The second panel from Electron’s Flex at Scale 2024 event addressed what Flexibility Service Providers (FSPs) need to encourage them to participate in flexibility markets. According to the panel, everything points back to how value can be increased or made more readily available. This further reinforces how value and volume are irrefutably linked.
The panel included: Doug Cook, Director, Strategy & Flexibility at Ohme; Rachel Fletcher, Director, regulation & economics at Octopus Energy; and Mike Ryan, Commercial Director at Constantine Energy Storage. Jo-Jo Hubbard, Electron’s CEO and Co-Founder, moderated the panel.
Here’s an overview of some of their key insights.
Read how value and volume work together to drive flexibility at scale
1. We need to separate the two very different categories for distributed energy assets
Fundamentally, there are different types of energy flexibility at the distribution level, split according to their overarching purpose:
- Assets built and financed to make money from flexibility
- Dual-use assets which benefit the consumer as well as offering flexibility services
Everyone is talking about how it is more economic to build and engage larger energy resources at distribution level. However, dual-purpose energy resources have a huge amount of value up for grabs.
The Centre for Net Zero “somewhat conservatively” predicting £95 billion in savings from the consumer assets underlying domestic flexibility by 2050.
The relative value of those assets when planning for that future of domestic flexibility is key, according to the panel. “I would argue that we’re comparing apples and bananas,” says Doug.
“I saw a levelised cost of flexibility graph [aiming to demonstrate the average cost of energy for comparison between different sources] constructed by a consultant the other day. It showed that decentralised energy is more expensive than utility-scale storage. However, that’s comparing someone’s ability to heat their home or take the kids to school in an EV, versus an industrial-scale, shipping container-sized battery.
“It’s applying an energy-industry specific lens to focus on what’s going to give you the cheapest flexibility, ignoring the externalities and positive consequences available for peoples’ lives.” Those positive outcomes bring value in their own right.
2. Financial assets need to see more revenue predictability and have a simpler route to market
The panel also discussed creating more predictability in revenue for asset developers looking to finance new distributed resources.
One opportunity at distribution level is to focus on collecting more data on the value of local flexibility. This would help enable the creation of a better forward curve.
Currently, financers find it difficult to predict the revenue that can be earned on an energy asset. That lack of information makes financing more expensive and thus slows asset build-out.
“How can we create the insights that will allow you – financiers – to build your forward curve around decentralised assets, ensuring their flex value can make them more affordable for more people?” asked Doug. “As it stands, there is no independent way of pulling all that information together, observing it, and then making major investment decisions in decentralised assets on that basis.”
The complexity of understanding value in these distribution-level markets has also created business for intermediaries and consultants. That eats into the value available for the consumers.
“More parties in the value chain creates more complexity, which makes it harder to get more assets to play in these markets,” said Mike.
Once again, the importance of transparent and portable data is the key – both for simplifying the complexity of the processes and helping investors to understand the performance of assets and their flexible potential.
3. There is still ample opportunity for retailers to create a value proposition for consumers based around improving their lifestyle
Dual-use assets can also offer a valuable commodity to consumers. They can help those consumers to see value in participating in flexibility – over and above financial reward.
“It is our responsibility as energy retailers to develop the products that are easy to use, and that provide consumers with good value,” said Rachel. “Intelligent Octopus lets consumers know what their tariff is and what the conditions are. There is no need for them to understand how it works behind the scenes.
“The point is that their vehicle is charged when they want it to be charged, at the amount that they’ve commissioned.”
Looking to the future, where smart and flexible technologies in homes will become the norm, Rachel extended this analogy further to the benefits of financing around those assets.
“If the consumer proposition is a zero-bill home for 10 years, that then starts to have a positive impact on the value of the home, the customer’s ability to get a mortgage, the rate that they get,” said Rachel.
4. Yet more consumer value can be unlocked by considering different financing models
The panelists also debated the opportunities that extend beyond retailers’ consumer products. Under the current market design, only retailers or suppliers can unlock many of the consumer value propositions.
They have direct access to the balancing mechanism and can offer money-off bills and other rewards for participating in flexibility.
Asset operators can’t access the balancing mechanism in the same way. Plus, if they were to offer a consumer proposition for using flexibility, this would make the consumer liable for income tax and a extra friction.
“If asset operators sell EV chargers, they have a commercial relationship with the customer that lasts as long as they’ve paid the operator for the charger,” said Doug. “Anything the operator then pays them for their flexibility is income – which treasuries can tax.”
There are therefore other potential avenues or partnerships to pursue that unlock value to pass back to consumers. For example, joining up the payments with the financing model for the asset in the first place and or various rent-to-own models.
Although the market for this option is still at an early stage, it could be a way to pay consumers back for flexibility.
5. Flexibility needs to be transparent and trustworthy to encourage volume into markets
The panel concluded on a point that’s behind much of the change needed to encourage flexibility providers to participate and introduce more volume into flexibility markets. Consumers need to trust in the outcome of using flexibility.
“The true commodity here is trust,” said Doug. “But we, the energy industry, transact in pounds and pence in energy markets. For flex to work, we must be relentlessly focused on trust.
“How does flexibility make it simple for the customer, make sure there’s accountability, make sure that parties are doing the thing they say they’re going to do? Ultimately, that transparency creates the trust and makes flexibility viable for the whole industry.”
The topic of trust is worthy of its own blog. Suffice to say that FSPs need to have confidence in how their assets will be treated and how the service will be delivered.
Trust will then encourage them to participate in flexibility markets – and that volume will help drive value.
Read more from the Flex at Scale event in our key takeaways blog and our summary from the first panel on boosting value in flex markets.
