Energy sector needs to embrace change
Four game changers that revolutionise the sector
By Professor Leonardo Meeus (Director of the Vlerick Energy Centre) and Daniel Dobbeni (Chair of the Vlerick Energy Centre).
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“Unlike many other sectors, power systems – and electricity grids in particular – were a model of stability and predictability; this is no more the case!” says Daniel Dobbeni, the chair of the Vlerick Energy Centre. “This industry was and still is also highly diverse,” adds Prof. Leonardo Meeus. “16 companies manage 70% of global electricity demand. 41 companies manage 100% of the electricity demand in Europe. The distinction between a transmission grid and a distribution grid for transporting electricity is 70,000 volts in Belgium, which is just defined by regulations. There are more than 2,300 distribution grid companies in Europe, the smallest of which has only one employee.”
This energy sector is now facing all kinds of new challenges as well as opportunities. The liberalisation of the power market has not only undermined stability, but triggered an unstoppable acceleration process. Of all the new trends and uncertainties in the market, there are four that could genuinely cause a fundamental revolution in the sector.
GAME CHANGER 1: Technology
Forget ‘smart grids’, ‘offshore grids’ and ‘super grids.’ A major technological development for the future is the ‘micro grid.’ These (private) grids at the scale of a few houses or neighbourhoods allow consumers and companies to disconnect partly or completely from the existing grid infrastructure. These micro grids are becoming reality thanks to a number of technological developments among which local generation and storage (e.g. batteries, electrical cars, or simply heat).
To understand the impact of micro grids properly, we have to return to the traditional debate that has dominated the sector until now, i.e. central versus decentralised generation. We used to have a highly centralised system with large power stations (hydroelectric, nuclear, coal and gas) that generate electricity on demand in the (nearly) exact quantity required by the consumption. These units produce electricity at very high voltage that is converted in stages down to the level required by the consumers.
With the fast growing share of renewable energy sources in distribution networks, decentralised generation is growing rapidly. In general, decentralised energy sources generate electricity depending on external constraints that are not influenced by consumption (e.g. heat generation, solar or wind energy). As a result, during some moment in the day, energy will flow back from a distribution grid to the transmission grid.
The more renewable energy sources are connected to the local grids, the more storage becomes key. But at the same time, storage could offer the possibility to become less dependent on the connection to the public grid. That would cause upheaval both in terms of grid operation as tariff structure. Such situation is already happening in some parts of California, triggering a reshuffling of the regulation and the traditional business model of the power industry.
Micro grids already exist. Typical examples are airports, campsites or ports. Chemical companies usually have gigantic private grids on site which also provide electricity to other companies nearby.
We will have to wait and see how the public grids react to this new development and what their role will be in the future. After all, private grids also need an owner and someone to manage them. Only time will tell what is the best way for the current players to deal with this new business model.
GAME CHANGER 2: Market organisation
With smarter grids that will locally align electricity generation with consumption, the differences between transmission and distribution are fading. With generation becoming increasingly decentralised, distribution operators are facing grid situations that were once only to be found at transmission level. In other words, decentralised generation increases the need for an improved coordination between distribution and transmission.
Simultaneously, as national power systems are becoming more and more interdependent, cooperation among transmission systems operators is taking different forms. From Coreso (a joint venture between five transmission companies delivering services for a more secure operation of cross-border flows) to consolidation of the Belgian transmission system operator Elia with 50Hertz in Germany.
Although more local for distribution system operators, an evolution towards economies of scale and consolidation at national level is observed in Europe, though only to a limited extent. This may also be coupled with a tendency towards grid integration of gas, electricity, water, heating and telecom. In Vienna, for example, there was recently a merger between the electricity grid and the natural gas, telecom and district heating networks. After all, distribution is an inherently local activity which requires cooperation with local authorities. This kind of evolution is mainly a local distribution phenomenon that seldom occurs today at transmission level.
In any case, there is every indication that the way in which the power market is organised will change dramatically. In the early phases of liberalisation, we mainly saw significant amounts of consolidation for electricity producers and retailers. Up to now, system operators have kept out of the fray, but the question is how long this will last. And if we can learn one lesson from other sectors, it is surely this: once the consolidation process has started, it continues at a far greater pace than anyone would ever have expected.
GAME CHANGER 3: Regulation
An important characteristic of the energy sector is the extensive regulation that is derived directly or indirectly from European and national legislation. Although day-to-day decisions are traditionally made by national authorities, the foundation of ACER (Agency for the Cooperation of Energy Regulators) is a milestone for the sector. To date, this agency has already gained a certain level of genuine decision-making powers. For instance, if national authorities cannot agree on how to share the cost of a cross-border transmission line, it is the agency that will make the decision.
We have already had a European Single Market for goods and services for quite some time, but this has not affected electricity until recently. For the power sector, the situation appears fairly complex. On the one hand, the European directives for a single internal electricity market and the fast rising share of (variable) renewable energy sources increase the need for a power system and grid that is developed and managed as if there was only one in Europe. On the other hand, the generation mix is determined nationally while the grid is regulated by national bodies. In fact there is a gap here in terms of regulation: how can you further develop a European market with national regulators?
There is an institutional problem as well. A regulatory body with decision-making powers is itself a fairly new phenomenon in Europe. Beforehand, decisions were taken by the Ministry in charge. With the arrival of ACER, national regulation is facing another change.
GAME CHANGER 4: unexpected players
With major changes induced by technology, market and regulation, new players are entering the energy sector while existing players reshuffle their strategy. Who can say for sure that the existing players will continue to supply electricity in the future?
The emergence of electric cars means that car manufacturers are fairly obvious challengers. Electric car batteries are becoming steadily more advanced. An example is Tesla Motors. To be able to offer electric cars for a reasonable price, you need to produce batteries on a large scale. Tesla needed a second sales market, which it found as a wholesaler of energy storage for more stationary purposes (back-up power, reduction of demand during peaks, etc.). Although this idea still needs to be demonstrated, it has the potential to change the business case for battery storage.
Monitoring is another aspect that might attract other challengers. For example, Google already analyses its users’ e-mails to send targeted advertising messages. Supermarkets do the same thing with customer cards. The customer consents to this in exchange for extra services or discounts. Likewise, all kinds of information can be obtained from energy consumption data for which Google and alike will show great interest. New players from unexpected angles might therefore be able to supply energy at very competitive rates in exchange for consumer data.
Finally, this is also a story of mergers and takeovers. New initiatives might just as well come from telecom companies or even a player in the water industry.