Energy Efficiency: An Effective Tool for DER Management

I recently had a conversation with the International Energy Agency’s (IEA’s) Kathleen Gaffney regarding the upcoming IEA Global Conference on Energy Efficiency and a preconference workshop, which will focus on the use of energy efficiency as a tool for distributed energy resources (DER) management. Guidehouse Insights considers energy efficiency as part of wider DER management, and the North American energy market is well-advanced in the use of energy efficiency as a tool for managing networks. But Europe is way behind the curve. Given the amount of attention flexibility services currently receive from regulators and policymakers, the industry would be remiss to not fully consider energy efficiency as a tool of equal value compared to other flexibility services. 

Vertically Integrated Utility Model Allows for Energy Efficiency

Energy efficiency is made much easier in vertically integrated monopoly markets. Liberalization in Europe has led to many positive outcomes, and I believe that competitive markets combined with a sensible approach to decarbonization will see Europe lead all other major regions in the energy transition. However, energy efficiency is difficult to implement in unbundled markets: energy suppliers’ profits are predicated on a volume-based sales model. How can these companies be rewarded for selling less of their core product? Why would a supplier spend thousands installing energy efficiency technologies in customers’ homes if those customers can switch to a different supplier the next day? While network owners will benefit from a reduced need to invest in network infrastructure, how are suppliers—which are separate businesses—supposed to share in the networks’ cost savings?

In monopoly markets, the situation is different. Regulators have found it relatively easy to create frameworks that reward utilities that help their customers reduce overall energy consumption. Customer relationships are long-term, and the revenues lost through reduced consumption are replaced with financial rewards and a reduced need to invest in network infrastructure.

Most DER Management Tools Focus on Changing, Not Reducing Energy Consumption

Energy efficiency is different compared to other DER management tools, as it is the only option that reduces overall consumption. All others—DER management systems, demand response (DR), aggregation, energy storage, microgrids, transactive energy—just shift consumption patterns away from peak periods or increase supply to meet demand. These tools were largely developed separate from each other, but significant convergence is occurring as they mature. Driven by a desire to use flexibility markets (or non-wires alternatives in the US) as an alternative to more costly network reinforcement, there is significant momentum behind the technologies. 

Reducing Consumption Is a Powerful Tool to Delay or Avoid Network Reinforcement

If deployed at scale and focused on the right areas, energy efficiency can be a highly effective tool for network operators seeking to alleviate grid constraints without investing in new grid infrastructure. Unlike other flexibility tools, energy efficiency can permanently take out loads. Flexibility without energy efficiency relies on a market that pays stakeholders a financial incentive to behave in a certain way at specific times. Network operators have to balance the costs of paying for the flexibility scheme against the cost of infrastructure upgrades. However, targeting an energy efficiency program at customers served by a problematic feeder will help reduce overall consumption, which reduces the requirements for flexibility and/or infrastructure investment. The real issue for European regulators and policymakers is to create a market that allows energy efficiency to bid into flexibility programs. If energy efficiency can deliver a tangible benefit to the system operator at different times of the day, there should be no reason why energy efficiency is not rewarded in the same way as a DR customer just shutting off a load.