The Retail (R)evolution Power to the customer. The fundamentals of the smart energy system

Transcription

1 The Retail (R)evolution Power to the customer The fundamentals of the smart energy system

2 Customers are the essence of our business. Delivering the services they need and expect is our top priority. In this paper we set forward the industry s vision of customers role in the changing electricity system and we analyse the type of market design, regulatory framework and empowering actions that will open up new opportunities for them. The paper addresses consumer associations, policymakers and regulators across Europe. It is divided in two sections: First, we explain the changes affecting the power system as a whole and the resulting need for more flexibility. We then take a closer look at the downstream segment of the system (retail and distribution). A real flexibility and efficiency potential exists there and it is our belief that revolutionary changes are happening on that side of the system, making it possible to grasp this potential while creating new opportunities for customers: innovative products, new types of energy services and demand response programmes. Second, we look at the framework needed to pave the way for this smart energy system. - The consumer framework identifies the kinds of actions needed to empower customers to take part in the system and ensure they benefit from the new opportunities it offers. - The regulatory framework contains six clear recommendations for policymakers and regulators looking to set the course for tomorrow s smart energy system.

3 table of contents PART A WHY EUROPE NEEDS A SMARTER ENERGY SYSTEM CHAPTER 1 GAME-CHANGER FLEXIBILITY: THE POWER SYSTEM IN TRANSITION The power sector is in the midst of transformative changes A more flexible system is necessary and possible 5 CHAPTER 2 THE RETAIL REVOLUTION: READY FOR SMARTNESS? A changing customer s environment with new opportunities The untapped flexibility potential? 14 PART B THE FUNDAMENTALS OF THE SMART ENERGY SYSTEM 14 CHAPTER 3 GETTING THE CUSTOMER ON BOARD Awareness and Trust Choice 22 CHAPTER 4 GETTING THE REGULATORY FRAMEWORK RIGHT 25 Recommendation 1 Show customers the value of becoming more active 26 Recommendation 2 Set up a secure, efficient and transparent framework for data exchange 27 Recommendation 3 Clearly separate competitive and regulated activities 28 Recommendation 4 Unblock market access for Demand Response 29 Recommendation 5 Incentivise smart grid investments 30 Recommendation 6 Set up supportive innovation policies 31 1

4 part A WHY EUROPE NEEDS A SMARTER ENERGY SYSTEM

5 chapter 1 GAME-CHANGER FLEXIBILITY: THE POWER SYSTEM IN TRANSITION GAME-CHANGER FLEXIBILITY: THE POWER SYSTEM IN TRANSITION 1.1 The power sector is in the midst of transformative changes The power sector is undergoing one of the most profound changes in its history. The liberalisation of the energy industry, together with the EU targets for decarbonisation and renewable energy sources (RES) as well as ground-breaking ICT developments have huge consequences on the way the sector works: we are moving rapidly towards a more decentralised, more sustainable, and smarter power system. These drivers also have significant effects on the system s downstream side, covering retail and distribution. A new service model is emerging, based around energy efficiency offerings, smart grids, decentralised generation and, most importantly, new types of customers: more aware and demanding, more active and engaged. 3

6 GAME-CHANGER FLEXIBILITY: THE POWER SYSTEM IN TRANSITION The European power industry is being reshaped by four main drivers 1 Increased competition The liberalisation of the European energy industry was first conceived in the 1990s as a way to encourage competition in the sector, thus providing customers with greater choice of services at lower prices. At the turn of the millennium, this project took shape with the unbundling of utilities: a process whereby formerly integrated monopolistic utilities separate their generation and retail activities from their transmission and distribution activities. Market trends across Europe indicate that liberalisation is bearing fruit, with wholesale markets becoming more competitive and customers increasingly benefiting from new types of products and energy-related services 1. 2Concerns about security of supply and climate change Change is also being driven by concerns about the high dependence on imported fossil fuels and climate change. The signing of the Kyoto Protocol, the European Energy and Climate package (the targets), and the EU Emissions Trading Scheme (ETS) have brought about the large-scale development of electricity generation from variable renewable sources. This change is all-encompassing: it includes utility-scale projects like wind and solar parks as well as smaller scale, decentralised energy resources such as roof-mounted solar panels and micro combined heat and power systems (micro-chp). 3 ICT developments Advances in technology and telecommunications mean that customers across Europe are starting to take matters into their own hands: they are becoming more and more interested in value added products and services that match their shifting expectations in today s more interactive, realtime, and on-demand world. Home energy management systems are developing; they will ultimately allow customers directly or indirectly to participate in the energy market. Electricity grids are also benefiting; they are turning into more intelligent and automated two-way streets with bidirectional communication and power flows. 4Increasing use of electrical appliances and local power generation Customers today are using an ever larger number of electronic appliances, for reasons linked to comfort, entertainment, e-health, environment and security. This increase of appliances in and around the home combined with the progressive introduction of new loads such as heat pumps and electric vehicles is likely to cause electricity demand from households to rise. At the same time, new technologies such as micro-chp and solar photovoltaic have made power generation at household level a real economic possibility. Customers with such installations no longer only consume energy, but produce electricity as well. 1 Note, however, that regulated tariffs are still present in 18 EU Member States. 4

