Can utilities take on energy aggregators?

Energy suppliers are keen to enter the aggregation market as part of demand response programmes.

Large energy consumers, such as those in the industrial and commercial sectors, are becoming increasingly aware of the advantages in demand side response (DSR).

However, for many, there exists a degree of misunderstanding around participation and practice. To ensure demand response success, big consumers look to experienced aggregation partners who can respond to asset manager queries that involve track record and experience in the field with similar customers, and how the core business operations of participating sites are protected.

When it comes to employing demand management, most large consumers either do it themselves or through an energy aggregator like Flextricity and Restore.

But energy suppliers are keen to change this and take advantage of this market. According to a 2016 Ofgem survey, energy suppliers are actively targeting industrial and commercial firms to build more robust DSR portfolios. Commercial aggregation service providers include suppliers such as EDF Energy, E.ON Connecting Energies GmbH, Engie, Npower, Open Energi and Centrica.  

The report shows that energy suppliers are becoming more active in the demand response market and some analysts predict that suppliers have the ability to compete with aggregators mainly because of their already impressive Industrial and commercial customer base.

Suppliers are searching for ways in which to incorporate DSR into their business models so as to provide better value to their customers.

In fact, Baringa Partners manager Eamonn Boland says that these suppliers are moving into demand side response aggregation through either acquiring start up aggregators for their innovative technology and expertise or they are developing it onsite since they already have a “clear route to market.” He adds that utilities have the added advantage of brand recognition.

Energy aggregation requires agility

But, other than brand recognition and a large customer base, do they have what it takes to compete with aggregators?

Aggregator Limejump’s Erik Nygard says that utilities may not be agile enough to do it on their own. He questions whether they have the ability to adapt to a fast-changing market without acquiring businesses or partnering with aggregators. Nygard also predicts that it will take the utility 10 to 15 years to become a successful aggregator.  

Nygard describes Limejump as neither a demand-side response aggregator nor energy supplier but a “next generation utility”.

Currently, the firm has a supply licence but has yet to supply much of its industrial and commercial customer base with power. The company is working hard to change this within the next year.

Right now, Limejump pays industrial and commercial (I&C) firms as well as universities and schools in return for selling the flexibility in their energy consumption into various demand-side and balancing markets. It also buys and trades power from distributed generators and harnesses their flexibility to ramp up or down to generate an income from these markets.

Alastair Martin, the founder of aggregator Flexitricity, agrees with this opinion and says that the “one-stop shop” strategy may not stack up because I&C customers are becoming increasingly sophisticated and will weigh offers on merit.

These companies will purchase electricity supply from whoever offers the most competitive tariff and the best data services. He adds: “They will buy energy efficiency from whoever is best at energy efficiency and they will buy demand response from whoever is the best at demand response.” It is for this reason that demand response prospect has to “stack up on its own”, he explains. “They [utilities] do not have track records or experience [in DSR aggregation].”

Stuart Ravens, Principal Research Analyst Energy at Navigant, has a different opinion. He told Engerati that the quickest route to market for a supplier is to acquire an existing DR supplier but it wouldn’t take 10-15 years to build something up on their own.

Ravens estimates 18 months to two years is more realistic. He explains that if utilities grew a DR business organically from within a C&I customer management department, it would “take a long time” since they do not possess that requisite experience or knowledge. “However, I would expect most of the large suppliers would build something within an R&D, innovation, or incubation division. That’s how most operate now.”

He adds: “Those suppliers not doing it already will likely have something on their roadmaps.”

Brett Feldman, CEM, Principal Research Analyst Energy, Navigant Research, told Engerati that while vertically-integrated utilities in regulated markets hire aggregators to run their demand response programmes due to a lack of in-house resources to do so, utilities in liberalised (deregulated) wholesale markets, utilities are often prohibited from competing with aggregators thereby ensuring a competitive third-party market without the utility exerting its influence.

If you include retail suppliers as utilities, there are several that are now or have in the past competed with or acquired DR aggregators.

Centrica owns Direct Energy in the US which offers demand response programmes to its supply customers. NRG bought Energy Curtailment Specialists. Constellation Energy bought CPower several years ago but sold it a couple years ago, but maintains a strategic relationship to offer DR to its customers.

Aggregation and engagement

With many industrial and commercial consumers, there is a perceived risk when it comes to DSR. There is a real concern around the negative effects of DSR on productivity but with automation technology, productivity does not have to be impacted and aggregators can unlock small pockets of flexibility as a result.

But, to get this message across to consumers, energy aggregators need to focus on market education.

Another customer barrier is revenue certainty. Without a long-term revenue assurance, energy managers are unable to make a compelling business without longer-term revenue assurances.

According to Alana Johnson, products and flexibility manager at Dong Energy, if participants fail to come together and outline how customers participate in different schemes – and perhaps provide a longer-term guarantee on payments – there is a danger of losing that “very good level of interest” and not capitalising on the value of the flexibility that is currently available and unused.