From Commodity to Services: The tale of renewable utilities
The shift to renewable energy is mounting and increasingly inevitable, but still the questions arise; how will this renewable shift affect the current energy industry and how large of an impact will it have? Furthermore, will this change in the industry standards be of small importance like the introduction of 3G, 4G and then 4G LTE in the telecoms industry, or will there be a much deeper fundamental shift in industry competitiveness, like that of the telecommunications industry in the early 2000s?
The Earth is warming and as seen by the Paris Agreement, hardly anyone will try to deny that it is caused by humans, but that wasn’t true very long ago. Even though the movement towards a renewable and circular economy is relatively new, governments around the world are already effectively incentivizing the revolution. From the beginning the Germans jumpstarted the Energiewende, or “energy transition”, by offering subsidies for solar and wind turbines, to the Norwegians re-shaping consumer behavior quickening the adoption of electric vehicles, it is fairly safe to say renewable energy is here to stay.
Historically, at least in the United States, utility companies have operated as a monopoly much the same way the telecommunication industry did until the end of the 20th century. The regulation of the energy industry, like that of telecoms, was intended to make it profitable to generate and distribute electricity to as much of the population as possible. More recently, the deregulation of the energy industry has ushered in new players, but it has taken a few years for the early adopters to chart the path and set the conditions for economies of scale.
While the Paris Agreement brought with it a new era for energy consumption, it also has cemented the need for a new business model for utility companies. With the agreement to decrease energy consumption, if this treaty is to be followed, utilities will need to start to drive profitability from efficiency and not raw output. Although this is not an entirely new trend, in fact, for quite some time, utility companies have been investing in becoming more efficient. Attempting to curtail the need to bring on expensive supplemental generation during peak demand, companies have been investing in smart meters, demand response programs and other demand side management tools (i.e. calling a factory and paying to turn off a machine.)
Even with the efficiency measures, the explosion of renewable energy had some short-term costs. In the case of Germany and Spain, the increase in subsidized renewables increased their energy costs quite handsomely. What does it boil down to? Efficiency! While several countries went on a renewable pursuit, no one stepped back to think entirely what that would mean. Germany has such a high renewable capacity that often times during weekends and holidays when industry is closed, the grid is over supplied with electricity and the government has to pay consumers to take it in an effort to keep the grid safe. The problem with renewable energy and our current infrastructure, is there is nowhere to store the electricity. When the wind is blowing or the sun is shining the electricity is either used or lost, and unfortunately for us, peak demand is typically after the sun goes down.
So shouldn’t we upgrade our grid? While it seems intuitive, the simple answer is no. No, we should not simply repair dilapidated equipment that is out of date technology. Advancements in renewable efficiencies, mapping, manufacturing, IoT and the advancement of economies of scale, have set the scene for a renewable future. Big companies like RWE Group and Energia de Portugal are famously breaking off daughter companies, Innogy and EDP Renewables respectively. EDP Renewables, Innogy and the other utilities at the spearhead of the renewable energy transformation, are gathering awards and charting a new path for the development of innovation in the industry. They are working together and co-creating with entrepreneurs in a first of it’s kind utility backed energy accelerator, Free Electrons. Understanding the future is uncertain for them, they are willing to work together to stay afloat.
So what is the future of energy? Freedom. Complete and total freedom of a consumer to operate smartly in the wholesale energy market. What does that mean? Like in the telecoms revolution, you will cut the wires from your house and engage in a contract with a utility company for services they will provide. It will feel much the same way engaging with AT&T or Verizon in the US, or like Orange and Movistar in Spain. Solar panel leasing, energy management software, home battery systems, smart meters and the wholesale marketplace will allow for your home unit, connected to a localized microgrid of energy producing units, to skip the middleman and continuously buy from the wholesale market. So why will they offer you these services if it takes them out of the middle? Simply put, if they don’t someone else will. Self-generation is increasingly popular and as the prices continue to decrease, the adoption is only going to increase.
So how can you be sure? Well, utility companies are already shifting to a service focused model. Competing to determine what the most interesting packages to customers are, utility companies are already offering a diversified array of packages. The offerings range from, Texas’ TXU Energy’s, servicing over 1.7 million customers, extensive solar, large appliance insurance, and net metering, to Innogy’s SmartPool technology offering decentralized generation grid stabilization. Innogy’s 23 million European customers are also being offered, use of Fresh Energy - a smart energy app, and the rest of their smart home offerings. EDP Renewables has a wide offering of smart home devices offered as a service as well, the trend can be seen around the industry.
So, what does is this change to renewables mean for the utility industry and ultimately us as consumers? With the decentralization of energy production to, near the point of consumption, and lack of need for government regulation to make the industry appealing, competition will become fierce and be in the favor of the end consumer. The shift to renewables is powering the decentralization of the industry much like that of the telecommunications industry in the early 2000s. Ultimately, we will see a fundamental shift in the way we interact with our providers in the future to a service based industry.
What is holding us back? Our habits are built on a use of electricity on demand, which is why fossil fuels are quite convenient. Although, it seems the lithium-ion economies of scale are developing just in time. In North America, Tesla’s Gigafactory has named itself after its planned ability to produce 35 GWh of capacity per year. If you asked the Chinese what they thought of the plans for unroll 35 GWh of capacity annually, they would laugh as they compared it to their 120 GWh capacity annually planned by 2021. The European Union has recognized the security risk of being dependent on foreign batteries and the need for a battery industry, launching the European Battery Alliance. Thanks to the industry opening up, smart batteries are starting to creep into our homes and we will become increasingly decentralized. The revolution is here, companies like Grid+ and Power Ledger in the blockchain space are charting the path for an open wholesale marketplace, Nissan and Mercedes are getting into the home storage space, and governments are following suit to say the least. The new giants will be those who stay ahead of the servicization trend and truly benefit the end user.
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