This article was written in collaboration with Podero CEO and Co-Founder Chris Bernkopf. It originally appeared on Climate Drift in parts one and two .

Introduction

Traditional energy resources and the electrical grid are at a turning point. Fossil fuel energy sources are limited and produce carbon dioxide (CO2) emissions that are affecting the delicate balance of our planet. We are witnessing our climate change as a result of greenhouse gasses. The world will not significantly reduce electricity use, so we must make it completely emissions-neutral, which is only possible if we decarbonize our energy production, electrify everything we can, and synchronize renewable electricity supply and demand – which are in oppositional cycles. Using distributed energy resources (DER) is the pathway to help offset energy supply and demand, and efficiently rebalance the grid. Household DER devices, such as heat pumps, ACs, electric vehicles, and EV chargers, pose challenges for utility operators to predict and orchestrate. However, there are organizations capable of connecting to DER devices on the grid, steering their energy consumption, and increasing green energy consumption at lower cost intervals.

1. Decarbonizing Energy Generation

The World’s Insatiable Need for Energy

The world’s use of energy is not slowing down. Watt-hours are used to measure quantities of electricity or heat produced. An average household uses about 10,000 kilowatt-hours (kWh) of electricity each year. Global electricity consumption has grown to over 20,000 terawatt hours (TWh) per year. To help understand that scale of consumption, consider this: A single home needs 1 kWh of energy for one hour, and 1 megawatt (MWh) of energy can sustain 1,000 homes for one hour. A gigawatt (GWh) is equal to one billion watts, and a terawatt is equal to one trillion watts.

Energy is so fundamental to our lives that it’s very challenging to use less of it. Even if one billion people in predominantly high-income countries want to reduce energy usage, their progress in doing so is far too slow to make significant progress toward limiting climate change (1-2% per year). Many of our technologies, such as washing machines, data centers, and hospital equipment, improve our lives in many ways. It would be extremely difficult to separate from our day-to-day usage. Saving energy at individual touchpoints or even at scale cannot get us to net zero, nor will it get us even close. Even when calculated generously, if the European Union were to reduce its energy use by 1.6% every year, it would take almost 40 years to halve its energy consumption.

The 7 billion people in developing countries are within their rights and are on track to achieve higher living standards. That upward trajectory means they will consume exponentially more energy to meet these standards due to a growing population, industrial development, and economic advancement. Global electricity demand is expected to more than double from 25,000 TWh to between 52,000 and 71,000 TWh by 2050, due to the growth in emerging markets’ energy needs and electrification across the economy.

Renewable Pathways to Decarbonizing Energy

We must quickly decouple energy generation from greenhouse gas (GHG) emissions. Many governments have set targets for substituting and phasing out fossil fuels, but they still rank highly as the primary sources of most of our energy. Globally, progress to reduce reliance on carbon-intensive energy resources has been slow.

Decarbonizing energy means we have to switch to renewable energy and electrify everything we can when it comes to consumption. Electrification is a crucial tool for reducing greenhouse gas emissions because it offers us the chance to switch renewable energy sources across multiple sectors. To be successful, we also need to synchronize our use of renewable energy across all of our electric devices. If our devices aren’t in sync with available renewable energy sources, we must use some form of non-intermittent, mostly carbon-intensive, electricity generation.

Approximately one-seventh of the world's primary energy is currently sourced from renewable technologies. Generating renewable energy creates far lower emissions than burning fossil fuels. Transitioning from fossil fuels, which currently account for the lion’s share of emissions, to renewable energy is key to addressing the climate crisis. Renewable sources are some of the cheapest forms of energy in most countries, and they create three times more jobs than fossil fuels.

Green, Distributed Power at the Lowest Cost

Solar and wind lead the way as the cheapest sources of energy. Both governments and private entities are rolling out solar at an ever accelerating pace. The cost of solar power production follows Swanson’s Law, named after Richard Swanson, which asserts that the price of solar photovoltaic modules drops 20 percent for every doubling of cumulative shipped volume. Today solar energy is 250 times cheaper to produce than it was in 1976. Rates are likely to continue plummeting faster than experts estimate, as previous estimates were incredibly wrong.

Levelized cost of energy (LCOE) is a measure of the average net present cost of electricity generation for a generating plant over its lifetime. With increasingly widespread implementation of renewable energy sources, costs have declined, most notably for energy generated by solar panels. Cost of Electricity by Source.

