Flexible prices and fair access for all – the electricity market of the future

In my last article, I set out the vision for a new type of power grid that would be cellular, flexible and based on local generation. This would entail a large-scale transformation of infrastructures and high financial expenditure, and one may well ask who is to bear the costs. The answer: private capital can finance this transformation, at least to a large extent and if the market is adapted accordingly.

 Outdated market design inhibits developments

 Today, however, not only the power grid is still oriented toward a few central producers, but also the electricity market. Private individuals and most companies act only as passive consumers, purchasing electricity at a constant price. There are thus no incentives to adjust one’s own electricity consumption so that it harmonizes better with the requirements of the grid – with the exception of large industrial enterprises. They have been practicing load control for a long time and can also participate in the balancing energy market.

 Transmission system operators in Germany issue invitations to tender for their minute reserve requirements via an online platform. For example, a steel mill operator can register there and then control his electric furnaces based on the situation on the electricity market. In simple terms, when there is an oversupply of electricity, the plant is heated at full load and the plant operator is paid accordingly for this provision of negative balancing energy. At the same time, he tries to throttle his processes at times when there is excess demand and electricity is correspondingly expensive.

 In order to be able to participate in this market, however, there is a capacity threshold. This has been lowered in recent years, so that it currently amounts to 5 MW as a rule and up to 1 megawatt in exceptional cases, nevertheless this is still considerable output. Market access is still not granted for small assets.

 Nevertheless, the DIRECTIVE (EU) 2019/944, Article 15, states that “active customers are entitled to sell self-generated electricity, including through power purchase agreements” and “entitled to participate in flexibility schemes and energy efficiency schemes.”

 Market regulations allow for the entry and exit of producers and suppliers based on their assessment of the economic and financial viability of their operations. This principle is not incompatible with the possibility for Member States to impose public service obligations on undertakings operating in the electricity sector in the general economic interest in accordance with the Treaties, in particular Article 106 TFEU, and in accordance with the provisions of this Directive and Regulation (EU) 2019/943 of the European Parliament and of the Council (6).

 Business case energy transition

 Sometimes it is argued that the energy transition endangers security of supply and consumes huge sums of money. But it can be argued in response that there is no alternative, which is certainly true. Nevertheless, it is worth taking a different perspective. If you think of energy transition not just in terms of generation, but as a holistic concept that includes storage, optimized use and distribution of energy, the result is a system that supports security of supply instead of restricting it.

 None of this comes for free, of course. Neither private individuals nor companies will invest in large numbers in the conversion and expansion of the energy supply out of altruism. This will only happen if it is worthwhile for investors. This is not the case with the market as it is currently structured, however. At best, only a few large corporations will profit. In the spirit of the above-mentioned EU Directive, we should work to break up old monopolies and open up the electricity market in such a way that many different players can offer and trade there.

 Why should private players now act as electricity intermediaries? We need an incentive in the form of flexible electricity tariffs. Only then will it be worthwhile to make home storage units or bidirectionally charging e-cars available as a flexibility reserve for the grid. On the technical side, however, this initially requires intelligent electricity meters / smart meters. From an economic perspective, a paradigm shift is taking place here, namely the transition from fixed to flexible prices. Companies in the travel and transportation industries, for example, have long been using flexible prices to optimize their planning and to better utilize capacities. There are early booking discounts and last-minute offers. Deutsche Bahn offers its allotments of saver fares at times when it expects demand to be low, and the same is true of airlines. In short, the more flexible I am in terms of time, the cheaper I will be able to get from A to B. Both sides benefit from this – the customer through the lower price and the provider through the more even utilization of his capacities.

If we want to make the best possible use of scarce resources, an electricity market of the future should also function according to this system. After all, allocation via market prices is the most efficient distribution mechanism known to the market economy. Even if the mills of legislation grind more slowly than I would personally prefer, something will definitely happen here over the next few years (there will soon be a separate article on the political framework conditions of the energy market and current developments).

 No matter whether you’re an architect, an engineer, a company or a private person, anyone who plans a building today should also do so with a view to future developments on the energy market. Buildings that are to be active energy centers (energy hubs) rather than just passive consumers will need a completely different infrastructure with systems for energy generation, storage, distribution and transmission. The higher investment that such a building entails will pay for itself once the design of the electricity market has been adapted to the requirements of the energy transition.