7 GAME-CHANGER FLEXIBILITY: THE POWER SYSTEM IN TRANSITION GAME-CHANGER FLEXIBILITY: THE POWER SYSTEM IN TRANSITION Operating the electricity system is becoming more challenging 1.2 A more flexible system is necessary and possible The aforementioned shifts in energy policy, technology, and customer focus bring new opportunities for customers and the industry. Customers will more and more benefit from new services, be able to save on their energy bill and potentially become electricity producers themselves. Companies will tailor and offer new types of products and services. But these developments also pose new challenges to the electricity industry, which has to cope with a higher share of variable and decentralised generation, while maintaining constant supply and fair prices for customers. Electricity differs from other energy products in that it cannot (yet) be stored in large quantities at best it can be stored indirectly through e.g. the storage of fuel or water in a reservoir. Instead, at every point in time, the system must produce exactly the amount of electricity that is being consumed. This balancing of the system was relatively straightforward in the traditional one-way system, in which electricity was produced by large power plants that ran steadily on gas, coal, nuclear or hydro, and in which demand was relatively easy to predict. Balancing is more challenging in a system that is shifting towards smaller, variable, less predictable and more dispersed renewable generation that cannot guarantee a predetermined amount of electricity at a certain point in time. 5

8 GAME-CHANGER FLEXIBILITY: THE POWER SYSTEM IN TRANSITION To keep the system in balance while the share of electricity from variable renewables continues to grow, the power system must become more flexible and efficient. Over the past few years, EURELECTRIC has increasingly been looking into the flexibility potential across the whole value chain and has made recommendations on how to best grasp it. This report wants to complete the picture by focusing on the downstream side of the system, i.e retail and distribution, as highlighted below: 1 Building new interconnections and using ICT developments to modernise and automate electricity networks Transmission networks: Transmission networks are the electricity highways linking big power generators traditional nuclear, hydro, coal and gas plants, but also large-scale wind and solar parks to the centres of consumption. In this respect, the European network is facing a significant investment backlog. Investments should focus on increasing cross-border flows of power between EU countries by expanding interconnections (inter-market flexibility). Distribution networks: In contrast to their transmission highway counterparts, distribution networks are made up of the smaller roads and paths that deliver electricity to its ultimate point of consumption, for instance households and businesses. These networks were not originally designed as connection points for electricity generators. However, this is currently changing and will continue to do so as the share of renewables and decentralised electricity production increases. Distribution networks will therefore face new constraints to develop their capacity of hosting and enabling bi-direction flows. So far, distribution companies (DSOs) have designed their networks with an eye to peak demand, building additional capacity as peak demand increased. However, as consumption and production patterns change, other solutions might be more cost-efficient. Technological improvements like more intelligent grids, as well as new technical rules will reduce the need for additional capacity, increase efficiency and ensure that the lights stay on. In addition, DSOs roles and responsibilities will need to be adapted to the changing paradigm. 6

9 production heat lighting ict supply chain 2 control room lab Improving market rules to allow generation, storage, and demand response to provide flexibility to the system Market integration should be completed: The EU is set to create an integrated European market by This requires additional interconnections between EU countries as well as EU-wide market rules allowing every player to benefit from the same conditions across Europe. This would improve competition and optimise cross-border flows. Mature renewable technologies should be part of the market: Technologies like on- and off-shore wind and solar PV are ready to play a full role in the market. Such generators should be treated like any other generator, selling their production into the market and bearing the same obligations and responsibilities. In addition, convergence towards market-based support mechanisms for not yet mature renewables would expose such generators to market prices that reflect variations in demand and supply, thereby ensuring that the production becomes more cost-efficient and flexibility is more suitably priced. Back-up generation needs a viable business case: Conventional generation has a crucial role to play as a flexible fall-back option when there is not enough wind or sun. However, the current situation is very challenging as many power plants have difficulties to cover their fixed costs while facing a future in which the increase of renewables means that they will be running even less. Storage potential should be exploited to the full: Storage is another flexible solution to reduce temporary mismatches between supply and demand. Today, the only economically viable large-scale storage option consists of vast water reservoirs used to produce hydropower. However, double grid fees and user charges are discouraging new investment and are even leading to the decommissioning of existing plants. We believe Europe s hydropower potential can and should be further developed. Other types of (not yet mature) storage technologies should be supported via R&D funding. Retail customers should be allowed to provide flexibility: Another crucial source of flexibility could come from demand response (DR), by which customers react to price signals and financial incentives either directly or indirectly by means of automation. Many large and energy-intensive industrial customers already use demand response services, for instance reducing their electricity consumption when prices are high. At household level, these services are still at a very early stage. 7 GAME-CHANGER FLEXIBILITY: THE POWER SYSTEM IN TRANSITION GAME-CHANGER FLEXIBILITY: THE POWER SYSTEM IN TRANSITION

