Navigant Research Blog

Value of Industrial Flexibility in Europe

— September 5, 2017

The Clean Energy for All Europeans proposal (the so-called Winter Package) is a policy package that aims to meet climate objectives and ensure economic growth. This package prioritizes energy efficiency and renewable energies while fostering organized electricity markets to realize cost savings. It also empowers consumers, strengthens their rights, and gives them an active role in energy markets. The Winter Package emphasizes variable renewable sources and shifts the design of the European power systems toward increased interactivity and complexity.

Industrial demand flexibility can facilitate the cost-effective integration of more renewable energy sources (RES) in the EU market and assist with increasing costs of electricity that hamper the competitiveness of the EU industry. In some cases, industrial customers can provide flexibility much more cost-effectively than supply-side resources. However, industrial customers with flexibility potential must have access to all value streams; different industrial loads can provide many different services. For example, demand-side management (DSM) is always a voluntary service, which distinguishes it from curtailment.

Industrial Demand Flexibility Business Models

There are several business models to deal with demand flexibility that are in line with proposals under the Winter Package. Savings in energy bills are possible through flexibility in responding to dynamic energy prices in day-ahead markets and time-dependent cost-reflective network tariffs, alone or in combination with onsite renewable generation. Additional revenue can be obtained via market participation in system services, such as reserves and balancing, ancillary services, and interruptible contracts.

Energy consumers should be able to access the market directly or work with aggregators. Examples from Australia and New Zealand show that the average capacity of an industrial customer is roughly 0.5 MW, and these are not able to provide flexibility options to the system themselves. Therefore, the role of aggregators is key.

The procurement of balancing capacity and ancillary services close to real time, rather than in big chunks, allows the availability of flexibility to be predicted. Today, most flexibility is sold in balancing markets, but not every industrial process is fit to respond in 15-minute intervals. Still, industrial customers are interested in participating in these markets. Examples from the United States, Australia, and New Zealand indicate industrial customers offer to free up load to provide system services at fair prices.

It is important to set the energy-only market right in all member states and to make the system more flexible. To facilitate flexibility services, power markets need to become more dynamic. Renewable energy will have increasing impacts on power prices. Dynamic pricing would give flexibility a value.

Better engagement of consumers in the energy market should be enabled as soon as possible—the Winter Package provides additional policy and regulatory support in this respect. However, the implementation of policies in member states is often lagging. Regional and multinational approaches can help (e.g., opening of several markets to efficiency/RES development measures).

Value of Flexibility

Flexibility is gaining importance in the changing power markets. Various policy measures should be implemented to stimulate the exploitation of industrial flexibility operations:

  • Introduce dynamic pricing to capture the full value of flexibility.
  • Allow participation of demand in day-ahead, intra-day, and balancing markets, including through aggregation.
  • Design cost-reflective network tariffs aligned with periods of maximum network utilization.
  • Avoid other regulated charges and take non-electricity costs out of the tariff.
  • Make RES responsible for imbalances (exceptions for small-scale RES), move toward efficient imbalance pricing systems, and allow aggregation and imbalance compensation.
  • Abandon net metering policies and allow self-generation for onsite variable renewable electricity.
  • Adopt high level principles-based harmonization of flexibility mechanisms across the EU.

Experience with other policies (e.g., energy efficiency policies for industry) shows that accurate policy and market design measures may encourage industrial customers to be more cost-effective.

 

Brexit and the Future of Energy in the United Kingdom, Part 1

— July 12, 2016

Energy CloudThe world is still reeling after the United Kingdom’s shock vote to leave the European Union (EU). So what does this mean for the country’s energy policy? And what does this mean for companies seeking to do business in energy in the United Kingdom?

The short answer to the first question is nobody knows, but it will either stay the same or get worse. Only a few short weeks after the world woke up to the reality of Brexit, there is far too much uncertainty to form a considered opinion about the extent to which the United Kingdom’s energy sector will be affected by the vote. However, it is worth taking a step back to assess the different scenarios that may evolve during the Brexit negotiations.

Period of Uncertainty

Until the U.K. government invokes Article 50 and formally notifies the EU about its intent to leave, the United Kingdom remains a full member. Article 50 will not be invoked until the new Prime Minister Theresa May enters Downing Street; however, there may be legal hurdles and a vote by Parliament before Article 50 can be invoked. There may even be a snap general election, further extending the period of uncertainty.

Brexit will either look very similar to the current state of affairs (although the United Kingdom will no longer participate in the European Parliament, it will still enact its laws), or the United Kingdom will cut itself off completely and face many years of trade renegotiations. So what can we expect the impact of Brexit to be on the U.K. energy market?

A Potential New Direction

The United Kingdom’s energy policy has been closely tied to wider EU policy for the last couple of decades. EU policy is heavily influenced by a low-carbon future and a pan-European energy market. The United Kingdom’s renewables, smart meter, and air quality targets were all set by Europe; a full departure from the EU via Brexit would mean the United Kingdom could tear up its commitments and choose its own direction.

Given the impending start of the United Kingdom’s smart meter rollout, this is probably an unstoppable train that has already left the station. However, if Brexit leads to a recession and higher fuel bills, there will likely be pressure on government to delay the smart meter deployment or rescind the legal obligation that forces suppliers to deploy meters. The United Kingdom has lagged behind many European countries in its commitments to improve air quality; a full Brexit from the EU will likely see the country delay further, given a likely shift back to fossil fuel-powered generation.

The short answer to the second question of what Brexit means for companies doing business in energy is “wait and see.” Look for more on this topic in the next post in this two-part series.

 

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