Opportunities for market players along the residential energy flexibility value chain

Residential energy flexibility in Europe could unlock €24-€58 billion annually, yet only a fraction has been tapped. The race to capture value intensifies as demand surges and monetization mechanisms mature. Who stands to win: utilities, OEMs, telcos, or software providers? This Viewpoint explores three go-to-market models and reveals how value can be distributed along the value chain.

TAPPING INTO RESIDENTIAL FLEXIBILITY

Europe’s residential energy flexibility needs are expected to more than double by 2030 due to surges in variable renewable energy sources and increased electrification. To meet these needs cost-effectively, the demand-side must offer flexible solutions, in addition to supply-side resources, including peaking plants, smart grids, and energy storage.

While the technical potential for demand-side response (DSR) in Europe is approximately 100 GW, only 20 GW has been activated, primarily by commercial and industrial organizations (C&I). By 2030, the EU could face a 60 GW shortfall in generating capacity at peak demand. The flexibility created by DSR could cover this gap, avoiding the need to build new power plants and resulting in an estimated €2.7 billion annual savings for society.

Thanks to the growth of electric vehicle (EV), heat pump, and smart appliance ownership, the share of DSR is expected to increasingly shift from C&I to residential by 2030. Potentially 50%-70% of the 2030 DSR potential may come from households (see Viewpoint “Taking Demand-Side Response to the Household Level”). Therefore, market players should increase their focus on households and provide solutions to unlock flexibility. To encourage households to participate in flexibility markets, residential end users need a monetary incentive. The value created will thus have to be shared between the flexibility provider and the receiver, potentially diluting the value for both parties.

Is the value sizeable enough to be attractive for individual households to trade their flexibility? Will it be worthwhile for OEMs, utilities, and software providers to address this market and invest in the required capabilities? Which market player will secure the largest share, and why?

VALUE POOLS: €24-€58 BILLION PER YEAR

There are two key value pools for residential end users:

1. Costs saved through optimized time-of-use that considers dynamic electricity tariffs
2. Revenue generated by selling flexibility on a dedicated market (see Figure 1)

The size of these two value pools is highly dependent on the nature of electrical assets connected, the country-specific need for flexibility, and the maturity of the mechanisms to monetize it. Currently, dynamic energy contracts are available in nearly every European country, but the number of countries offering monetary grid incentives has remained very limited. Households in the limited number of countries where both dynamic contract and monetary grid incentives are available could save between €22 and €53 per month by charging EVs or running heat pumps when prices are low, or in response to grid incentives.

Users could also earn an additional €9-€21 each month by selling and trading their flexibility on markets for capacity, wholesale, and ancillary services. There are major differences across countries depending on the maturity and prices of the capacity and ancillary services markets. In most countries, residential assets are still excluded from these markets. If both value pools were combined, the total addressable value of residential flexibility in Europe would be an estimated €24-€58 billion per year.

In addition to the two outlined value pools, optimizing self-consumption (e.g., charging EVs when the sun is shining) is another value pool that market players could consider. However, it is not formally considered flexibility, so it is not included in this analysis.

CAPTURING ADDRESSABLE VALUE FROM FLEXIBILITY

To realize the value of flexibility, companies should go to market with offerings that allow residentials to monetize their implicit and explicit flexibility. Home energy management systems (HEMS) can enable this monetization for residential users. However, the right to capture part of this generated value will not be distributed equally along the HEMS value chain (see Figure 2).

Which category of players has the required capabilities and the resulting right to capture part of the value generated? Figure 3 shows that energy service providers are well positioned to offer solutions to end users. They have developed, often through partnerships and acquisitions, the relevant capabilities to help households monetize their flexibility. Telcos can also leverage their proximity to users to build upon core capabilities, such as platform building and Internet of Things (IoT) competence, which makes them trustworthy.

Software providers are increasingly able to offer digital-enabled energy services as an extension of their strong competence in platform building and software development. OEMs, however, whether in automotive or other assets, typically have limited capabilities for platform/software development and energy services. Partnerships or acquisitions would better position them to help end users monetize their flexibility.