10 GAME-CHANGER FLEXIBILITY: THE POWER SYSTEM IN TRANSITION Customers will progressively move to the centre of the electricity system 8

11 chapter 2 THE RETAIL REVOLUTION: READY FOR SMARTNESS? 2.1 A changing customer s environment with new opportunities Until very recently, the electricity retail business was simply about delivering electricity to people s doorstep. In a world with regulated tariffs and without competition, retailers 2 had little incentive and room to innovate, while customers had no interest in becoming more active. THE RETAIL REVOLUTION: READY FOR SMARTNESS? This situation is now changing rapidly. With the progressive liberalisation of the energy sector, retailers have started to offer more sophisticated services to household customers and businesses 3. In most EU member states, switching rates are increasing steadily. The retail market in the Netherlands today There are currently 32 energy retailers in the Netherlands that deliver electricity and/or gas to customers and small businesses. Many are so-called retail-only companies that were created after market liberalisation. They offer different contract forms: contracts for electricity and/or gas, contracts with fixed or variable prices, one-year contracts or contracts that are fixed for several years. A growing number offer contracts, which include solar PV and energy efficiency measures such as insulation, double-glazing, and condensing boilers. Some are also involved in application of high-efficiency cogeneration and/or efficient district heating and cooling. There are also companies specialised in local collective projects for larger groups of customers (with e.g. the application of solar PV or wind). With the introduction of smart meters, many retailers have started to develop tools geared towards raising awareness and reducing consumption, for example smartphone apps, online tools and home displays. In 2012, 12.7% of all Dutch energy customers both households and businesses switched their electricity and/or gas retailer. This is the highest switching rate to date and roughly double the rate in 2004, the first year of liberalisation. 2 For the sake of clarity and conciseness, in this paper, retailer means all market parties active in the retail business: supplier, service provider, aggregator etc. 3 Note, however, that regulated tariffs are still present in 18 EU Member States. 9

12 THE RETAIL REVOLUTION: READY FOR SMARTNESS? The customer s environment is also being shaped by other industries, in particular in the area of information and communication technologies. The number and variety of electronic appliances that customers purchase are increasing. Today it includes media devices (TV, computers, tablets, smartphones), heating systems (thermostats, air conditioning, heat pumps), white goods (washing and drying machines, dishwashers, ovens, refrigerators), and distributed energy resources (solar panels, batteries, electric vehicles). The drivers for this development usually lie outside the energy world, in areas of comfort, entertainment, as well as economic and environmental considerations. As smart meters are installed across Europe in the coming years, an unprecedented amount of energy data will become available. For the first time, in-depth knowledge of actual consumption and understanding of the thermal behaviour of housing will all be achievable, meaning that retailers will be able to tailor their offers to customers usage. Such innovative offers will deliver powerful messages to customers about the value of altering their electricity consumption provided that market-reflective end-user prices are in place. Customers willing to share their consumption data could, for example, benefit from tailored energy efficiency services, house improvement or demand-response programmes. Crucially, they will be able to save money by using energy more efficiently and flexibly, and by producing, storing and selling electricity. Demand response (DR) in particular will take many shapes and forms, depending on the preferences of the customer, the level of technology development, and the value of flexibility in the market. Examples of such offers include: Time-of-Use (ToU) contracts: higher on-peak prices and lower off-peak prices. Dynamic pricing: prices fluctuate to reflect changes in the wholesale prices and local network loading. Critical peak pricing: same rate structure as for ToU, but with much higher prices when supply is scarce or system reliability is compromised. Retailers already propose different types of DR products, some requiring a more hands-on role for customers, for example adjusting consumption based on information received on their smartphone, others relying on some forms of automation. Many on-going pilot projects are testing new types of products to gather knowledge on customers actual interest and participation. Example of an existing DR progamme: Hot water management in France Today in France, 8 out of 12 million electric boilers are controlled by a rippled signal that enables the boilers to be switched on or off according to off-peak/on-peak electricity prices, thereby optimising consumption while ensuring that customers continue to have the hot water they need. In this automated system, customers need not take any action, although they can always decide to override the system if they wish to do so. 10

13 THE RETAIL REVOLUTION: READY FOR SMARTNESS? 0,40 0,35 THE RETAIL REVOLUTION: READY FOR SMARTNESS? 0,30 0,25 /KWh 0,20 0,15 0,10 0,05 0 0:00 1:30 3:00 4:30 6:00 7:30 9:00 10:30 12:00 13:30 15:00 16:30 18:00 19:30 21:00 22:30 capacity tariff electricity tariff taxes Example of a pilot project on dynamic pricing In the summer of 2012, the Dutch DSO Enexis started three dynamic pricing pilot projects in cooperation with retailers GreenChoice and Dong Energy in order to investigate the potential energy flexibility of household customers and the required cooperation between the market parties. One integrated kwh tariff is offered to customers, which varies every hour based on the local network loading and the prices on the wholesale market. In addition customers receive information about the locally produced energy. In this pilot project, the tariffs are presented to customers by means of an in-home energy display. Every participating household has a smart appliance which is programmed on the basis of the supplied energy tariffs. 11

