As the energy system becomes more decarbonized and decentralized, the ability to balance electricity supply and demand requires significant additional flexibility. The good news for utilities is that the industry has an opportunity to release hidden sources of flexibility across the value chain, from power generation, through the transmission and distribution networks and to the consumer. And the demand-side area represents clear untapped value for utilities to flex the system.
In Europe, significant shifts are underway in how electricity is produced and consumed. On the demand side, the adoption of electric vehicles (EVs) and the switch from gas to electricity for heating residential and commercial buildings is increasing. On the supply side, renewable energy, mostly wind and solar, is accounting for a growing share of electricity generation in Europe. The net result of these shifts: higher demand peaks, but of shorter duration.
The challenge for utilities is to find new ways to match supply and demand by infusing more flexibility in the system.
According to our research on flexibility needs across six European countries, 55 to 90 GW of additional flexible capacity will be needed by 2030. This represents an increase of 30 to 45 percent over the current generation capacity. However, operating hours of all flexible capacity will decline by 20 to 30 percent from 2015 levels.
This changing European power landscape opens up opportunities for established energy providers and new players to deploy new flexibility solutions. Many of the solutions will reside on the demand side, involving end consumers who, to date, have not been major players in flexibility. Success in flexibility services starts with understanding the energy consumer. There is a growing universe of consumers with diverse needs, motivations and behaviors. To create compelling propositions for these consumers, it is critical to understand the differences among consumer groups—whether between residential and business consumers or among businesses, whose needs vary greatly across sectors. It is a new world for energy providers, that need to go beyond simple power delivery.
Next, energy providers must carefully decide which business models are ideally suited to support new value propositions for flexibility services, and build the necessary capabilities to achieve them. We distinguish two major ways to offer flexibility services: as an aggregator or as an energy optimizer. Utilities may choose to take one or both approaches, depending on how the organization is positioned in the market, its assets and capabilities, and the type of energy consumers it serves. Experimentation with innovative consumer propositions across both approaches is needed for all consumer segments to explore viable business models.
Successful propositions for demand flexibility require very different capabilities than from the traditional energy supply business. We identify six capabilities of consumer-centric, digitally enabled business models:
Success hinges on a clear strategic vision for the critical role of flexibility in the European electricity system, and leadership to bring this to execution. Individual players need to play on their own strengths to stake out their position in the changing competitive landscape, while exploiting complementarities with partners to grow the value pool.
It is a new world, and the future belongs to those who embrace the opportunities of change with focus and ambition, and put consumers at the heart.