Energy-as-a-service

Flexibility is really needed and Energy-as-a-service could be a solution.

“You’ve got to start with the customer experience and work back toward the technology – not the other way around.” Steve Jobs.

Nobody eats electricity. If we buy electricity, it is because we want to use it for something useful: having lights, watching TV, heating a home, or charging an electric car. What is important is the final use, not the electricity/energy consumed to achieve it. Yet, in a world with a lot of renewables, we want people and companies to adapt to the supply side as we have less control over the wind and the sun¹. Practitioners developed the concepts of Flexibility or Demand-Side Management. To have this flexibility, we are counting on flexible tariffs, incentivizing people to adapt their consumption. But are people ready for that? Or can there be another way?

We believe that there might be a different solution: the concept of “Energy-as-a-service”.

Let’s explore but first, we have to make a detour by Africa.

The African experience with mini-grids

Working within a different environment invariably brings a fresh perspective, and this axiom holds true in the dynamic energy sector. Sub-Saharan Africa, in particular, can bring some great insights.

One interesting initiative involves the establishment of renewable-powered mini-grids. Presently, there are over five thousand such mini-grids in operation across developing nations.

A mini-grid powered by solar.

Simply put, a mini-grid is a very small grid. And like larger grids, there are many possible variations with regard to the size, ownership model, sources of generation, etc. All these variations make mini-grids extremely diverse and original ideas have been developed.

Mini-grids: small-scale laboratory

Historically, generation was following demand. Nevertheless, with the increasing share of renewables, there is an increased need for flexibility from the demand side, which can be described as follows:

Demand Side Flexibility (DSF) or Demand Response is the capacity to change electricity usage by end-users from their normal or current consumption patterns. DSF can be motivated by market prices, distribution tariffs or reliability signals.

Like their larger counterparts, mini-grids also face the challenge of balancing energy consumption with generation. However, due to their smaller scale and the prevalent use of renewable energy sources, operators are compelled to innovate in order to sustain this equilibrium. There are different ways to innovate but a common one is to play with tariffs. Here, we present a diverse array of innovative tariff concepts designed to enhance flexibility:

1. Consumption-based or Capacity-based Pricing: Mini-grid tariffs can be structured either on a consumption basis, where users pay per unit of electricity consumed ($/kWh), or a capacity basis, where the cost is determined by the peak power demand ($/kW).

2. Time-of-Use and Seasonal Variations: Tariffs can be adjusted based on the time of day or the season, reflecting the varying demand and cost of electricity throughout the day or year.

3. Subscription-based Model: Users can opt for a subscription plan, which offers a specific amount of energy at predefined times, promoting predictability in energy costs.

4. Regressive or Progressive Pricing: Tariffs may follow regressive or progressive pricing structures, where the unit price decreases or increases with increasing consumption, respectively.

5. Flat Fee for Specific Devices: Some mini-grids offer a flat fee for powering particular devices or appliances, making energy access more accessible and transparent.

6. Reliability-based Tariffs: Different tariff tiers can be established to align with varying levels of grid reliability, ensuring that users pay based on the quality of service they receive.

7. Energy-as-a-Service: Instead of selling electricity by units, mini-grid operators can offer energy as a service, focusing on delivering specific outcomes or services, such as lighting, cooling, or productive machinery.

The myriad of tariff ideas reflects the diversity of mini-grid setups and the creative solutions employed to meet local needs. By exploring these innovative approaches, we can have some inspiration. Let's delve deeper into the idea of Energy-as-a-service.

Energy-as-a-service

Electricity is always used for doing something: powering home appliances, heating our residences, providing hot water, illuminating our surroundings, and charging electric vehicles. In essence, it functions as a conduit through which we access specific services. Consider this perspective: what if consumers were billed not for the amount of electricity consumed, but rather for the services it enables?

This is the concept of Energy-as-a-service. From Deloitte:

Energy-as-a-service (EaaS) is a delivery model that combines hardware, software, and services. Solutions should combine demand management and energy efficiency services, facilitate the adoption of renewables and other decentralized supply sources, and also optimize the balance between demand and supply. The chief benefit for the consumer is in the simplification of an increasingly multifaceted service offering.

In this paradigm, consumers are not charged directly based on their electricity consumption; instead, they are billed for the specific services they receive. This model becomes increasingly relevant in a world where adaptability is paramount, particularly with the widespread adoption of electric vehicles, heat pumps, and home batteries.

With Energy-as-a-service, the service provider assumes responsibility for orchestrating the energy delivery required to fulfill the desired services. This involves optimizing power distribution in accordance with grid conditions and prevailing market prices, ensuring efficient and cost-effective service provision.

Making sense

The implementation of such an idea would most probably be difficult and it might never be really deployed. Nevertheless, electricity tariffs in a power grid with a large share of wind and solar cannot simply stay as it is. The current mainstream idea with regard to tariffs is mostly the dynamic electricity tariffs but it is not perfect². Would consumers really appreciate being affected by very variable tariffs changing every hour? Furthermore, capacity-based tariffs are often cited for the grid component but they might well introduce counter-intuitive incentives³.

The deployment of smart meters, coupled with the integration of data analytics and artificial intelligence, opens up a vast landscape of inventive tariff possibilities. However, the prevailing sentiment among most consumers is to view energy as a straightforward monthly expense, with little appetite for grappling with intricacies.

Could the concept of Energy-as-a-Service effectively shift the burden of complexity to specialized service providers, allowing individuals to pay a straightforward fee for access to the services they require? This way, consumers could enjoy the benefits without the hassle of the price volatility of the energy landscape.

1. See the post here on the future of electricity markets with high volatility.

2. Two issues could arise:

• Local congestion issue: incentivizing all cars to charge at the same particular hours might lead to too concentrated electric consumption.

• Tariff determination: is the day-ahead tariff enough? Should the tariff consider the intraday price and the balancing price as well?

3. Counter-intuitive incentives: by imposing capacity-based tariffs, any consumption above the normal capacity would be somehow punitive, independently of the local situation with regard to congestion. See this post for more info.