14 THE RETAIL REVOLUTION: READY FOR SMARTNESS? In a more distant future and if the customer so wishes, the home itself could become the interface with the energy system (and other systems), optimising consumption and production by means of automated control of appliances according to individual preferences regarding comfort, lifestyle, scheduled actions, budget, expected savings, and prices. All these developments produce a fundamental change to the currently known retail and distribution businesses, giving rise to a smarter system in which all dimensions interact much more with one another. Whilst smart is often used to describe all sorts of innovative technologies, products or processes, e.g. smart grids, smart meters, smart appliances, it should rather refer to the system as a whole. Without entering into technical details, one could say that the smart energy system is intelligent, using analytics and automation to turn data into insights (and products) and to manage resources more efficiently. Crucially, it is steered by competitive markets and regulation that incentivise customers, retailers and DSOs to interact in a way that delivers optimal outcomes. The home of the future: example of a new single house Smart applications Home area network Micro generation Solar PV Appliances and electronics Advanced washing machines, refrigerators, freezer, etc. Television and other electronics Central systems Electric heat pump Nano technologies (i.e., NanoAir and NanoFilters) Lighting Building fabrics Roof and walls insulation with aerogel Active windows Double shell building Source: McKinsey Home of the Future Initiative. 12

15 THE RETAIL REVOLUTION: READY FOR SMARTNESS? Conceptually, the smart energy system is made up of four building blocks with the following interaction stem Generation Conventional generation and decentralised energy resources (including decentralised generation (DG) and storage) cover a wide range of resources which can benefit from making flexibility available to the power system. Consumption provide flexibilty Electricity customers (households, SMEs and industry) with or without their own local production (for example from solar PV) can potentially make their flexibility available to the power system. They will manage and adjust their electricity consumption directly or indirectly by means of automation in response to real-time information, incentives and price signals. THE RETAIL REVOLUTION: READY FOR SMARTNESS? Markets handle flexibilty An important feature of a smart energy system is its openness to new ideas and business propositions that will create value. Retailers and third party aggregators will be active in encouraging customers and small generators to offer flexibility by opening up interesting retail opportunities. They will aggregate individual flexibility in sufficiently large volumes for it to act on the wholesale/balancing/ancillary services markets and thus help keep the system balanced. Network management request flexibility The future distribution networks will have to be designed to meet a mix of variable generation and consumption. They should have the possibility to request and enable flexibility from distributed generation and load in order to optimise network availability in the most economic manner. DSOs will therefore play a fundamental role in developing and managing the infrastructure of the smart energy system: they will increasingly move beyond their traditional role of building and connecting towards connecting and managing. 13

16 THE RETAIL REVOLUTION: READY FOR SMARTNESS? 2.2 The untapped flexibility potential? What is flexibility at household level? Flexibility at household level is the ability of an appliance connected to the power system to change its consumption profile (time or level of consumption) through automation or direct action by the customer. Customers flexibility potential will depend on the appliances they have, but also on their lifestyle and, crucially, individual preferences. In a system with more and more diverse electric appliances connected to the network, the potential sources of flexibility are increasing. This flexibility comes in many forms. Some appliances like batteries allow electricity to be stored, decoupling power consumption from the enduse. Others can help shift power consumption to different times without affecting the end-use, e.g. a dishwasher. And yet others, for example boilers, can reduce, interrupt or even increase power consumption instantly, if needed 4. Moreover, as homes become smart, delivering standardised and interoperable connectivity, accessing this flexibility will become easier. Such flexibility could be beneficial to the whole system, including customers themselves: On the one hand, customers would save money and lower their electricity bills, with no adverse impact on their comfort and electricity use. On the other hand, customers could help reduce grid congestion by shifting demand to times when there is idle grid capacity and generation costs by shifting demand to times when there is more renewable power available 5. This flexibility would reduce or postpone investments in network and generation capacity, lowering the cost of keeping the system up and running. They will, however, only be willing to deliver flexibility if they are convinced that the benefits (e.g. energy and financial savings, knowledge about one s consumption, simplicity linked to automation, etc.) outweigh the costs (e.g. potential actions to be performed, potential loss of autonomy, cost of equipment, etc.). 4 See Shift, not drift: Towards active demand-response and beyond, THINK, June Examples include water boilers that charge when the electricity price is lowest and renewable electricity is available, heat pumps that stop because a power line is overloaded, or electric vehicles that adapt their charging patterns to balance out fluctuating renewable power. 14

