Demise of Demand Flexibility v1.0

For today's demand flexibility market, a new category of business was created to coordinate third-party assets called an “aggregator”. These businesses engage customers to allow their assets to participate in flexibility schemes, driven by the desire of energy networks to control them. Call it a VPP, a capacity market, a flexibility market or plain old energy trading; it's using your assets to make money and you, the end customer who probably spent thousands on the asset, might get a slice (if you're lucky).

Here are 5 factors why today this version of the market can not grow to the scale required and will ultimately remain a niche service to relatively few commercial customers.

1. Economic?

Rather than simply increasing the cost of energy during high-demand periods, today's demand response implementation increases costs to all customers to fund a few customers to participate. This funding is typically routed through serval businesses (customer -> network -> aggregator -> device operator/manufacturer -> customer) each taking a share ahead of the customer, It is estimated that <30% of the original charges are ultimately received by the customer.

• Decreasing Value of Flexibility: As more aggregators enter the market, the value of flexibility provided diminishes due to increased competition, driving down the cost of flexibility. The UK is one of the most mature markets for third-party assets with significantly declining values. The TSO paid ￡11M in 22/23 across 1.6M customers/assets and ￡9M in 23/24 across 2.2M customers/assets for demand flexibility events (although there are other markets).
• Revenue Disputes: Aggregators, customers, asset manufacturers and asset operators all want a larger share of the declining revenues from flexibility services or will be unwilling to participate.?Customers often receive pennies or nothing from participating.
• High Customer Acquisition Costs: It is costly for aggregators to convince customers to allow their assets to be used for flexibility; plus the complexity of interfacing with thousands of different asset types and manufacturers to automate participation incurs significant costs.
• Complex Value Chain: In the tradition of the energy industry, all customers pay more for their energy so that some, after the cash is filtered through multiple businesses in the value chain, can receive a fraction of the cost, feeding the 'energy industry machine'.

Inversely, the greatest and most frequent economic benefit to a customer is achieved by avoiding, as far as possible, the use of grid energy (especially during higher-cost periods) and retaining any surplus energy for later use (rather than exporting it to the grid). For most, cost avoidance is far more beneficial than trading energy with the grid (V2L is king, V2G isn't).?

2. Trust?

For any flexibility model to succeed, customers must trust the party to manage their assets responsibly and without disrupting their primary functions. Most assets we buy do not have the primary function of serving the energy industry (or managing energy) but to support our daily lives and businesses. For decades the energy industry has struggled with customer trust which raises several concerns:

• Concerns from Manufacturers: Manufacturers worry that external control of their assets could damage their brand reputation or even, in extreme circumstances, the physical asset itself. Third-party-caused malfunctions or misbehaviours will likely tarnish the perceived reliability of their products.
• Asset Longevity: Asset owners and manufacturers fear that allowing external control could shorten the lifespan of their assets giving rise to increased warranty claims and replacement costs.
• Personal Interest of Asset Owners: Many asset owners may see no material benefit from allowing their assets to be used for energy flexibility, especially if it might impede the asset's primary function.

3. Access and Control

Manufacturers design and own the communication systems that enable their assets to be controlled remotely, such as IoT chips and cloud infrastructure. These systems are not free to the manufacturer, and they often find themselves sidelined in the value chain, despite bearing the cost of connectivity.?

• Third-Party Authorisation: Few manufacturers currently offer substantive third-party control of their assets, preferring the view that they are best placed to maintain the highest standard of reliability and performance from their product. However, we see assets without third-party access being ‘reverse engineered’ or ‘hacked’ by agents of the energy industry in their desire to take control. How sustainable this is with thousands of manufacturers creating hundreds of products with dozens of firmware versions, only time will tell.
• Common Interface: In a desperate attempt to expand the controlling reach of the energy industry, many nations are considering legislation to compel manufacturers to comply with national energy industry regulations. Even though these regulations are far from mature (and the technical standards even worse) the cost to manufacturers to support each nation's regulatory insanity could be enormous.

4. Dynamic Tariffs

Growing in ubiquity, dynamic tariffs have the opportunity to deliver flexibility without many of the downsides of version current demand response mechanisms. Using economic signals (the tariff) to encourage customers to adjust their energy consumption based on cost (and supply availability).

• Proven Success in Europe: Dynamic tariffs are already common in Northern Europe. Germany has mandated that all energy retailers offer dynamic tariffs by 2025. In the UK, customers who switch to dynamic tariffs can save an average of 7% on their energy bills without changing their behaviour—more if they actively optimise their consumption.
• Direct Customer Benefits: Unlike flexibility schemes, dynamic tariffs directly benefit customers and align consumption with the energy industry’s ability to deliver power, based on real-time supply and demand.
• No leaky value change: Devices that effectively follow dynamic tariffs that return 100% of the economic benefit to the customer.?

The largest challenge to the adoption of dynamic tariffs today is their accessibility to third parties. If devices could easily access a customer's tariff it could "follow" the tariff and minimise their energy costs.

5. Winning against household brands & tech giants?

Are energy companies now competing with the manufacturers of brands we all recognise and trust? Will the 'energy use-case' be enough to win the trust of the customer or will manufacturers simply add the 'energy use-case' to their existing automation, convenience, information and security use cases (depending on the product)??

Manufacturers also understand the ability & tolerances of their products best, they have invested in their smart, connected capability and are typically the organisation that maintains this connectivity for the lifetime of the product.?

Casting the net wider, global technology giants like Amazon (Alexa), Google (Home) and Apple (Homekit) already hold command of all things "smart" in the device ecosystem. With their extremely broad and encompassing "smart home" propositions and vest interests. Will these allow the energy industry to independently control the energy use case or will they simply add this feature to the many already in operation?

Conclusion

Considering the broad challenges this industry-centric solution faces; the incumbency of the product brands & tech giants as today's “trusted controllers” plus the growing popularity of dynamic tariffs. Is it possible for our bloated, archaic, glacial-regulated energy market to be accepted or successful with the current approach??

The energy industry already has an enormous challenge in the creation of renewable energy and the upgrading of networks to carry 3 times more power, will it also be able to win the hearts and minds of customers to convince them it and it alone knows how electricity works?