With the increase in electricity production from renewable energies and dynamic electricity rates, households are becoming key players in demand flexibility. Thanks to smart meters, self-consumption, and aggregators, they can adapt their consumption, taking advantage of financial opportunities while supporting a more sustainable electricity system. The active involvement of households in managing electricity demand reduces dependence on fossil fuels, eases pressure on infrastructure, and improves the resilience and sustainability of the grid.
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In the context of the transition to an electricity system increasingly based on renewable energies, maintaining the balance between electricity supply and demand represents a major challenge. Thanks to the functioning of the electricity market, new alternatives for flexibility and demand response are emerging to adapt to the availability of renewable energies (link to article on optimizing the electricity system). However, to fully exploit the potential of these adjustments, it is essential to actively involve all consumers.
1) Evolution of the Residential Energy Landscape
Traditionally, residential consumers have had little involvement in flexibility and demand response mechanisms, thus missing out on the economic benefits of electricity price variations. Most electricity consumers were not (and still are not) exposed to variable or dynamic rates depending on different times of the day, which limited their ability to adapt their consumption in response to fluctuations in electricity prices[1].
Nevertheless, studies such as those conducted by Ito (2014) and Fabra et al. (2021) have shown that even when consumers are faced with dynamic rates, which convey more information about the needs of the system, their response is often inelastic, meaning that they do not significantly change their consumption[2]. As a result, residential consumers have long been perceived as passive and inflexible, with limited ability to individually adjust their energy consumption.
However, the energy landscape is changing rapidly. More and more households have the potential to adapt their consumption to the availability of renewable energy[3]. Residential consumers can now generate their own electricity through residential photovoltaic installations or as part of energy communities. They can also adjust their consumption based on dynamic rates and periods of surplus through smart meters or energy sharing systems, and manage significant shiftable loads such as electric vehicles or heat pumps.
In particular, the introduction of smart meters has significantly improved the accuracy of knowledge about household electricity consumption[4]. Before their implementation, this knowledge was based on estimates derived from statistical models. Now, thanks to smart meters, this knowledge is much more accurate, with readings taken every 30 minutes. This increased accuracy allows for more precise remuneration of consumption adjustments based on consumption levels at a specific time, thus creating financial opportunities for residential demand response.
Faced with these major changes and the challenge of transitioning the electricity system, it is becoming increasingly clear that the active involvement of residential consumers in demand response is not only logical, but also beneficial for the entire electricity system. Indeed, residential consumers and businesses connected to the low-voltage grid account for 77.3% of total electricity consumption in France.
2) Concrete Means for Residential Flexibility
Residential consumers now have several concrete means of participating in demand flexibility (or response) in the electricity system. From a more global perspective, any adjustment in consumption or investment in storage capacity to align with renewable electricity sources contributes to the system and reduces our dependence on controllable fossil fuel generation sources. This note presents opportunities for residential demand response without going into the limits.
Dynamic electricity contracts
Based on the economic theory of marginal cost pricing, billing for electricity in real time allows all relevant market information to be transferred directly to consumers [6]. This can be done through supply contracts or discounts during periods of market imbalance. One of the major advantages of these mechanisms is that they encourage users to consume electricity when prices are low, i.e., when renewable energy is relatively abundant compared to demand, thus efficiently aligning electricity production and consumption.
In practice, however, few residential consumers opt for these contracts. Being risk-averse, they prefer fixed-price contracts over a given period (often several months or years). Furthermore, even when these dynamic contracts are chosen, there is little evidence that consumers respond to price variations. For the time being, electricity price variability is not a major driver of flexibility, but this situation could change, particularly if electricity prices rise and remain high.
However, when consumers have invested in their own generation units that they want to make profitable, they respond to simpler financial incentives such as those for self-consumption. Similarly, when consumers have energy-intensive appliances, such as electric vehicles or heat pumps, whose consumption can be automated by aggregators, they can reap the financial benefits of their response and reduce their bills.
Self-consumption
Self-consumption refers to the practice whereby consumers use the electricity they generate locally, usually from renewable sources such as solar panels installed on their own roofs. In other words, residential consumers consume the electricity they generate themselves. Self-consumption can take place at the individual level or within an energy community.
In France, approximately 600,000 homes were equipped with photovoltaic installations in 2022, and 53% of these installations are used for individual self-consumption. Furthermore, the number of individual self-consumers increased by 77% between 2022 and 2023 .This growth reflects the growing importance of self-consumption in the residential energy landscape.
