Residential demand response (DR) is an emerging market in Europe, with an estimated 1.3GW of assets already contracted today. France accounts for much of this success, with the leading provider Voltalis boasting 900MW, while the Nordics, the Netherlands, Germany and Switzerland trail behind.
By 2030, almost half of all vehicles sold in Europe are expected to be electric, a significant new load on the grid, which will need to be actively managed. Equally, with the cost of home storage falling, new opportunities to integrate and optimise existing photovoltaic (PV) systems are also increasing. The residential sector has huge untapped potential with over 200GW of installed assets of which HVAC and hot water heaters account for 97 per cent. However, accessing these assets for DR is challenging; less than one per cent of all existing residential electric HVAC and hot water assets have inbuilt connectivity.
Conversely, it is common for electric vehicle charge points and home batteries to have connectivity enabled (60 and 55 per cent of the installed base, respectively) but the installed capacity remains small (5.5GW). Of course, connectivity, is just one factor in making accessing these assets for DR possible.
According to Dr Philippa Hardy, principal analyst at Delta-EE over the next five years, 65GW of new assets are expected to join the grid edge across major European Markets. “The variety of assets in this segment is wide; each with different characteristics around its potential scale, accessibility, flexibility in usage patterns and ease of customer acquisition; which has led market players to select different types to focus on,” she says.
Voltalis, founded in France in 2006, is Europe’s shining example of DR with nearly one million devices connected through 100k members representing 60 per cent of DR capacity in Europe. “It initially relied on partnering with housing associations and local councils to build out its portfolio.” Hardy explains. “In 2020, it signed a €20m loan from the European Investment Bank to speed up large-scale deployment across Europe. Its near-term vision is to install their smart box in a third of electrically heated French homes.
“France aside, progress of residential DR programmes in Europe has been slow, outside of pockets of activity from the likes of first movers such as tiko, Peeks and Eliq. While these companies proved the concept, most are still struggling to scale and are exploring new value streams to increase profitability. Eliq, for example, has pursued a software only approach to overcome some the challenges.
“Despite these struggles, signs do point to growing momentum with several innovative companies crowding into the market. A new breed of player – technology companies entering as energy retailers, such as Tibber, Octopus Energy and Awattar – are quickly gaining scale with tens of thousands of customers. These start-ups offer dynamic time-of use tariffs and optimisation, to help customers reduce their energy bill.
“With the outlook rosy, large players such as Eneco, Shell and EDF are also beginning to enter the market, mainly by acquisition, to join existing start-ups dominating this space. As the market develops, both scale and a broad offering are key to success, but what remains unclear is whether one approach will win out.”
Value streams – state of play
The European market is inherently complex but bidding into ancillary services was initially the quickest win, providing a value stream for independent aggregators and energy suppliers alike to generate revenue. While it continues to be the stream that is accessed by the highest number of companies across Europe, competition is driving down profitability.
“As a result, participants are increasingly seeking new value opportunities, such as wholesale markets and stacking multiple streams to maintain profitability,” Hardy adds. “Dynamically accessing revenue from across the many market stakeholders that benefit from flexibility is key to covering high fixed costs. An alternative approach is first gaining scale, such as energy retailing with time-of-use optimisation, and then accessing other value streams once scaled enough to bid into these markets. At present, France, Great Britain and Finland have the greatest number of available and accessible value streams for residential DR. Greater intermittent renewable generation coupled with the move to settling markets in near real time (every five minutes as opposed to every 30 minutes) will increase price volatility. The question is, by how much? As wholesale and balancing markets require even greater levels of flexibility, the potential value for residential DR programmes could also widen. On the other hand, these changing market dynamics also represent a potential risk to players who find it difficult to flexibly manage their portfolios.”
