Flexibility management: An enabler for electricity networks to support the energy transition

According to the IEA’s World Energy Outlook 2023, almost $15 trillion will need to be invested in global electricity grids by 2040, as part of the Net Zero Energy scenario. In many regions, this investment could be effectively optimized through grid flexibility management — utilizing already available assets to their fullest by shifting demand and supply in time.

Although the discussion around flexibility management as an enabler for the energy transition is not new, its importance has escalated with the uptake of renewable energy resources and demand electrification. This signals a very welcome shift towards more dynamic and responsive grid management for the energy transition.

Real-time system control has always been essential for maintaining secure energy supply, power quality, and grid stability. But in today’s energy transition era, the growth in weather-dependent generation from multiple energy sources, coupled with additional volatility driven by transport, plus heating and cooling electrification, is taking these energy system control challenges to a new level.

Flexibility management – on both the demand and supply side – represents a massive lever with which to manage these challenges, while allowing to postpone or avoid grid augmentation, thereby lowering overall system costs. Making smart use of flexibility also helps customers to maximise utilisation of the renewable energy sources. This is not a lever that should be overlooked in today’s world of constrained supply chains with long delivery timelines for infrastructure projects, and an increasing focus on the energy affordability.

Taking an example, South Australian Power Network (SAPN) has the ambition to integrate up to 11GW of flexible customer assets on a grid that was originally designed for 3GW. The distribution network aims to achieve this by pioneering the technology, creating incentives and removing barriers to adopting demand-side flexibility. This means shifting load and generation outside peak times, with a key focus on maximising the use of South Australia’s abundant solar resources. Flexibility in customers’ energy resources and appliances will not only reduce network build and increase network utilisation, thereby reducing grid costs. - It will also unlock significant value driving down energy spend for households. SAPN’s customers already have access to ‘Flexible Exports’ — flexible solar exports that utilise ‘dynamic operating envelopes’ managed by the grid to maximise the export of excess solar energy to the grid; and SAPN plans to introduce flexible connection options for all connection types in coming years.

Network flexibility management building blocks

The foundation for network flexibility management is built on the flexible assets connected to the grid and behind-the-meter: generation, batteries, and various load devices (including electric vehicles) that allow for shifts in demand and/or supply in time. See Exhibit 1 for an example portfolio of assets and some criteria used to assess their potential for flexibility management. Flexible assets portfolios and their importance may differ substantially by region depending on climate, regulation, socio-economic characteristics and customer types. For example, commercial and industrial customers can provide flexibility by adjusting their processes, through the use of e-boilers and heat buffers for low-temperature heat, to name just a few options.

Approaches to network flexibility management, too, vary significantly across global jurisdictions. While the technological basis is similar, different regions adopt unique strategies based on their specific regulatory environments and energy system contexts.

The overall direction is towards network operating limits becoming more dynamic, naturally adapting to real-time adjustments. This is driven both by the need (increasing volatility of supply with penetration of weather-dependent generation), as well as improvements in the grid’s ability to manage flexibility.

Key enablers for flexibility management involve three blocks of network capabilities:

a)??? access to data – information from respective devices and communication technology to provide close-to-real time visibility of low-voltage grid and flexible resources connected to the grid (smart meters, batteries, PV inverters, EV chargers, IoT devices for other flex load assets etc), and forecasting capabilities.

b)??? ability to simulate the network condition and possible interventions – often called a ‘digital twin’, relying on the network models down to low-voltage level.

c)??? ability to control the flexible assets, directly or indirectly, to enable the necessary interventions.

Building and exercising these capabilities often requires changes in regulation, as distribution networks, similarly to transmission system operators, must be able to define standards and operating limits for grid-connected flexible devices. They will need the power to access relevant data from these devices with sufficient frequency and granularity.

Regulatory landscape evolution

When it comes to setting up the regulatory system for flexibility management, five aspects stand out:

Level of control over the flexible resources by the network operator. The landscape of options ranges from binding programs including direct coordination of assets e.g. via setting operating envelopes, to non-binding programs based on price signals (see Exhibit 2). A combination of binding and non-binding controls can be used by the same network, depending on the flexibility needs.

