Enabling Electrification without Burning More Fossil Fuels

Unlocking the dormant capacity in demand-side flexibility

Demand-side flexibility is a critical tool to reduce the dependency on fossil fuels and balance our electricity grid. My discussion with Karl Bach, CEO of Axle Energy, suggests that 1) the lack of a compelling value proposition, 2) usability challenges, as well as 3) the burdensome integration into the energy markets, limit consumer participation in demand-side flexibility. Incumbents — who are in the pole position to unlock this dormant capacity due to their distribution advantage — will need new technology solutions to 1) access markets at scale and 2) optimise within the heterogeneous asset base.

Our electricity grid is a sensible type of animal: For it to function, electricity production and consumption need to be in balance. Yet, both vary significantly throughout the day. With the volatile production patterns of renewables and volatile consumption patterns from the electrification of mobility, heating, industrial production, finding such a balance remains difficult.

Historically, this balancing challenge was solved with flexibility on the production side by firing up power plants with fast ramp-up times, making gas a major flexibility source in Europe. However, the limitations of this solution remain a pressing concern, due to the consequential high carbon emissions and dependencies on gas-exporting countries. A way cleaner, yet still underutilised solution to the balancing challenge is flexibility on the demand side. Or in other words, turning non-critical consuming devices off to smoothen the energy demand curve.

I discussed with Karl Bach what it takes for Europe to utilise the full potential of demand-side flexibility. With his company Axle, he is building the software infrastructure required to unlock the dormant capacity in consumer assets connected to the grid.

Lack of a compelling value proposition, ease of use, and burdensome integration into the energy markets limit consumer adoption

Today, most demand-side flexibility stems from industrial and commercial sources, such as large industrial plants or grid-scale battery storage systems. Flexibility from consumer assets remains mostly untouched, despite its even larger potential. In the EU, demand-side flexibility from consumer assets is forecasted to reach almost 120 GW by 2030, which equals 16% of the forecasted peak electricity demand. Karl identifies three major roadblocks that we need to overcome to tap into this dormant capacity:

1. Compelling value proposition. To get consumers to opt in with their flexible assets, providers need to create a compelling value proposition. Only if consumers understand the value they are missing out on and their ability to tap into that value, will they decide to integrate their flexible assets.
2. Ease of use. To tap into flexibility markets, the user experience of the consumer must be seamless. This involves both a low barrier to value for consumers in terms of automation, but also high reliability in terms of ensuring the required service levels of the connected assets — or in other words that despite the costs, your EV is fully charged when you need it.
3. Market integration. Today’s flexibility markets are designed for the era of centralised power plants. Integrating a large base of heterogeneous and decentralised assets creates a new level of system complexity for energy providers and regulators. The high-reliability requirements to ensure grid stability make those usually risk-averse bodies move slowly. Nonetheless, the potential benefits to consumers remain high: experts estimate that by 2030, consumers will save up to €71b annually if the bureaucratic hurdles and lack of incentives for consumers are overcome.

Utilities could have a head start to unlock consumer flexibility but lack the technology to access markets at scale and optimise within a heterogenous asset base

A successful demand-side flexibility provider needs scale in terms of connected devices and capacity. Achieving scale allows to access energy markets as a relevant counterparty to the TSOs, but also the chance to combine uncorrelated electricity demand profiles in a larger portfolio to ensure delivery capability. As a result, the winners of European flexibility markets will need to master distribution despite the outlined adoption barriers among consumers.

Since long-established incumbents (i.e., utilities) are hard to push out and have a significant distribution advantage within their existing customer base, they are theoretically in the pole position to win the market. While the connectivity of assets is increasing in the era of IoT driven by OEMs and technology infrastructure providers like enode, there are two technology challenges that incumbents need to solve to unlock the dormant flexibility potential in their asset base:

1. Market access at scale. A core challenge for incumbents is to sell flexibility in the market at scale to manage the behind-the-scenes of market transactions, such as payments. To solve this, they will need new software infrastructure that transforms energy transactions in the way that Stripe has transformed financial transactions. The US company Leap has shown that this works for large assets — now a similar technology is required to unlock the long tail of assets.
2. Optimisation. Offering flexibility will require managing millions of fragmented devices with different consumption patterns that result from varying consumer needs. Understanding how to best make decisions in this fragmented asset base while fully catering to consumer needs is a complex, multi-layered optimisation problem that needs solving at scale and in real time. Companies like Tibber (a next-generation energy provider) and Tesla with its energy plan offered in several regions have shown that it works. Now it is all about enabling incumbents to follow their lead.

Are you a founder in energy, a utility looking to solve the above-mentioned challenges, or just interested in learning more about unlocking the dormant capacity in demand-side flexibility? Feel free to connect with Karl Bach on LinkedIn or drop me an email: belling@earlybird.com.