Flexibility: the key to accelerating energy transition
Written by Anna Trendewicz
Why is flexibility the key to unlock a renewable energy system?
The energy system is in the midst of an epochal transformation, the like of which has not been seen before. But the energy system isn’t a single monolithic entity, it’s a complicated patchwork with multiple layers. And different aspects of the system are transforming at different paces. For instance, the adoption rate of renewable generation – in particular wind and solar PV, electric vehicles, heat pumps and battery storage, is far outpacing the slow adaptation of the transmission and distribution grid infrastructure. This risks slowing the overall pace of the transition as the pace of renewables adoption is throttled while the infrastructure plays catch up.
That’s where flexibility comes in; it’s the missing link to balance the energy system, given the more volatile supply and demand patterns and the location mismatch between generation sources and consumption centers. Think of Germany or the UK, where most of the wind generation is concentrated in the north and needs to be transported to the higher-consuming south. As grid capacity becomes the bottleneck, the copper plate model of the energy system requires a major upgrade, incorporating an additional dimension – location – to allow for a local and regional balancing of the electricity system by leveraging decentralized infrastructure in a more granular way.
Flexibility in the energy system can contribute to resolving the key challenges of scaling the renewable energy system and driving decarbonization in at least three ways.
1. Avoiding the curtailment of renewables such as EV charging, battery storage charging or green hydrogen production at times of high supply
2. Avoiding the deployment of peak capacity – which is typically provided by natural gas plants – by for example managing demand side response
3. Deferring grid infrastructure investment by improving its utilization
How big is the market opportunity?
The flexibility market, viewed as combined transmission and distribution system operators (TSO & DSO), for ancillary services associated with aggregators, utility-scale batteries and EV smart charging, could reach $260 bn by 2050, a 20x increase from today’s size. The energy crisis has served to further accelerate the political debate around the flexibility regulatory framework and its importance for peak shaving. For example, the EU introduced a mandatory 5% peak demand reduction target to alleviate skyrocketing energy prices and to protect consumers. According to a recent report by DNV, demand-side flexibility in the EU could reduce renewable energy curtailment by 15.5 TWh improving the availability of decarbonized electricity and potentially saving €2.7bn annually compared to installing generation capacity to meet anticipated peak demand by 2030.
What is the climate impact potential?
Assessment of the CO2 reduction potential of flexibility is a challenging task. At FEV, we developed an in-house methodology to tackle this question. Firstly, we define unit impact in terms of 1GW of flexible power capacity. For simplicity, we make estimates regarding peak demand time per year, the CO2 intensity of peaker plants, the CO2 intensity of the EU power mix on average and flexible capacity utilization, which reflects the fact that it is not always available at the time it is needed and not always located where it is needed. We estimate the unit impact of 84ktCO2/GW flex capacity per year. Given that total global capacity could reach 14,747 GW by 2050 and 20% of that is flexible, flexibility could contribute to 5GtCO2 cumulative savings, which is equivalent to approximately 12.5% of today’s global annual greenhouse gas emissions.
Who are the main players to watch?
The companies in flexibility space can be classified into three main functional areas:
- Aggregators – Companies that help flexibility providers monetize their assets on the energy markets by combining them together to form a virtual power plant that can be dispatched on the power market during peak power demand. Interesting companies to watch here include: Recurve (US), Leap (US), EnergieDock (DE), Gridbeyond (IE), Flexitricity (UK), Sympower (NL), encentive (DE).
- Marketplaces – Platforms that facilitate the transactions between power grid operators and flexibility providers. TSO & DSOs place their intraday, short-term and long-term flexibility requirements on the platform, and flexibility providers place their bids to provide the service. The matching and billing processes are executed through the platform in a secure way. Interesting companies to watch in this space are: Nodes (NO), Electron (UK), piclo (UK).
- DERMs – Grid planning and optimization tools that are used by grid operators to integrate renewables, avoid congestion issues and optimize the dispatch in order to reduce the overall system cost. Interesting companies to watch are: Weavegrid (US), Plexigrid (ES), Camus Energy (USA), mPrest (IL), OpusOne (US).
We believe that flexibility is a fascinating investment opportunity and now is the time to explore it. We are excited to see a new energy market design being created to address the emerging challenges of system balancing driven by the progressing energy transition. As an expert in the energy field with a deep understanding of this sector, we are well-positioned to partner with exceptional entrepreneurs and help with scaling companies in this space. In addition to a great fit for our investment strategy focused on digital, asset-light business models, which drive the decarbonization, flexibility is complementary to and enables further growth of our portfolio companies e.g. ev.energy.