How demand flexibility democratises the energy system
Do you know the difference between flexibility and demand side response?
The difference is under appreciated even by industry insiders. Both attempt to unlock the value of flexible demand using different business models.
At Tempus we believe that flexibility (also known as price responsive demand) is the superior approach. Flexibility works in markets; demand side response works in government offices.
Flexibility = responding to the market value of electricity
Demand side response = responding to contractual signals sent by the system operator
We believe that markets are the better way to unlock the value of flexible demand. The economics are fantastic - flexible demand can replace expensive and dirty fossil fuel generators.
We are working to prove the flexibility business model. By doing this we are choosing to take risk on the availability of fair markets over the availability of fair demand side contracts.
In fair markets, flexibility will win
The ability of fair markets to drive innovation, reduce cost and improve customer experience is well documented. The ability of unfair markets to stall innovation, reduce value and increase price is also well documented. A fair market requires regulation - regulation should be minimised but not eliminated.
We define a fair market as one where any technology or business model can compete on its relative economic merit. The economics of flexible electricity demand in a fair market are fantastic. Flexibility is the sharing economy technology for the electricity industry. The capital-lite and low marginal cost business model of flexibility benefits both for Tempus and our customers, both forward thinking electricity retailers and electricity customers.
We will come to rely on flexible demand as the marginal asset on the grid when prices are high. Flexibility can displace the dirty peaking assets of today (open cycle gas turbines, coal-fired and diesel generators). The savings from not building, operating or maintaining these 20th century assets will flow into the pockets of everyone who uses electricity.
Flexible demand not only lowers the cost of electricity. It also makes markets work. Markets where demand is never flexible are fundamentally broken - this is the 'missing money problem'. The missing money problem is not a fundamental feature of electricity markets -demand that responds to high prices solves it.
So not only does flexible demand require a fair market, it also creates one.
Availability of markets versus contract design risk
Any business model takes risk. Flexibility takes risk on the availability of fair markets. Demand side response takes risk on the fair design of demand side contracts. At Tempus we believe that working to unlock flexible demand in a fair market is a better business model than working to secure demand side response contracts.
The availability of demand side response contracts depends on politics and regulation. Historically these contracts have often prevented new technologies (such as flexible demand or storage) from competing on a fair basis. These contracts are often biased towards existing market participants with minimum size participation requirements that lock out most electricity customers.
Regulation that is well written for today can struggle to keep up with new technologies that operate in fundamentally new ways. The accelerating rate of technological development means even the fairest regulator will not keep up. Markets can instantly adapt to new technologies and business models by rewarding companies based on their ability to participate in the market.
Markets innovate so rapidly due to the diverse ecosystem of business models that can be adopted. Allowing markets to fairly decide which wins eventually leads to this best practice becoming standard practice among companies that survive.
On a business by business basis there will be challenges as some customers are more flexible than others - but globally we will succeed by learning from the experience of us all. This stands in contrast to the central procurement of demand side response. This centralised system has historically constrained the number of business models that can survive and favours existing market participants. A key reason for this is the influence and relationship between the regulator and dominant market participants.
Demand flexibility democratises the energy system and makes it work for all of us.
Adam Green, Data Scientist