Thousands, if not millions, of tiny tweaks to solar over the period of 45 years has led to serious cost reductions. As wind and solar technologies improve and the cost of their production goes down, it’s extremely difficult for nuclear or gas energy sources to compete financially. This is because any changes to nuclear or gas generation systems take years to complete versus the shorter iterative cycle to make improvements to solar or wind technologies.

Chart showing the price of solar photovoltaic panels as a function of cumulative installed capacity, with annual values beginning in 1975. This represents the 'learning curve' for solar panels. Source: Solar (photovoltaic) panel prices vs. cumulative capacity. Our World in Data.

While clean energy sources account for 20 percent of final energy use globally, renewables’ share in the world’s power mix is expected to more than double in the next few decades. With this surge of new energy sources our electrical infrastructure requires a boost in flexible capacity to ensure security of supply and a balanced grid. The complete switch from fossil fuels to renewables such as wind and solar will reduce overall energy prices by 23 percent at current prices. As prices for solar and wind most likely continue to reliably fall, the price reduction may turn out to be even larger.

As we shift to clean energy, we are also replacing, or electrifying, devices that rely on fossil fuels. There would be no point in us establishing and accessing green energy to then use devices that produce emissions. Broilers, furnaces, stoves, and vehicles are all examples of devices that are now electrified so that we can heat our homes, cook, or travel from one place to the next without producing emissions.

2. Electrify Everything

The Rise and Challenges of DERs

Distributed Energy Resources (DERs) are small-scale power generation or consumption devices surging through the modern energy system like an unstoppable wave. Unlike traditional power plants or large power consumers like factories, DERs are decentralized and spread out across the energy system.

There are front-of-the-meter (FTM), or utility-side, DERs that operate at a large scale, such as wind farms and photovoltaic solar farms. There is behind-the-meter (BTM), or consumer-side, DER, such as heat pumps, ACs, electric vehicles, EV chargers, consumer-scale inverters, home batteries, microturbines, and fuel cells. There are four ways to use DER: generation, storage, energy efficiency, and demand response.

Generation technologies can be installed anywhere electricity is used, on the distribution grid.
Energy storage can be used to shift energy consumption to times of low demand, supply power back to the grid at times of high demand, and help stabilize the grid. Energy can be stored as electrical energy in batteries, heat in heating systems and boilers, or cooled air in buildings and refrigeration systems.
Energy efficiency solutions, such as heat pumps or LED light bulbs, which use far less energy than gas boilers and electric resistance heaters or traditional light bulbs while maintaining the same level of service.
Demand response resources shift energy consumption in response to electricity prices or to support grid stability.

Virtual power plants are grid-integrated aggregations of distributed energy resources such as solar inverters, wind turbines, batteries, electric vehicles, heat pumps, and other connected devices. They already benefit households, businesses, and society and are on the cusp of significant market growth. Source: Virtual Power Plants, Real Benefits. Rocky Mountain Institute.

While hundreds of millions exist globally, most aren’t intelligently used to manage the fluctuating electricity they generate and consume. Connecting small household DERs, typically under 10 kilowatts, is challenging for utilities. Larger-scale DERs at the scale of a few megawatts, like wind or solar farms, are more easily integrated into Virtual Power Plants (VPP). Utilities rely on DER technologies to delay, reduce, or even eliminate the need for additional power generation and infrastructure. DER systems can also improve voltage support and local grid reliability.

Flattening the Duck Curve and Reaching Zero Emissions

The switch from traditional power generation methods like coal, gas, hydro, and nuclear has one significant trade-off. Electricity from renewable energy sources like solar and wind is intermittent or inflexible, meaning we can’t generate power from them when their sources – sunshine and wind – aren’t available. This results in too little electricity being produced when demand is high, such as solar energy supply demand after 6pm, and increasing amounts of electricity being produced at times when there is little demand, such as solar energy supply/demand at noon.

The duck curve below is a graphical representation of electricity supply/demand on the grid as renewable solar energy production and demand shifts throughout the day. Renewables like solar and wind cause spikes in production, while new flexible DER devices cause spikes in consumption — unfortunately, mostly at opposite times. As an example, we turn up our heating and plug in our car just as the sun sets. It helps to illustrate the challenges of balancing energy production from intermittent, renewable sources and growing demand for DERs like electric vehicles, ACs, and heat pumps.

