Market design matters in REPowerEU’s push for electrification

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REPowerEU is poised to swiftly and decisively propel Member States towards greater energy security through measures that place greater emphasis on energy efficiency, electrification and renewable energy generation.

This urgent ambition, both desirable and laudable, is also an opportunity to achieve the decarbonization needed to mitigate climate change, provided it is coupled with the electricity market design reforms that are needed to give energy prosumers the opportunity to participate.

Solar panels on rooftops in California. (Photo by Simone Hogan via Shutterstock)

Prosumers – the term encompasses everything that produces, stores and consumes energy, from businesses to individuals and households – have the combined mass to make a huge difference in how energy is generated and managed. There are potentially millions of them.

Together they can provide the flexibility needed to help stabilize a highly renewable European energy system; the accelerated deployment of wind and solar generation offered by REPowerEU must be balanced with flexibility on the demand side.

Understanding demand-side flexibility

Demand-side flexibility manifests itself in the choices businesses and households make about their energy use. This can include the time a factory decides to run an energy-intensive process or the time an electric vehicle (EV) owner chooses to charge.

Prosumers who generate electricity from assets such as solar panels or wind turbines can choose to use it immediately or store it for use when needed. In any case, this reduces the pressure on the network and smooths out peaks in demand.

Storage capacity is key to demand-side flexibility, whether in battery energy storage systems that businesses (and increasingly homeowners) can choose from as part of their utility installations. renewable energy or in EV batteries that connect to the grid through their chargers.

Selling storage capacity to the network is one of the ancillary services that prosumers can provide, and there will be a growing market for it. Grid operators will want to buy capacity to help handle the growing volumes of intermittent and variable power from new wind and solar farms.

Importance of consumer choice

Choice is a recurring theme, and for good reason. Assets and controls that enable demand-side flexibility, including electric vehicles, tend to be more expensive than their non-flexible counterparts and there is a learning curve to fully utilize them. Budding prosumers will only invest time and money if they see how to benefit.

We recently observed in Germany how vital consumer choice and system efficiency will be in the transition from fossil fuels, when a proposed “distributable appliances law” was hastily withdrawn by the Federal Department of Energy amid widespread public opposition.

Highly unpopular, the proposals planned to penalize flexibility owners with higher grid fees if they refused to hand over control of assets such as EV chargers and heat pumps to grid operators at pre-determined times of day. the day to enable grid management through demand reduction.

The German public balked and automakers backed consumer sentiment as they feared such a move would seriously affect the sale of electric vehicles.

Best design on the market

The current design of the electricity market relies on a one-way flow of energy from large producers to passive users, but a decentralized model is quite the opposite: it involves many prosumers exchanging energy and ancillary services via two-way energy flows.

Market design reform could relatively easily unlock massive participation in demand-side flexibility by making the electricity market attractive to prosumers. If budding prosumers can see and understand how to monetize flexibility assets to reduce their overall energy costs, participation will increase dramatically.

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Pricing signals, such as time-of-use rates, can be one of them, but there’s more to it. Prosumers, due to their size, need some protection against fluctuations in electricity prices so that they can confidently forecast the return on investment needed to retrofit buildings and install related electricity infrastructure such as EV chargers.

For enterprises, return on investment is fundamental, and they hold the greatest potential to provide flexibility on the demand side. Data centers are among the companies that can make large amounts of energy storage capacity available, provided it is attractive to them.

Next steps

Policy makers, producers and energy sector experts need to come together to design a market reform plan that can be implemented quickly. Unlocking private investment is essential in the short and long term.

A different set of rules will provide the choice and security that is so important to investor confidence. New rules should make major demand-side flexibility projects bankable. Small contributions, from electric vehicle owners and others, should also be encouraged.

Achieving the energy efficiency, electrification and renewable ambition of REPowerEU will involve all of us. The roadmap must include the flexibility of the energy system.

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