Form of flexibility procurement. This refers to how the networks reward their customers for providing flexibility to the grid. Options range from regulated / network tariff-based to utility-contracted and market-based models as detailed in Exhibit 3.

Network pricing and the ability to convey pricing signals to customers via tariffs – directly and/or via retailers — becomes an important area of innovation for many distribution network operators looking to enable flexibility management. This approach relies on the network revenue pool redistribution via tariffs to reward individual customer flexibility. Australian distributors in particular are exploring the impact of time-of-use grid tariffs, two-way tariffs and eventually dynamic grid tariffs, as well as the possibility of more granular locational pricing.

Alternatively to tariff-based approaches, some European and US grid operators procure access to flexibility from markets (bilaterally or via so-called ‘flexibility platforms’). These payments subsequently contribute to customer tariffs via the operational expenditure component.

The other side of the coin: Flexibility recognition in remuneration scheme. Historically, electricity networks as regulated businesses have been primarily rewarded for their asset base, and incentivised to minimise operational expenditure. A real shift is taking place today, with multiple regulatory systems incorporating schemes that recognise the value of flexibility-based solutions, and provide levers for the network operators to implement them.

In Europe and the UK, regulators are beginning to explore the value of network flexibility management as a grid CapEx alternative. The UK employs output-based regulation with the TOTEX approach that already, in principle, incentivises DNOs to choose the most cost-effective solution to an issue, such as flexibility services. The latest regulatory scheme, RIIO-ED2, introduced an additional financial incentive for DNOs to more efficiently develop the network by taking into account flexible alternatives. They are rewarded/penalised up to + 0.4% / -0.2% of RoRE (Return on Retained Earnings) per year for facilitating the efficient dispatch of distribution flexibility services and coordinating with third-party platform providers.

Grid-connected storage ownership and coordination. Within the EU and UK, grid operators are normally barred from owning storage, other than in exceptional cases. This means that access to flexibility is remunerated via the OpEx component of the regulated revenue. Conversely, other regions experiment with regulations allowing to leverage CapEx to support grid flexibility. Network utilities are encouraged to consider non-wires alternatives (NWAs), including grid storage or stand-alone power systems, and if the NWA cost/benefit outcome is better than the traditional reinforcement, networks can directly finance and own them. The market players may contribute to the value stream in exchange for access to storage within set limits.

For example, Australian networks can own battery storage, as soon as they are not providing contestable services to the market. They can include batteries in their Regulatory Asset Base (RAB) via the value stacking model, reflective of network benefits. If they receive a waiver from the regulator, they are able to lease the spare capacity to market players. Similarly in the US, some utilities address seasonal peak congestion through direct tendering with customers for the development of energy storage systems as a NWAs. Outside of time slots agreed with the utility for grid management, these assets can sell into other markets with a certain percentage of their revenue.

Coordination between grids and markets. To enable the future of system balancing and grid congestion management, regulation will need to support closer coordination between distribution and transmission grids, wholesalers, retailers, and system and market operators. It will need to address who is allowed to collect user data, and who can access it? What is the interrelation between flexibility for local distribution grid management and ancillary services at the system level? These are just a few of the questions to be answered in this context.

Flexibility management is the key lever for enabling electricity grids to support renewables integration and demand electrification at scale, while avoiding over-investment in grid infrastructure. Making flexibility management work requires building data-driven grid capabilities, adapting operational frameworks and re-thinking regulation and policy along multiple dimensions.

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Oxana Dankova is BCG's Global Leader Energy Networks, Partner & Director in Energy practice and Climate and Sustainability practice.

Balazs Kotnyek is a Partner & Associate Director in BCG’s Energy Practice.

Pavla Mandatova is a Knowledge Expert in BCG’s Energy practice, focusing on energy networks.

Thijs Venema is a Managing Director & Partner in BCG’s Energy and People & Organization practices.

Tina Zuzek- Arden is a Managing Director & Partner in BCG’s Energy and Climate & Sustainability practices.