With more countries starting to rely on solar power, there are many potential solutions for the duck curve being explored and implemented to achieve better energy storage, power alternatives, and other renewables to fill in the demand gap. Source: CAISO and Visual Capitalist.

We can’t decarbonize our energy use if most of the green electricity production occurs when it’s not needed or if our consumption peaks when green electricity production is at its lowest.

III. Synchronizing Electricity

Generation is Inflexible, But Consumption IS Flexible

Though the duck curve is caused by DER technologies, they can be a big part of the solution. Smoothing the extremes of the duck curve depends on the number and size of DER solutions connected to the grid and regulations surrounding energy trading. Compensating for generation intermittency requires increased access to already installed and emerging DERs, such as batteries, electric vehicles, and heat pumps.

DERs enable flexible loads in the system, causing less extreme peaks and valleys of energy supply/demand, resulting in a flatter or “sleeping” duck curve. Creating this new version of the duck curve requires electricity to be traded on the market, leveraging emerging, integrated DER devices that can offset costs and increase grid resilience.

The EU has a set of rules on wholesale energy trading as part of the Green Deal Industrial Plan to foster competition in the energy market. Consumers are placed at the center of the EU’s transition to clean energy so that they can engage in the act of generating and supplying power. Dynamic tariffs, meaning those that charge variable rates based on electricity market prices, are being made mandatory in many European countries (Directive 2019/994). All utilities must offer dynamic electricity tariffs in Germany from 2025 onwards (EnWG § 41a). These are instruments to incentivize users to change their behavior since prices for these contracts are based on market supply and demand. The problem is that it's very difficult for a consumer to do this manually. A system is needed to enable users to use electricity at the best prices.

The Dual Flywheel of Distributed Energy Markets

Electricity markets are governed by supply and demand, and they operate across three levels: long-term power-purchase agreements, which operate months to years ahead; wholesale electricity markets, or spot markets, which operate up to one day ahead at 15- —to 60-minute intervals; and real-time balancing markets, which respond within seconds to minutes to stabilize the grid. For instance, while the day-ahead market closes 12 to 36 hours before power delivery (consumption or production), an intraday spot market can adjust just five minutes before delivery.

In periods of high renewable energy generation, electricity is usually cheaper than at times of low renewable energy generation. We can use these market forces for good to drive decarbonization. Electricity flows almost instantaneously through the grid, so utilities must precisely forecast and price how much energy production (supply) and consumption (demand) they’ll need based on load profiles. A load profile indicates how much electricity will be needed in certain time intervals. The profile can exist in 1-hour, 30-minute, or 15-minute intervals or for more extended periods, e.g., the next 12 months. Accurate forecasting ensures the stability of the grid. This keeps the grid balanced and trades electricity at the lowest possible price.

Electricity producers (utilities or individuals who generate their own renewable energy and sell into the grid) bid into the market based on production costs. Renewable energy sources are produced at near-zero operating costs – because they don’t burn any raw materials – making them often the cheapest, encouraging the system to prioritize clean energy. Bids in the wholesale spot market are accepted from the cheapest to the most expensive electricity bidder. The market operates on a merit order, with the cheapest electricity bid accepted first and offers in line following suit. Once the demand is satisfied, everybody receives the price of the last electricity purchase.

Market participants can significantly reduce their costs by adjusting the timing of electricity consumption and production. Shifting electricity usage from high-demand periods to times of abundant renewable energy can lower costs for all parties.

The Left Side of the Flywheel: Electricity Consumption by DERs

Shifting consumption to mid-day – when renewable energy is abundant and cheap – enables households and DER operators to save money. This reduces the total cost of ownership of DER solutions compared to their fossil fuel counterparts, fueling more deployments of DERs. With more DERs in operation, there is an increase in the amount of power used in the morning and the evening, creating spikes in electricity prices at those times. But by shifting DER power usage to mid-day, operators and owners can reduce their operating costs and help reduce reliance on fossil fuels.

The dual flywheel of distributed energy demonstrates the self-reinforcing relationship between DERs and renewable energy. As DERs shift electricity consumption to low-cost, low-carbon periods (mid-day), they boost the deployment of renewables. This dynamic feedback loop drives its own energy prices, decarbonizes the grid, and improves its resilience.