17 THE RETAIL REVOLUTION: READY FOR SMARTNESS? Such flexibility will depend on the customer s preferences and vary geographically and over time according to local and regional circumstances. It will also compete with flexibility provided for instance by generation or storage. The market will determine the most cost-efficient way of providing flexibility at a given point in time. While uncertainties about the exact potential remain, there is little doubt that demand response will eventually have a valuable role to play. Enabling changes to the regulatory framework can and should already be made today, allowing this flexibility potential to take off and its value to be exploited to the full. THE RETAIL REVOLUTION: READY FOR SMARTNESS? Customers flexibility can be beneficial to the system, the customer and the retailer Ulrich lives in Copenhagen and has just moved into a new house equipped with a heat pump which consumes 2,000 kwh of electricity a year at an annual cost of 600 based on a retail price of 0.30/kWh including taxes. The heat pump allows him to maintain an indoor temperature which satisfies his comfort requirements, i.e C during the day and C at night. A retailer approaches Ulrich offering him both electricity supply and remote management of his heat pump, while guaranteeing a temperature within his comfort zone. Ulrich is happy as he now pays only 550 a year, thus saving 50. Using controls and automation, the retailer switches off the heat pump for short periods of time when electricity prices are high, without the temperature in the house falling outside Ulrich s comfort zone. In this way, the cost of powering the heat pump is reduced by 50 a year. The retailer also switches the heat pump s consumption, when it benefits the power system, earning a further 25 by selling these services to the market or to the system operator. Ulrich s contract nevertheless gives him the option to control the device himself if needed. The retailer has thus reduced the net cost of operating Ulrich s heat pump to 525 a year. Ulrich saves 50, while the retailer receives 550 from him and earns an additional 25 a year by offering this flexibility to the market. This fictitious example shows that the customer, the retailer and the system stand to gain from using the heat pump s flexible electricity consumption. 15

18 part B THE FUNDAMENTALS OF THE SMART ENERGY SYSTEM

19 chapter 3 GETTING THE CUSTOMER ON BOARD Awareness of the opportunities offered by the market, of switching possibilities, of their own consumption and preferences Trust in the market actors and processes (switching, billing, etc.) Choice of different products and services The transition to the smart energy system can only be achieved if it builds on trust and is supported by the broader public. This means that changes have to be explained to customers, so that they understand why changes are necessary, what they imply, how much they will cost and above all how to gain from them. Customers are first and foremost looking for products that suit their needs and preferences at the lowest possible cost. Their support for the transition to the smart energy system will, in our view, depend on three main building blocks: increasing their (1) awareness and (2) trust so that they are willing and able to (3) make choices in a competitive environment. Politicians, regulators, consumer groups and the energy industry each have a role to play in this process: l The industry must work to enhance customers trust in pre-sale areas like marketing and contracting and in post-sale operations like customer care, billing, and dispute resolution and to design offers that respond to customers needs. l EU and national authorities are responsible for setting the right regulatory framework and effectively transposing existing legislation 6. l Member states, national regulatory authorities (NRAs), businesses and consumer associations have a shared responsibility to inform and educate consumers in order to improve their understanding and engagement in retail energy markets. GETTING THE CUSTOMER ON BOARD 6 This includes the Third Energy Package, the Energy Efficiency Directive (EED), the Consumer Rights Directive (CRD) and the Alternative Dispute Resolution (ADR) Directive. 17

20 GETTING THE CUSTOMER ON BOARD 3.1 Awareness TRUST At the 5 th Citizens Energy Forum (November 2012), European energy regulators CEER and European consumer organisation BEUC presented their 2020 vision for Europe s energy customers. This vision is based on the four so-called RASP principles: Reliability, Affordability, Simplicity and Protection & Empowerment. EURELECTRIC endorses this vision: we believe that the RASP principles are essential to create awareness and increase trust. This is why these principles have guided and will continue to guide the actions and commitments of our members when engaging with customers. Whilst the industry can certainly do more 7, a lot will also depend on a better regulatory framework, starting with the correct implementation of existing legislation. In the table below we summarise our views on the RASP principles and the type of regulatory actions needed from EU and national authorities to help the industry translate those principles into reality. reliability what we believe what we need Customers should be able to rely on: - their energy contract, - the information on offers and conditions they receive from retailers, - the different market processes (switching, billing, moving, etc.) and services they are offered. l Member States should fully implement existing EU legislation, e.g. switching within 3 weeks (3 rd Energy package), billing on actual consumption (Energy Efficiency Directive). 7 Examples of national and EU-level actions that EURELECTRIC and its members are taking in this regard are detailed in the EURELECTRIC paper Translating the BEUC/CEER 2020 Vision for Europe s energy customers into reality (December 2013). 18