Self-consumption offers several advantages in terms of electricity demand flexibility. By using the electricity they produce locally, residential consumers reduce their dependence on the traditional electricity grid, thereby helping to ease pressure on electrical infrastructure and stabilize the system as a whole. In addition, this practice gives them a financial incentive to adjust their consumption based on their own electricity production, thereby enhancing the flexibility and resilience of the electrical system. This trend also highlights the significant potential of self-consumption to encourage consumer participation in demand flexibility and the transition to a more sustainable and balanced electrical system.
In this context, the signals for adapting self-consumption demand are simpler than those for a dynamic contract. In addition, consumers are the initial investors in the production unit they seek to make profitable, as self-consumed electricity is cheaper than that used directly from the grid.
Aggregators
Another source of flexibility for residential consumers is aggregators. Acting as intermediaries between consumers and the electricity market, these companies pool (aggregate) residential sources of flexibility to reach a level sufficient to participate directly in the market. By aggregating small sources of flexibility such as electric heating systems or electric vehicles, aggregators act as virtual power plants, adjusting demand according to market constraints.
In concrete terms, aggregators add smart devices to the shiftable loads of residential consumers. They can then activate or deactivate these loads remotely, depending on the needs of the electricity grid and market opportunities. This approach optimizes the use of available resources, while offering consumers the opportunity to benefit financially from their flexibility.
In France, several aggregators are already operating in the market, including Voltalis, Centrales Next, Flexcity, and Equinov. These initiatives offer residential consumers the opportunity to take advantage of the financial opportunities offered by demand flexibility, while actively contributing to the balance and stability of the electricity system.
Conclusion
In the context of the energy transition towards a carbon-free electricity system, the challenges of maintaining the balance between electricity supply and demand are considerable. In this quest for flexibility, all sources are valuable. Residential consumers represent the new frontier of demand flexibility. With the expansion of more variable electricity contracts, self-consumption, and aggregators, their active involvement in electricity demand management is not only logical in the current context, but also beneficial for the entire electricity system. As significant contributors to total consumption and peak demand, their increased participation offers promising prospects for a more resilient and sustainable electricity system.
[1] According to the Energy Regulatory Commission (CRE), 57% of electricity consumption sites in France have subscribed to the regulated two-hourly sales tariff (TRV).
[2]Ito, K. (2014). Do consumers respond to marginal or average price? Evidence from nonlinear electricity pricing. American Economic Review,104(2), 537-563.; Fabra, N., Rapson, D., Reguant, M., & Wang, J. (2021, May). Estimating the elasticity to real-time pricing: evidence from the Spanish electricity market. InAEA Papers and Proceedings(Vol. 111, pp. 425-429). 2014 Broadway, Suite 305, Nashville, TN 37203: American Economic Association.
[3] Wesche, E. Dütschke, Organizations as electricity agents: identifying success factors to become a prosumer, J. Clean. Prod. 315 (2021), 127888
[4] In May 2024, 35.6 million Linky meters were installed in French households (Source: The Linky meter, an ally for responsible consumption, Enedis)
[5] Data for the last four months of 2022, considering all small consumers connected to the distribution network. (Source: Figure 1.5, Bilan Electrique 2023, RTE)
[6] Boiteux, M. (1956). Marginal cost pricing.Bulletin of the Swiss Association of Electricians,47.
[7] Ito, K. (2014). Do consumers respond to marginal or average price? Evidence from nonlinear electricity pricing.American Economic Review,104(2), 537-563.; Fabra, N., Rapson, D., Reguant, M., & Wang, J. (2021, May). Estimating the elasticity to real-time pricing: evidence from the Spanish electricity market. InAEA Papers and Proceedings(Vol. 111, pp. 425-429). 2014 Broadway, Suite 305, Nashville, TN 37203: American Economic Association.
[8] Bailey, M., Brown, D., Shaffer, B., & Wolak, F. (2022). Centralized vs Decentralized Demand Response: Evidence from a Field Experiment. Working Paper.
[9] Source: Enedis, Press release 07/11/2022 – Renewable energies: France has nearly 600,000 photovoltaic installations!
[10] Source: Enedis, French Observatory for Ecological Transition – Self-consumption
[11] Poplavskaya, LJ de Vries, Aggregators Today and Tomorrow: from Intermediaries to Local Orchestrators? Elsevier Science & Technology, San Diego, 2020