The Right Side of the Flywheel: Electricity production by renewables

Shifting demand to mid-day simultaneously boosts the price of electricity at that time, which boosts the profitability of renewable energy sources. This helps to flatten the “duck curve” and improves the attractiveness of renewable electricity investments, like solar and wind. This leads to an increase in the deployment of renewable energy sources, which in turn leads to more DERs being able to shift their consumption to times of cheap green energy production.

The grid becomes more flexible, stable, and cost-efficient as we synchronize, or load shift, when DERs successfully adapt to the production patterns of renewable energy sources. In the process, we create lower market prices and lower costs for everyone except fossil fuel plants. Market volatility can be predicted and mitigated by leveraging DER storage devices that enable load shifting and balancing, pulling cheap electricity off of the grid for use at a later time. This dual flywheel of increasing renewable energy production and optimized DER consumption creates a cleaner, cheaper energy market.

Ensuring Grid Stability Using DER

Grid stability hinges on a delicate balance of power to keep the grid frequency within a specific range. Grid frequency, measured in Hertz (Hz), reflects how often the alternating current (AC) changes direction in a power grid. It indicates whether there is an imbalance between electricity generation and consumption. All devices participating in the power markets, whether power plants, industrial machinery, iPhones, or DERs, can only operate within a specific frequency range—outside of it, they shut down. Blackouts happen when many devices, either generating or consuming energy, go on or offline in short succession. Managing grid frequency is crucial for preventing cascading failures and ensuring the continuous flow of energy within the grid.

The standard grid frequency varies between regions. The nominal value is 50 Hertz (Hz) in Europe and 60 Hz in the United States. Power system operators restore the frequency to its desired level using restoration reserves that can increase or reduce power use or production quickly on demand. Restoration reserves can be power plants, industrial machinery, or DERs.

FCR, or frequency containment reserve, is known as primary reserve and is used to stabilize the grid within 30-seconds or less.

aFRR stands for automatic Frequency Restoration Reserve. It is known as a secondary reserve and must be activated within either 7.5 or 5 minutes, depending on the country.
Devices operating on manual Frequency Restoration Reserve or mFRR must be activated within 15-12.5 minutes, depending on the location. It is designed to address longer energy frequency deviations.

Electricity markets, like the spot market and balancing energy markets, offer utilities and other market participants opportunities for arbitrage. They can profit by intelligently adjusting their consumption and production patterns to take advantage of favorable pricing in day-ahead and intraday spot markets. They can also get paid to help balance the grid by providing FCR, aFRR, and mFRR during times of deviation from the optional grid stability.

IV. Monetizing the Distributed Grid

VPPs: Connecting and Controlling Flexible, Smart Devices

Most organizations and individuals make decisions based on financial incentives rather than environmental impact. In the EU, most customers pay the same electricity price regardless of when they use it. The electricity markets offer significant savings while reducing greenhouse gas emissions, but most consumers can’t access these savings due to fixed electricity contracts and underutilized DERs.

Electricity prices vary across regions, influenced by infrastructure, geography, and government-imposed taxes. For example, taxes comprise a large portion of residential electricity prices in Denmark, Belgium, and Sweden. However, dynamic electricity contracts, where prices fluctuate daily, are becoming more popular. Spot electricity contracts offer hourly rates, but consumers can’t fully capitalize on available market savings even with these.

To unlock maximum savings, utilities must actively trade energy and pass those savings to customers. This is achieved through a Virtual Power Plant (VPP), an aggregation of power sources, whether power plants or DERs, that are connected and integrated into the grid. A VPP can consist of hundreds or thousands of DERs to help balance grid frequency. In the future, millions of devices could be part of VPPs with the right software.

VPPs allow utilities to trade (buy and sell) the consumption and production of power plants, consumer demand, and DERs on spot electricity markets. It also allows them to shift flexible electricity consumption and production capacity from peak hours to off-peak hours. This is called load shifting and has long been used by industrial and commercial sites to reduce costs, flattening the duck curve in the process.

Connecting, Steering, and Optimizing Consumer Power

Currently, load shifting is mostly done using power plants or large DERs, such as grid-scale batteries, wind turbines, large solar farms, and hydroelectric power plants. However, utilities are increasingly beginning to explore ways to add consumer-grade DER devices to VPPs so that they can benefit financially from the same methods and pass saving rewards on to consumers.