21 GETTING THE CUSTOMER ON BOARD affordability what we believe what we need Customers should be able to benefit from: Fair prices and transparent bills Fair prices are a crucial feature of a well-functioning market. Market liberalisation has put downward pressure on wholesale prices, which over the last 15 years have at the very most risen in line with inflation rates. However, in most Member States the strong and steady rise of taxes and the cost of funding government policies for renewable energy, social support and energy efficiency is offsetting any liberalisation effect on the energy component in end consumer bills. Services allowing them to lower their bills These include tailored energy efficiency services, house improvement and demand response programmes. l l l l l Member states should fully implement existing EU legislation and remove market distortions such as regulated prices and price caps. Additional actions could include giving stronger enforcement powers to the European Commission or imposing a strict date for termination of price regulation. Customers bills should reflect as far as possible the market-based cost of energy and should not be a vehicle for financing other policies. To lower costs, all energy sector subsidies should be progressively phased out moving towards 2020 and beyond. Member States should fully implement existing EU legislation, notably the Energy Efficiency Directive. Specific measures in case of fuel poverty Customers with energy debts are likely to have other debts as well. This is why a holistic approach is generally the best way to provide them with effective support. Energy efficiency financing schemes could nevertheless be a good way to support customers facing fuel poverty. If such schemes were to be introduced, we think they should be financed through general taxation to avoid levying energy bills. the rising cost of uk energy energy bill for an average uk household ,247 l l 1,311 Social policies should ensure that essential services are met and help customers tackle the root causes of debt, including energy debt. EU funding programmes such as Structural Funds could be used by Member States to improve energy efficiency in the housing sector, in particular for low-income families. 1,487 GETTING THE CUSTOMER ON BOARD 954 1, % % % % % % % % % % % % % % % % % % % % Breakdown of an average dual fuel energy bill based on Ofgem notional consumption of 6,500kWh gas and 3,300kWh electricity. key policy and regulation costs supplier costs transport costs commodity and production costs Source: RWE npower 19

22 GETTING THE CUSTOMER ON BOARD SIMPLICity what we believe what we need It is up to market parties to translate the complexity of the market into the simplicity that customers want by packaging attractive products. Customers should have easy access to the information necessary to compare offers and make informed choices. There are many ways to help customers choose the products best suited to their needs without hampering marketing innovation: Quality guaranteed price comparison tools can assist customers in navigating the retail market and comparing the characteristics of energy products. Retailers can offer personalised advice to their customers, e.g. which is the cheapest and most appropriate tariff considering their consumption profile and preferences. Simplicity is best guaranteed if the retailer remains the main point of contact for customers. This is even more relevant in demand response markets with smart meters because of the increased amount of data exchanged. Simplicity is also linked to better regulation. Overwhelming customers with information is not always helpful. Instead, the focus should be on providing them with meaningful data. l l l l The accuracy and objectivity of price comparison tools should be certified, e.g. with a trust mark from the energy regulator or an independent and competent consumer organisation. Some form of standardisation, e.g. in the terminology used, may be necessary to allow for accurate comparison of offers. Make retailers the main point of contact for customers to simplify their retail market experience. Policymakers and stakeholders through consultation processes should assess the impact of current national legislative provisions and requirements regulating the presentation of offers and bills to strike a balance between simplicity and comprehensiveness. 20

23 GETTING THE CUSTOMER ON BOARD PROTECTION AND EMPOWERMENT what we believe Customer protection is more necessary than ever, given the ageing population, increasing technological and income gaps in society, and the economic crisis. To avoid being counterproductive, such protection must be targeted. Customers can be considered vulnerable for different reasons (financial, health, etc.) and need different strategies to cope with their vulnerability. Member States should provide market neutral support. Protection from unfair commercial practices is as important for energy as it is for all other retail markets. Customers should have the means to resolve any queries, such as easy access to their supplier s customer service and independent third party complaint resolution bodies (ADR). l l what we need Member States should fully implement existing EU legislation, such as the Third package (e.g. Member States have to define the concept of vulnerable customers ), the Alternative Dispute Resolution Directive and the Consumer Rights Directive (CRD). The definition of vulnerable customers used by Member States should properly identify those, and only those, in real need of assistance with respect to their energy needs. Data security and privacy should be guaranteed. Customers should always give their agreement before their data is made available to a third party other than their retailer and DSO. Customer empowerment in practice: Money Saving Expert Cheap Energy Club GETTING THE CUSTOMER ON BOARD Money Saving Expert is the UK s biggest consumer website with over 13 million users a month and seven million recipients of the weekly . The Cheap Energy Club is a service that aims to alert customers when cheaper energy deals become available, or when it is time to switch away from a tariff that is ending. This service takes into account exit fees and other key tariff information, providing personalised calculations. The data supporting these is kept in a personal data store provided by all filed. Almost 300,000 users have signed up to the club in a short space of time. 21