Barriers to growth
While policy is favourable overall, regulation and market structures have been slow to change. At the same time, the ease of front-of-meter flexibility (grid scale storage, generation assets, interconnectors) and C&I DR (connecting larger, flexible assets) still dominates current market share. “While barriers vary from country to country, a lack of price volatility and signals to end users limit the attractiveness of providing flexibility through residential DR across most markets,” Hardy continues. “While network charging is undergoing widespread reform and with many new services still in trial stages, the future value is somewhat uncertain.
“A key challenge centres around communication and connectivity. Manufacturers are not building in connectivity as standard yet and are hesitant to allow access to their devices’ communications protocols, which increases complexity and locks out many customers. On the grid side, Transmission and Distribution System Operators’ technical requirements also present a barrier for small distributed assets to participate in balancing markets. The current work around – for engineers to visit customers’ sites to install their own hubs – is onerous and costly.”
The penetration of smart devices and smart meters that can facilitate time-of-use tariffs remains relatively low and predominantly focuses on gas-heated homes. In 2019, Europe had 400k devices connected to home energy management systems and 4.5m smart thermostats, with ~9 per cent% of these in gas heated homes.
Hardy explains that the final piece of the puzzle is customer engagement and acquisition. “With limited existing relationships, independent aggregators find it difficult to reach customers,” she says. “For energy suppliers, lack of trust has historically hampered customer willingness to grant management access in return for reduced bills. Further, many consumers are unaware of the availability of residential DR and many do not fully understand the benefits of smart grids and smart metering, which results in a ‘suspicion barrier’.”
From pilot to profitability
For the most-part, residential DR remains a fledgling industry despite proof of concept. High fixed-platform operating costs, along with hurdles to customer acquisition and market access keep most residential DR businesses from turning a profit. If the industry is to succeed, the whole process needs to be more fluid and for that it will need scale. Hardy points to three main strategies are emerging:
Partnerships: Made between partners in different parts of the value chain, because no one company can be the face of the market. We see partnerships between device manufacturers, aggregators and energy suppliers today. The US is a good example of where partnerships work very well to offer residential DR programmes. A lot of the industry’s future success will rely on incumbent manufacturers getting on board too – the more the better.
Acquisitions: Larger players are well positioned to acquire much of the expertise that they need to cover most, or all, of the supply chain. In 2019, Engie acquired the majority share of Swiss start-up tiko to do just that. At the time, Engie commented that the acquisition effectively completed their portfolio of load-balancing and storage solutions and would create new services for residential customers.
Software-as-a-Service: Several platform companies and aggregators are offering their expertise as white label services. As an example, Eliq’s recent partnership with Grönare, a Swedish tech start-up cum renewable energy supplier, to help improve their value stack. A more innovative customer proposition, Grönare facilitates customers to buy renewable electricity at wholesale price. Instead of a mark-up it charges a flat monthly fee.
The race to scale
Across Europe, value streams are opening up to residential DR programmes, but barriers remain and the challenges differ from country to country. “While the direction of travel is favourable, the path is not smooth,” Hardy concludes. “Consumers need something simple; devices manufacturers, regulators, industry players all have a role to play. And without sufficient devices connected, much of the untapped residential DR will remain just that.
What to watch
“The race to scale is on but what model will win out? Large incumbent manufacturers need to act now but not all have their ducks in a row in terms of technology. Aggregators have the technology and expertise but will continue to struggle for customer acquisition. Energy suppliers are new to the flexibility game but have a healthy portfolio of customers and can access more value streams. These puzzle pieces could fit quite nicely together, leading to a healthy pipeline of acquisitions.
“The rise of a new type of energy retailer are posing a competitive threat to existing energy suppliers, gaining traction by offering more innovative time-of-use optimisation, and partnering across the supply chain; A method employed by the likes of Tibber, Sonnen, and Social Energy.
There is also an increasing number of specialist platform providers that can offer Software as a Service as a white label to energy suppliers. While the market is still to take its final form, SaaS is an attractive alternative to investing in developing the capabilities needed to play without the capital investment of acquisition.”