One promising approach is creating a “virtual battery,” an aggregation of household scale DERs, such as home battery storage, electric vehicles, or heat pumps. The virtual battery provides the utility with a singular instrument that it can connect to a VPP. The VPP uses existing trading methods to buy and sell power for the virtual battery. The same methodology can be applied to aggregations of consumer solar inverters to maximize profits from solar power production. It can also be simultaneously orchestrate and address a mix of electricity-producing and consuming DERs.

Reaping the rewards of trading power from DERs on the electricity markets requires utilities to adopt a software stack to connect to consumer DERs en masse, read their data and control, or steer them according to trading signals. The utility must also forecast the power consumption of each device, aggregate the entire DER device fleet, and calculate possible trade scenarios. It’s important that any attempt at device optimization is easily communicated with consumers in clear terms and avoids disrupting a consumer’s comfort beyond a user-defined level.

If completed successfully, each DER device uses the full potential of its energy flexibility to consume power at the cheapest possible times, earns the maximum profit by participating in spot market price trading, and supports stabilizing the grid. By doing so, utilities can offer significantly cheaper electricity prices to consumers, help increase access to affordable electricity, and avoid significant GHG emissions by prioritizing electricity use from cheap, renewable sources.

Case Study: Podero Orchestrates DERs for E.ON, oekostrom, and KELAG

Podero is one of the software providers at the forefront of this industry shift. The company works with large utilities, including E.ON, oekostrom, and KELAG, among others, to create new revenue streams by trading DERs flexibility while offering 25+% cheaper electricity contracts to consumers. A win-win for consumers and utilities!

Podero provides utilities with a platform to create virtual batteries and integrate them into their VPPs. Consumers who have DERs can link their devices to the platform through Podero’s white-label app or the utilities’ own apps, provided they are integrated with Podero’s API. Once connected, Podero manages the DER devices according to user preferences, operational requirements, and trading signals.

After the software aggregates the devices into virtual batteries, it forecasts their load curves and proposes trades to the utility's VPP via the API. The utility can make those trades on the wholesale spot and balancing energy markets, passing along some of its earnings to customers.

Podero’s white-label app (pictured) offers a seamless way for utilities to launch consumer device optimization without any technical hassle. Consumers can connect devices from 51 manufacturers, or roughly one thousand different device models, which Podero steers according to its spot optimization algorithms and HEMS (Home Energy Management System) features. The result? The devices use power at cheaper times and maximize the use of self-produced solar energy, leading to cost savings for the consumer.

Podero quickly integrates into utility apps so that consumers have a unified experience without leaving the utility's software sphere. The integration is designed to work out-of-the-box and in the background without disrupting the customer experience. Utilities also integrate Podero’s trading APIs into their VPP to receive and transmit the data of their virtual batteries on Podero’s platform. The utility can then use Podero’s AI-generated trading forecasts to trade on the day-ahead and intraday spot and balancing energy markets. Through this system, the utilities can harness new revenue streams that enhance customer satisfaction and engagement with lower electricity costs.

Conclusion

As our energy demand continues to grow and climate change progresses, decarbonizing energy production and consumption is vital. The shift to renewable energy sources means electricity is increasingly intermittent. The energy flexibility found in DERs offers a promising approach to our shared challenge, and a vast number of flexible DERs are just waiting to be used to transform the energy system.

By aggregating DERs into virtual batteries that can be used to trade on the electricity markets using Virtual Power Plants, we can solve the intermittency issues associated with renewable energy, generate new revenue streams for utilities, reduce energy costs for consumers, and reduce greenhouse gas emissions.

Incorporating DER steering and flexibility trading into utility strategies is key to transitioning to a greener, more sustainable energy system. Utilities that do so will play a pivotal role in creating a world of abundant green energy.

Interested in learning how utilities can use DERs to create customer savings, earn new revenue streams, and make the energy grid more flexible, resilient, and sustainable? Chris, the CEO of Podero, is more than happy to walk you through Podero’s solution. Click here to book a meeting.
Are you looking for a growth-oriented marketing person who can help you create a mythology for your brand, deepen your customer relationships, and drive narratives that transform your business? Connect with Maura on LinkedIn or book time with her. She’s currently diving into different climate topics – including energy, circularity, decarbonization, and greenwashing – to deepen her expertise and share new avenues of storytelling for climate solutions.

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Blueprint for Steering Distributed Energy Resources