Energy crisis and the energy transition

Inevitably, the focus has been on the high energy prices for customers and, in some cases, energy retailers’ inability to pass these prices on due to regulated tariffs and price caps. This short-term focus is understandable, as is the need to protect vulnerable customers. But what are the consequences for the energy transition?

Our analysis encapsulates our customer-centric thinking and a distributed, joined-up energy system, not to mention the increased urgency required if we are to meet 2030 carbon goals and have a just, rapid and effective energy transition.

Four takeaways

Retail energy markets are not fit for a decentralized, highly efficient, low carbon future. Markets today focus on supplying energy up to the meter. They need to integrate energy supply, self-generation, and efficient consumption for customers. They must align propositions, business models, and market structures around customers and their ultimate needs. In short, they should focus on providing services to customers in the most efficient, clean way.

The current market is built around the “old world” of wholly centralized generation, the energy system ending at the meter, and passive customers. Change requires a focus on outcomes and bills, not only on commodity prices. Energy efficiency and efficient consumption remain critical.

High-efficiency, low-carbon assets like heating systems can be provided together with energy to power them, giving lower lifecycle costs for customers. Flexibility, generating your own energy and consuming it yourself needs to be bundled together with energy retail into simple propositions for customers.

These types of propositions can be just as effective for vulnerable and fuel poor customers as they can be for those able to afford higher-cost new technologies.

Transforming customer engagement applies not only to energy retailers, but product manufacturers and more besides. It requires transparency and trust, personalized insights and advice, empowering customers to have more control and make well-informed decisions. The first phase of the energy transition didn’t hugely involve customers – the next phase will.

The energy sector has not done a good job of engaging with customers on their terms. But it has done an excellent job of minimizing interactions and relationships with said customers, meaning most have very little understanding of how they use energy, how they could use it more efficiently, and how they can better contribute to fighting climate change and the spikes in their energy bill.

We need customers to be a part of the energy transition. Now, the data, tools, techniques, and technology exist to transform customer engagement, but the energy sector, including manufacturers and providers, needs to embrace them.

We can start by empowering smart energy communities – local, green generation integrated with the provision of supply and services. These can even be partly, or wholly community-owned and led, building more resilience from inevitable future global commodity price shocks.

Matching generation and demand on a more local basis, from cities down to the household level, and exploiting locally available renewable energy resources to provide resilience against fossil fuel price shocks will be vital steps. Customers need to be engaged in a more bottom-up, decentralized energy system. Energy providers should be establishing partnerships with communities, providing the expertise, competence, and other resources which consumers lack; because we urgently need more demand management and flexibility.

The new energy system has different challenges to the old one – including integrating renewables with variable output. Reducing peaks in demand, and increased flexibility to better match generation and demand (in time and in space) will be critical to a successful transition. Solutions lie in demand reduction, reducing peak heating demand, smarter tariffs to incentivize a reduction in peak demand, and demand-side flexibility – as well as some traditional “peaking plants.”

Dynamic time-of-use tariffs have come into the spotlight too, with some continually high prices feeding through to customers. These can have a continued role with customer segments attracted to such tariffs, however, the risks customers take must be commensurate with the rewards and their ability to manage the risks.

We need the flexibility that plays into all parts of the energy value chain – bringing flexibility to wholesale energy markets as well as networks. What’s more, we need to capture the huge potential of flexibility from customers – both industrial and commercial customers and residential customers – and from a wide range of assets including existing and new assets.

The current crisis shows the need for long-duration flexibility, typically provided by large-scale natural gas storage. But hydrogen could play this role in the future, with green hydrogen able to soak up excess renewables as well.

Urgency and speed are key. We need to be making much, much faster progress to hit our 2030 and longer-term carbon targets and goals.

About the author

Jon Slowe has more than 20 years of experience in the distributed energy, heat and energy services sectors, and is a founding director of Delta-EE. He has worked with an extensive range of clients across Europe, Japan and beyond, supporting and advising them on a wide range of energy transition topics. He is passionate about supporting the Delta-EE team’s role in helping the energy transition to happen as effectively and quickly as possible.