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Summary

• The cost of electricity generated by solar and wind has dramatically declined. In most regions renewables now represent the majority of newly installed generating capacity. However, as the sun doesn’t always shine, and the wind doesn’t always blow, power systems need to become increasingly flexible, such as matching supply and demand.
• This race for electricity system flexibility is unleashing a new phase of transformations in the power sector, for which existing companies are ill prepared. Due to the accelerating deployment of an array of ‘flexibility enablers’, the spectre of cost escalation – resulting from the expense of managing intermittent wind and solar power at huge volumes – may never materialize.
• New technologies that enhance system flexibility include smart electric vehicle (EV) charging, battery storage, digitalization with intelligent control, and demand-side management. Companies providing these solutions may come to dominate the power sector in the coming decades.
• New regulatory approaches are needed to encourage market actors to deliver flexibility. Evidence is growing that highly flexible electricity systems could deliver lower whole-system costs, especially given the dramatic projected falls in solar and wind power costs. This outcome is contingent on policy and regulatory action to stimulate the diverse set of flexibility-enabling technologies discussed in this research paper.
• This ‘second phase’ of transformations in the electricity system comes as the sector is still reeling from a profound ‘first phase’ of disruptive shocks – one most noticeably affecting Australia, the EU28 and parts of North America. In these markets, once-powerful utility companies are struggling or having to restructure to survive.
• The threats for today’s utilities are considerable, but so too are the opportunities for those able to transform. Whereas past market reforms have separated the operations of utilities into discrete functions, in the emerging ‘second phase’ of electricity system transformations energy services themselves are likely to be fragmented into smaller functions.