at unprecedented speed. The conflict in Ukraine and the impacts on international relations (particularly the severing of the link between European nations and Russian gas) means that this geopolitical event is destabilising the existing UK Energy Market through constraints on gas supply and increased competition for European gas stocks. Additionally, winter is coming, and an increased proportion of the nation now works from home. We are subsequently using more energy in the domestic environment. These could all be relatively short-term influences, but they are important considerations to avoid any knee-jerk or stress-induced design approaches to our burgeoning Flexibility Markets. As the demand for Energy is continuously on a rising trend, the need to improve our long-term Energy Security, modernise our infrastructure, and keep the environment and Net Zero at the centre of the design principles, the UK must balance the short-term pain with the long-term investment.

Looking Forward: The BEIS consultations for the ‘Review of Electricity Market Arrangements (REMA)’ & ‘Delivering a smart and secure electricity system’

It is clear that the progress towards Flexible Markets and DSR capabilities are rapidly advancing and there is much activity to engage and influence. However, there are two consultations we currently see as critical to enabling progress. The BEIS consultations for the ‘Review of Electricity Market Arrangements (REMA)’ and ‘Delivering a smart and secure electricity system’ offers a pivotal moment to shape this future market, as depicted this week by the National Grid ESO’s Future Energy Scenarios 2022.

Where they have the capability and capacity to do so, I think UK Energy Industry market participants have an unwritten obligation to consider these consultations and present their thoughts.

The consultations are open now, until 10th October 2022 and 28th September respectively.

Authors

Gavin Beresford

Principal Consultant

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