Limejump CEO Erik Nygard believes aggregators without a supply licence will struggle to survive as demand response revenues are commoditised.
Last summer Nygard suggested traditional utilities would “fall by the wayside” unless they could adapt their business models to suit a demand-led, decentralised power system. He also thinks that traditional aggregators may be in trouble if they are waiting for regulators to come up with a solution that allows them to play in wholesale market and balancing mechanism (BM), thereby broadening revenue streams.
Currently, they cannot do that unless they supply the customer whose flexibility they are using, or the customer has a contract with exposure to markets.
Ofgem and BEIS have asked, in the smart systems call for evidence, how great a barrier lack of access to those markets presents to unlocking flexibility and the regulator is looking at how a solution might work. But any fix will likely require cooperation and consensus from those that might not want further competition.
Nygard thinks any solution will therefore take some time – which some aggregators may not have on their side.
“The concept [behind the solution] is good. But if you are a business with demand response pricing coming off and that is all you do, you have a problem as a business model. You have nowhere else to go,” he told The Energyst.
“So our view is that, if you want to [access the BM], just register yourself as an electricity supplier, and deal with the physical delivery of energy and then you can play the flexibility however you want.
“If you have a good knowledge of what happens in the physical energy market then going down this route is not actually that complicated.”
However, other aggregators believe that the underlying problem should be fixed.
Paul Troughton, senior director of regulatory affairs at Enernoc, said the issue is not about ‘having a supply licence.’ “That is relatively relatively trivial to obtain. Rather, it’s a market design flaw that the sale of flexibility in these markets is forcibly bundled with retail supply. This is bad for customers and for the efficiency of the system, as it tends to constrain the level of participation severely,” he told The Energyst.
“Some aggregators do attempt to be suppliers, but the problem they face is that it’s very difficult for them to compete effectively with larger suppliers, as, while the clever use of flexibility should give them a cost advantage, this tends to be outweighed by their lack of scale: it’s very hard to win large customers’ business against competition from the major incumbents.”
Aggregators and niche retailers around the world have tried to make this work, he said, pointing to Tempus Energy as a UK example.
“You might conclude that the capabilities and priorities needed to be an effective and competitive retailer and those to be a good aggregator are quite incompatible,” he said.
“Fortunately, there’s an easy fix: remove the forced bundling of the two services, so that customers can shop around separately for the best retail deal and the best deal to get value from their flexibility. This has been done successfully elsewhere and there are processes in train to get it done here.”
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An aggregator’s job is to maximise the value of their customers’ demand flexibility, and access to the wholesale market is an important part of this. But aggregators owning the whole value chain is potentially inefficient. There’s no reason aggregators can’t work with a customer’s existing supplier to unlock wholesale market opportunities. Customers should be free to choose the best aggregator and the best supplier for their needs. What’s key is the ability to connect their flexibility to all markets, and that comes down to tech.