VALUE DISTRIBUTION BASED ON MARKET STRUCTURE

Different companies offer different capabilities for monetizing flexibility across the HEMS value chain (see Figure 4). Three realistic setups for the structure of the supplier market have emerged, and all three will likely be deployed globally:

• Setup 1. The OEMs’ role is limited to designing, developing, and producing HEMS hardware. The rest of the value chain is covered by integrated utilities. In the UK, Octopus Energy facilitates EV purchasing and provides installation services through a subcontractor or partner and provides smart charging and smart tariffs through its Intelligent Octopus Go offering.
• Setup 2. In this arrangement, OEMs integrate across the value chain and need only to partner with a utility for energy management services. In the US, for example, the Ford Motor Company partnered with Duke Energy to offer fixed monthly rates for home EV charging; customers use the OEM platform and user application to set their charging targets or departure time, and Duke Energy manages the charging schedules and grid-related charging restrictions.
• Setup 3. The OEMs’ role is limited to hardware production, installation, and asset-related services (e.g., lease and rent, warranty or insurance provision, and audit and repair, potentially provided through “carefree packages”). Platform, software, and energy services are offered by different specialized providers. Flexa, a start-up dedicated to building Europe’s largest virtual power plant in the residential sector, is actually a joint venture (JV) of Enpal, Germany’s top renewable energy system integrator, and Entrix, an energy sector AI innovator. While Enpal manages the platform and software required to monitor and aggregate distributed energy resources (DERs), such as residential solar systems and batteries, Entrix specializes in trading energy and optimizing grid interactions to monetize the flexibility generated by Enpal’s DERs.

Figure 5 shows the number of market participants in a given setup and their respective contribution to the end user’s experience and flexibility monetization. These factors will impact the distribution of value among market players and end users:

• In Setup 1, the integrated utility will capture the majority (~70%-75%) of the flexibility value, as it provides convenience to the end user through an end-to-end service offering. While the utility’s role excludes HEMS hardware manufacturing, it does not result in a lower value share, since the OEM’s right to capture flex value is limited (~0%-5%). The resulting 25% of the addressable value remains as savings for the end user.
• In Setup 2, the OEMs have integrated software capabilities to collaborate with utilities to deliver optimized energy flexibility services. The integrated OEM captures part of the value (~35%) by providing platform and software services, but utilities are expected to still capture majority of the value (~40%), as they provide the energy services that play the most pivotal role in monetizing flexibility. As a result, households end up with 25% of the value of their flexibility as savings.
• Finally, in Setup 3, OEMs only provide services associated with hardware, and all other services are provided by specialized software players, similar to Setup 2. The end-user share of the value is diluted to 20% due to the involvement of multiple players, as each is entitled to a fair share of the value created by household flexibility. Here, the software company providing energy services will capture the majority of the flexibility value (40%) because their role in monetizing flex is greater, as opposed to the provider of the enabling platform and user application (25%) or the OEM (15%).

Since the value of a household’s implicit and explicit flexibility will be shared with solution providers to make the business model viable, the share of the value captured by the end user will be diluted to 20%-25% to the benefit of market players that are integrated across the value chain. Integrated utilities will most likely capture the majority of the flexibility value since they don’t need partnerships to go to market with convenient end-to-end offerings and are well-positioned to tap into the residential flex pool and capture €17-€42 billion revenue in Europe.

It is worthwhile even for nonintegrated utilities that only provide the “last mile” energy service to invest in entering the residential flexibility market, since they can capture a large share of the value by playing the most pivotal role in monetizing flexibility across the HEMS value chain (€10-€23 billion in Europe). Potential integrated OEM partners have a weaker position because their role is not to monetize but to enable by providing hardware and software. Nevertheless, they can still claim a share of €8-€20 billion in Europe, and enabling flexibility differentiates their other HEMS products and services, but finding the right utility partner will be critical.

In a more fragmented setup, specialized software companies function similarly to nonintegrated utilities. The software company provides energy services and captures the majority of the flexibility value, as their role in monetizing flexibility is greater than the contribution of the platform or user application provider (similar to OEMs). Considering strategic partnerships or JVs with other software providers or with OEMs will ensure user buy-in and seamless integration.

Conclusion

CAPITALIZING ON THE OPPORTUNITY OF RESIDENTIAL FLEXIBILITY

Executives must take a structured, market-informed, and long-term view and position themselves strategically across the value chain. They need to examine where to play and how to play to align capabilities with monetization potential:

1. Prioritize high-value geographies. Target countries with a favorable combination of high grid flexibility needs, wide availability of dynamic contracts, and mature mechanisms for monetizing both implicit and explicit flexibility.
2. Assess integration ambitions along the value chain. Not every player should integrate fully across the value chain. Base decisions on capability assessment and ROI.
3. Define targeted go-to-market model with the right partners. Identify strategic partners that complement current capabilities and accelerate go-to-market. Timing is critical; early partnerships may lock in long-term value capture positions.
4. Plan for volatility, but build for stability. Flexibility derives its market value from volatility, but as the energy transition progresses, volatility patterns may soften. Strategy and business models should withstand periods of lower volatility through diversification and long-term approaches to user engagement and retention.