Project Summary
Energy efficiency retrofits rolled out by Local Authorities (LAs) and Social Housing Providers (SHPs), such as home insulation and storage heating, represent an opportunity to procure flexibility from disadvantaged households that are typically not able to participate in flexibility markets.
Flex Direct aims to develop a new way to procure this type of flexibility by Distribution System Operators (DSOs). The project is developing novel commercial models and coordinated market approaches to enable LAs and SHPs to operate in direct contract with DSOs. This will incentivise use of energy efficiency in flexibility markets and facilitate participation of ‘hard-to-reach’ customers at scale.
Innovation Justification
While the uptake of flexibility from energy efficiency, under current market arrangements, has been low, Discovery highlighted the opportunity for scaling through domestic energy efficiency programmes. Flex Direct brings an innovative approach to enabling the participation of disadvantaged consumers in flexibility markets by exploring novel commercial and contractual arrangements between DSOs and Social Landlords.
The counterfactual scenario is assumed to be continuation of existing commercial arrangements related to energy efficiency flexibility. Our analysis indicates that this approach is unlikely to drive market uptake, as Social Landlords would not earn enough revenue from participating in flexibility markets to justify the additional costs of submitting flexibility bids and meeting existing governance requirements. Flex Direct is innovative compared to the counterfactual for several reasons:
• Reconsiders the role of Social Landlords (who manage housing for a large segment of vulnerable consumers) within the wider energy system through novel commercial and contractual frameworks with the DSO. In Alpha, we will assess suitability of different archetypes of Social Landlords to participate in the solution and consider associated arrangements to ensure benefits are felt by the end consumer.
• Improves DSO visibility of energy efficiency retrofits rollout by gathering data to assess potential impact on demand across the network. There is an opportunity to unlock additional value for disadvantaged customers by aligning data on centralised funding for energy efficiency retrofits against electricity network needs.
• Explores new approaches to demonstrate the volumes of flexibility achieved from energy efficiency measures such as adding equipment to feeders or transformers. This represents a significant change from present approaches relying on aggregated smart metering data, which poses a major barrier within current social housing contexts.
• Improves the DSO understanding of how vulnerability is impacted by an increasingly flexible energy system and ensures safety mechanisms are built in to protect end-consumers.
Throughout Discovery, we have collaborated with stakeholders across the energy efficiency and flexibility value chain to test our solution, refine the desired outcomes and identify key challenges preventing uptake of energy efficiency flexibility. We also engaged with eight Local Authorities to pinpoint their most significant barriers and to understand the challenges disadvantaged customers face in participating in the transition to Net Zero. These learnings will feed into Alpha to ensure the new Flex Direct offer meets market expectations and considers the main barriers: data protection, contractual risks, resource requirements.
Flex Direct is best suited for SIF due to the complexity of the surrounding issues, in addition to the extensive collaboration required to ensure flexibility though energy efficiency can be adopted across the sector. It requires significant research and engagement to be undertaken which could not be funded as part of business-as-usual (BAU) activities due to the level of risk and uncertainty associated with novel market arrangements suitable for vulnerable customers. Alpha has been designed to both build upon core learnings identified with Discovery and to address key requirements ahead of a potential live trial within Beta. As such, the scope and scale is well-suited to SIF requirements and phased nature.
Discovery allowed IRL and CRL to reach 3 with TRL at 4. By the end of Alpha, the aim is reach IRL, CRL and TRL between 5-6 as the product is validated, partnerships are formed, and commercial models are built.
This first-of-its-kind approach will enable stakeholders to unlock additional flexibility and wider benefits from energy efficiency measures. This has the potential to deliver significant value, as the timing and the delivery of the energy efficiency installations is monitored and incentivised towards areas with network constraints and with high populations of disadvantaged customers. Therefore, Flex Direct addresses Challenge 2, Theme 4.
Impacts and Benefits
Flex Direct will provide DSOs with new commercial arrangements to unlock additional flexibility and wider benefits from energy efficiency measures. There is opportunity to deliver significant value, particularly as the delivery of the energy efficiency installations is incentivised towards areas with network constraints and with high populations of vulnerable customers. The CBA assessed the potential benefits of a coordinated market approach and improved information sharing between Social Landlords and UKPN against a pre-innovation baseline which reflects the existing BAU network planning approach.
The baseline is based on the DFES Consumer Transformation scenario and assumes a continuation of the current trend: that energy efficiency retrofits providing network flexibility remains low, while retrofits occur sporadically across the network, with limited visibility for the DSO. This could cause over- or under-procurement of flexibility and higher network reinforcement costs than would be the case with a coordinated approach.
Our analysis assumes Flex Direct can help influence the location of retrofit deployment to provide enduring peak demand reduction and enabling deferral of network reinforcement. Our CBA has found this offers a potential net present value of £108m across UKPN’s area to 2030.
Financial - future reductions in the cost of operating the network (£70m across UKPN’s area to 2030)
The installation of energy efficiency retrofits at-scale which provide peak demand reduction can defer, displace or avoid the need for costly network reinforcement incurred by the DNO, passed on to end-consumers through energy bills.
Financial - cost savings per annum on energy bills for consumers (£4.85m per year across UKPN’s area to 2030)
The installation of energy efficiency measures delivered through co-ordinated market approaches introduced through Flex Direct would result in a reduction in customer energy bills as their peak energy demand is reduced.
Environmental - carbon reduction – indirect CO2 savings per annum (26 kt CO2e reduced across UKPNs area to 2030)
The installation of energy efficiency measures delivered through co-ordinated market approaches introduced through Flex Direct would result in a reduction of peak energy demand which in turn would reduce the resultant carbon emissions from power generation.
Further, by reducing peak electricity demand through large-scale energy efficiency measures, the need for network reinforcement is reduced. Consequently, fewer new grid and primary transformers will be required to support the network. This will lead to a reduction in carbon emissions associated with the manufacture of these transformers, which would have been necessary in a traditional network reinforcement scenario without Flex Direct.
Revenues - improved access to revenues for users of network services
An increase in vulnerable/disadvantaged households participating in flexibility markets as their relevant Social Landlord provide flexibility services to the DNO directly. These benefits have not yet been quantified and will be explored further in Alpha as the Flex Direct commercial framework is developed.
New to market – processes
Stimulating the market and increasing uptake of energy efficiency and flexibility through new commercial models and standards. This offers wider potential benefits across DNOs if learnings are shared and adopted across the sector.
Others that are not SIF specific
The project will deliver additional wellbeing benefits to vulnerable and disadvantaged consumers. This includes quality of life improvements due to having warmer homes from energy efficiency measures and the benefits of ensuring vulnerable and fuel poor customers are also able to benefit from participating in energy markets.
Expanding the CBA to capture wider societal benefits will be a key objective in Alpha, ensuring that commercial arrangements being developed considers holistic value delivered to the end customer.
