Flexibility marketing as a business model of the future: ICT and big data as success factors

Person stretching their leg on a railing.

The energy system is currently undergoing a period of upheaval that is historic in scale. The generation of electricity in Germany and in many other countries is being transitioned toward environmentally compatible and sustainable methods of power generation that are largely based on volatile renewable energy sources (RES) such as hydroelectric power, wind power, solar energy, geothermal energy and renewable raw materials. New business models are emerging from the resulting situation of temporary overcapacity. Marketing of this power can be implemented on a flexible basis using demand-side management or energy management. To take advantage of the economic potential, power providers need to begin using real-time information and communication technology (ICT) in their plant control systems. This is to be done in a manner that enables smart evaluation of large amounts of data so that the energy system can be optimally controlled.

Flexibility marketing enables efficient use

Since the operation of RES plants is associated with very low marginal costs, the construction of RES plants and their addition to the grid has already led to a profound reduction in the exchange price for electricity due to the merit-order effect. Merit order refers to the order in which power plants are deployed, which is determined by the variable costs of electricity generation. It involves meeting demand by having the least-expensive power plants switched on first. The price is then determined by the last power plant that is needed to meet demand, with this last plant having the highest marginal cost of operation. The merit-order effect refers to market entry of power plants with lower marginal costs displacing power plants that generate power more expensively.

The merit-order effect has been clearly visible in the last five years, with the electricity price on the exchange falling by more than 50% compared to 2011 (from €55 to €25/MWh). The profits from electricity marketing as a standalone business activity are therefore falling dramatically. This is leading to significant problems for energy suppliers in particular, whose power plant fleet mainly consists of conventional power plants. At the same time, a steady increase in the RES surcharge from approx. 2 cents in 2010 to 6 cents in 2014 caused the electricity price for end customers to rise by 20%.

Even though the energy transition has already spawned new business areas, most of these business models have little to nothing to do with traditional electricity marketing, the core business of today’s energy supply companies (ESCs). However, in a market in which overcapacity is being built up knowingly and intentionally, returns from conventional electricity marketing are not expected to rise again. This situation calls for action to be taken. It is necessary for ESCs to update their business model, even if it is costly to change the structure of their business undertakings in order to take advantage of new business areas.

The policy goal of meeting demand with 80% renewable electricity producers (65% of which are highly fluctuating producers) is obviously not economically feasible without serious changes on the demand side. The current methods of compensation for forced curtailment of demand is no longer a financially viable model for the future. The principle of market-based economics will also need to take hold in the area of renewable electricity generation, with the electricity producers being responsible for the sale of the power they produce. The feed-in priority specified in Germany’s Renewable Energy Sources Act, which was supposed to kick-start the production of new energy technologies, is no longer adequate in a situation in which the market share is 30%.

Opportunity for energy suppliers

It is precisely in this environment of transformation that there is a great deal of opportunity for energy suppliers. There is great untapped revenue potential in the strong supply-side overcapacity of volatile RES electricity generators that will be built by 2050.

If we use an electricity price of €25/MWh to evaluate the conservatively calculated 30 to 40 TWh of power in 2050 which cannot be used with the current demand structure, there is potential of up to €1 billion annually. To ensure that this oversupply of power does not lead to a further drop in prices on the exchange or to curtailment of production in manner that does not make sense economically, the demand capacity must be expanded in such a way that it can consume the volatile electricity in times of high infeed.

Demand-side management as a business model

The response to overcapacity is to make arrangements for flexible control of demand for electricity (demand-side management) so that it is possible to take advantage of peaks in generation. This can be achieved by switching heat generation from oil or gas to electricity with heat pumps and electric water heaters, through additional sources of demand such as air conditioning and electromobility, by increasing the system’s capacity for storage (batteries, heat reservoirs and cold reservoirs) or by combining energy systems (combined heat and power, power-to-heat, power-to-gas).

By actively distributing, installing, maintaining and managing electricity consumers that were capable of being controlled, actively supporting electromobility and taking specific measures to increase the storage capacity of their systems, the ESCs create their own sales market for volatile electricity generation from their wind turbines and photovoltaic systems. The power-generating portfolio of the future is rounded out by conventional generation with power plants that can be dynamically controlled to serve as a backup supply for meeting the remaining demand for electricity.

ICT infrastructure for flexible marketing

To be able to successfully market the peaks in generation, an energy supply company must be able to make real-time adjustments to the controllable demand of its customers and to the power storage units according to the volatile generation of renewable energy sources. Such real-time control is only possible through the use of state-of-the-art information and communication technology (ICT). Development and maintenance of the necessary ICT solutions for real-time control of complex energy systems continues to be associated with prohibitively high costs today, which often jeopardise profitable and successful implementation of the business model.

It is often necessary for companies to become software developers themselves in order to flexibly implement their new business processes on a digital basis. There are too few cloud-based, adaptable, and cost-effective off-the-shelf solutions that keep operational and administrative IT costs low. As an alternative, companies can fall back on software producers who develop data and process management systems for the energy industry. For example, Seven2one has set for itself the goal of creating a uniform and flexible standard platform for real-time control of energy systems in the cloud. Standardised, configurable data objects with generic basic functions and a modular architecture make it possible for custom data structures and process flows of the business model to be implemented in an economical manner. And more importantly, these structures and processes can also be continuously updated and optimised. On this basis, the business logic of a variety of different business models can be implemented with standard functions on a modular and cost-effective basis.

Big data becomes smart data

The solution for real-time control of energy systems features flexibly adaptable data organisation that processes large amounts of data nearly in real time using in-memory database technology. High-performance, customisable import interfaces integrate various data sources, including exchange data, sensor data, meter data and measurement data from building management systems. A powerful analysis and forecasting library (big data analytics) provides decision-making support functions to determine optimal operating strategies for the energy system to be controlled. These control commands are communicated to the plants using the control technology. A functional monitoring system with complex event processing and alarm function keeps a close watch on the how the system is operating. Reliable infrastructure with encrypted communication and secured access protects against misuse.

Business models of the future need smart information and communication technology (ICT)

The overcapacity of fluctuating electricity generation that is being built up as part of the energy transition offers energy suppliers great economic potential. This can be tapped through expansion of controllable electricity demand among their own customers as well as by increasing storage capacity in their own balancing group.

Demand-side management and real-time energy management are new business models for flexibility marketing that require real-time ICT for optimal plant control. Cloud-based off-the-shelf solutions with a flexible business intelligence platform as a foundation can prevent IT costs from jeopardising the profitability of the new business model. Market participants who master this technology will be successful in the smart energy market of the future.

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