24 GETTING THE CUSTOMER ON BOARD also on features such as billing type and frequency, contract duration (price insurance), terms of payment, service level, granularity of information, and type of generation fuel mix (green or grey). 3.2 Choice Awareness and trust are two essential steps to empower customers. However, without choice they will not be better off. As some recent studies demonstrate 8, customers have different energy needs and there is no single measure that will make them all more aware of their flexibility and savings potential. While some customers will be looking for the simplest products, others will seek to reduce their environmental impact, pursue energy efficiency measures, or even install their own distributed generation units. This reflects a broader trend of customers becoming accustomed to a wider variety of choices in other traditionally passive services: in telecommunications, internet, banking and the like, customers are no longer content to be positioned exclusively at the receiving end. Many want to have more options and influence on how the companies that provide those services operate. It is only natural, then, to see some customers extending this behaviour into an area as fundamental as energy. This is why it is crucial to ensure that customers can freely choose from a range of products, services and contract types designed by competing retail companies. They should be able to base their choices not only on price and brand, but Choice enhances engagement and competition, putting downward pressure on prices and upward pressure on service standards. The challenge for retailers and policymakers is to ensure that those choices are explained as simply as possible, whilst ensuring that customers are not misled. Customers have increasingly different values and preferences 9 I want the best service for me and my family Service-centrics I prefer a familiar experience I value convenience and efficiency 18% Tech-savvys 15% Traditionalists Self-reliants 14% 13% 22% I prefer to manage my electricity consumption on my own 18% Cost-sensitives I look above all for the best financial rewards I like testing new technologies Source: Accenture 2011 Methodology note: Results based on a conjoint analysis. Base: All respondents. Source: Revealing the Values of the New Energy Consumer, Accenture, 2011, Social-independents 8 Actionable Insights for the New Energy Consumer, Accenture end-consumer observatory 2012; Shift, Not Drift: Towards Active Demand Response and Beyond, THINK, June Accenture s global survey is based on questionnaire-led interviews with 10,158 residential end consumers in 19 countries (among which 10 European countries), conducted online in native languages in December 2011 for Accenture by Harris Interactive. The selected countries represent a range of regulated and deregulated markets. For countries with large and/or diverse populations, participants were selected from a broad spectrum of locations. 22

25 GETTING THE CUSTOMER ON BOARD A tale of two characters with different needs and preferences Mary and John are neighbours. They both own an electric vehicle (EV). Mary has decided to contract the services of a retailer, allowing her to be rewarded for being more flexible. John is not interested in that kind of service: as a doctor he often needs his EV at short notice. One day both arrive home at around 7pm and plug in their EV. They have their dinner, fill the dishwasher and switch on the TV. Although they do not realise it, electricity prices at this hour are quite high. While John s dishwasher is running, Mary s does not start until 4am, when electricity is cheaper. Meanwhile, both EVs start charging at 7pm, but with many other EVs in the area charging at the same time, Marie s retailer in agreement with the DSO reduces the charging speed for her vehicle from 8 to 10pm to avoid an overload of the network. The DSO pays the retailer to do this, who gives Mary a discount on her next bill. The different charging patterns result from different customer choices: Mary has told her appliances that she only needs her EV and clean dishes at 8am the next day, while John has clean dishes at 9pm and his EV completely charged as soon as technically possible. When he is called to an accident during the night John finds his car ready. Mary in turn is happy to have a bill that ends up being lower than John s. GETTING THE CUSTOMER ON BOARD 23

26 GETTING THE CUSTOMER ON BOARD As technologies evolve so too defining, understanding and serving energy customers. In fact, for retailers, traditional household segmentation may no longer be valuable. They will have to consider overlapping customer types that require differing levels of sophistication to understand and engage. Smart meters will allow customers to share detailed consumption data with their energy retailer who will be able to build improved energy profiles to support more specific energy savings advice. The insights from more sophisticated, data-driven analysis of customer behaviour, demographics and expressed interests will also enable retailers to customise packages and programmes. As they start to offer a wider variety of offers, it will be critically important to develop expertise in test marketing and running pilot projects. Fine-tuning such capabilities will help retailers more accurately gauge customer interest levels, develop the right packages, and spot emerging trends. Retailers must consider overlapping customer types Bill payer Consumers who pay for energy usage. Premise occupant Energy-consuming occupant of a specific premise. Prosumer Energy consumers who both purchase and supply energy. Roaming consumer Consumers that roam within and outside of the energy provider s service area. Community consumer Groups of consumers who have joined together to manage, purchase and/or generate energy within their own communities. Source: Accenture

27 chapter 4 GETTING THE REGULATORY FRAMEWORK RIGHT EURELECTRIC s customer vision builds on Awareness Trust Choice supported by the right regulatory framework Show customers the value of becoming more active Set up a secure, efficient and transparent framework for data exchange Clearly separate competitive and regulated activities Unblock market access for Demand Response Incentivise smart grid investments by DSOs Set up supportive innovation policies Society expects utilities to pave the way and finance the transition towards the smart energy system. However, the needed investments and innovative solutions will only occur if an appropriate regulatory framework is in place. Such a framework should strike a fine balance between stability and flexibility: - On the one hand, it should be stable and transparent, both in the regulated (distribution) and in the competitive (retail) part of the electricity business. Predictable rules and changes to those rules will spur investment and attract innovative financing models. - On the other hand, it should retain enough flexibility to apply to different national contexts and adapt to changing circumstances over time. The right level of smartness for an electricity system will depend, among other things, on the state and structure of the national grid, the share of variable renewables, electric vehicles and storage in the system, and customer preferences. A one-size-fits-all model would not be appropriate. The framework should be aligned with the existing EU targets while reflecting the individual needs of each country. It should be developed in discussion between relevant stakeholders and the national authorities. This chapter sets out recommendations in six areas where we believe decisive action by national and European policymakers and regulators should be taken. 25 GETTING THE REGULATORY FRAMEWORK RIGHT

28 Recommendation 1 Show customers the value of becoming more active Encouraging customers to provide flexibility to the energy system is only possible if they receive clear financial signals that lead them to become more active in energy retail markets. This requires the following: Ensure that electricity markets function properly Member states must stop discretionary intervention in retail electricity pricing. Blanket price regulation prevents customers from seeing the value of becoming more active. It should be phased out as a matter of urgency 10. In addition, even in countries without blanket price regulation, a large part of household electricity bills is regulated (taxes, charges). This part of the bill remains unaffected by changes in wholesale prices. The larger it is, the lower the signalling effect for customers, reducing the likelihood that customers flexibility potential will be used. Allow distribution tariffs to be cost-reflective and avoid cross-subsidisation and free-riding Network tariffs should be more capacity based. Such a tariff structure would encourage more efficient use of the network capacity and avoid cross-subsidisation. Send one unambiguous signal to customers Sensible regulation should allow market parties to send unambiguous price signals to customers. Retailers will translate the complexity and sophistication of a wellfunctioning market into the simplicity that customers demand, by packaging attractive products. Successful retailers will offer products that are easy for the customer to understand and that effectively reduce any complexity in costs (wholesale prices and variable network tariffs). As situations might arise in which the interests of retailers to use load flexibility for supply portfolio management will be in direct conflict with the need of DSOs to maintain local grid stability, a new set of contractual agreements will be needed between the different market players. Make the customer bill simple and transparent Depending on customers needs, retailers should be allowed to provide them with a bill that differentiates between the energy, network and tax components (including support schemes). Customers should also have easy access to disaggregated billing information, e.g. when demand response is bundled with other service offers. However, there is a trade-off between accuracy and simplicity. The ultimate aim is to ensure that customers understand the bill they receive. It should be up to customers and retailers to agree on the level of information contained in the bill, bearing in mind that information can also be communicated by other means (e.g. internet). Further information is available in the following EURELECTRIC reports: Network tariff structure for a smart energy system, May 2013 Active Distribution System Management, A key tool for the smooth integration of distributed generation, February 2013 Customer Centric Retail Markets: A Future-proof market design, September 2011 EURELECTRIC views on Demand- Side Participation, August Special measures could be considered for vulnerable customers, depending on the national situation. 26

29 Recommendation 2 Set up a secure, efficient and transparent framework for data exchange Data exchange is indispensable for the proper functioning of the smart energy system and will be a key means of creating new value. Without appropriate data, neither DSOs nor retailers will be able to perform their tasks. DSOs need technical data to operate the distribution system safely and efficiently, and to expand it as necessary. Retailers need consumption data in order to hold their energy portfolio in balance and package innovative products and services based on customer preferences. However, most customers will only be comfortable sharing their data if they are confident that these are stored securely in a way that safeguards their privacy. Any framework for data exchange between customers, retailers and DSOs must take these concerns into account. EURELECTRIC believes that customers should always explicitly give their consent before their data are made available to third parties and should be informed for what purpose the data are used. In general, we think DSOs - as regulated, neutral entities are best-placed to ensure effective customer data protection. In most EU Member States, DSOs already collect metering data from customers. Decoupling the collection of such data from processes carried out by market parties (e.g. contracting, billing) creates a level playing field on which all market players can compete, while customers can be sure that data is only passed on with their consent. At the same time, data handling should not be unnecessarily costly. Setting up additional data-handling entities would raise costs, create redundancies and increase the potential for communication errors. A decentralised or centralised DSO-run data hub 11 which handles all data related to DSO assets and connection points could be more efficient. Finally, the creation of a smart energy system will only be possible if actors from different sectors be it energy, ICT, telecoms, transport, or building and facility management find new ways of cooperating. Such cross-sectorial cooperation is needed to develop the standards, processes and protocols missing today, and without which creating a truly cost-efficient and competitive environment is not really possible. Further information is available in the following EURELECTRIC reports: Communicating smart meters to customers which role for DSOs?, June 2013 The role of Distribution System Operators (DSOs) as Information Hubs, June 2010 Standardisation makes economic sense Standards for information exchange are an efficient means of integrating the different players and components that make up the smart energy system. They are also a good way to reduce costs, by e.g. allowing retailers to monitor and remotely control with the agreement of the customer appliances, solar panels, electric cars and other distributed energy resources in a standardised way. Standardised information exchange also reduces the cost of switching retailers, improving competition in the market. This implies a certain level of standardised messages, both within the home and between the energy system and the home. Divergent industrial or national initiatives in this field could hamper the take-off of smart appliances. A common European approach, i.e. a clearance of nationwide existing smart grid projects, is preferable. Standards for smart grids are being set at EU level, but gaps nevertheless remain. Work on issues such as interoperability and demand response should be stepped up. Closed technological standards that hamper innovation should be avoided in favour of data interfaces that allow interoperability of different systems. 11 For countries where the DSO is not the owner of the meter, e.g. the UK, the data handling model could be different. 27 GETTING THE REGULATORY FRAMEWORK RIGHT