The energy transition, a story of choices for new and existing players

The electricity directive from the Clean Energy Package (clean energy for all Europeans) was recently adopted. It is down to the individual Member States to implement the new deal for energy users described in this directive. In the months ahead, Belgium will therefore have to convert this new deal into federal and/or regional regulations. As is customary, the EU directive also leaves scope for policy implementation choices. This is exactly what the last round table workshop of 2019, organised as part of Vlerick's Prime Foundation Partnership with KPMG, was all about.

Variable rates, also for consumers

Dynamic pricing was one of the choices discussed. Indeed, the electricity directive makes it compulsory for retailers to offer dynamic retail contracts. What form might these take?

“There are various formulas for dynamic pricing,” says Magali Vercammen, Energy Sector Lead at KPMG. “They differ according to the granularity of the measurement period, for example price signals per hour, per half hour or per quarter of an hour, and the degree of flexibility of time-dependent rates, known as ‘time of use tariffs’.”

“It’s clear that dynamic pricing is inextricably linked with smart meters,” she continues. “For example, smart meters that can control consumption remotely open up interesting prospects: they make it possible to adjust the operation of certain devices, such as heat pumps, to the hourly electricity rates and shift consumption to cheaper off-peak hours. Real-time price formulas in which consumer rates constantly follow wholesale prices are even more sophisticated.”

“The various Member States have introduced different forms of dynamic pricing – time of use pricing, real-time pricing, critical peak pricing and so on,” adds Vlerick researcher Ellen Beckstedde, who was closely involved in the preparation and organisation of the workshop. “Innovative retailers have jumped on the bandwagon. For example, in Norway and Sweden, Tibber has introduced an app that you can set to charge your electric car at times when the electricity price is lowest. And the UK's Octopus Energy is an example of a retailer which is already offering formulas that follow the fluctuations in the wholesale market – daily or every half hour.”

The importance of local energy communities

The implementation of the EU's climate and energy policy objectives means a transition to a low-carbon energy system in which renewable energy sources play an important role and new technologies are developed and implemented. In turn, this kind of energy system presupposes a certain degree of decentralisation in which the roles of energy producers and consumers will inevitably change. “The EU's starting point is that the citizen is at the heart of the energy transition,” says Professor Leonardo Meeus. “Some consumers are already playing an active role, for example in the production of renewable energy or the management of local networks.”

These energy cooperatives, set up by individuals or groups, private households, small businesses and local authorities, are also known as local or civil energy communities. “These energy communities are expected to play an important role in the energy transition, as they can make a practical contribution to the development of sustainable alternatives for energy generation and distribution and bring many benefits to local communities,” says Leonardo.

Peer-to-peer

Just as smart meters are linked to dynamic pricing, peer-to-peer trading is a concept that is closely connected with energy communities. “There are also various formulas for peer-to-peer trading,” says Ellen. “For example, sonnenCommunity in Germany is an aggregator of prosumers – small-scale virtual power plants, so to speak. Powerpeers in the Netherlands, enyway in Germany and Bolt in Belgium offer consumers the choice of various local renewable energy producers – individuals, farmers and (small) businesses. The Dutch company Vandebron combines the two roles.”

Challenges and unanswered questions

“Of course this new model does not come without challenges,” says Magali. “Local, renewable production will usually only cover part of the total demand for electricity, which means that consumers need a backup supplier. The same consumer can therefore purchase their electricity not only from different energy sources but also from different suppliers, for example from one or more local producers and a traditional retailer. The question now is whether local producers should fulfil the same conditions as traditional retailers – access contracts with network operators, a contract with a ‘balancing responsible party’ or an access responsibility contract with Elia (Belgium’s transmission system operator), public service and reporting obligations etc. These aspects are not yet regulated by law.”

“In the past, we have had similar discussions about aggregators,” smiles Leonardo. “Many unanswered questions still need to be resolved. What are the roles and responsibilities of the various players, how will they work together and who will coordinate their collaboration? But that's normal,” he stresses. “Every time the ecosystem changes as a result of new players, the issue of roles and responsibilities arises.”

Getting started

“The transition to clean, low-carbon energy is crucial in the fight against climate change,” says Jorn De Neve, Partner Deal Advisory and Head of Energy at KPMG. “A lot has happened since our last workshop: in December 2019, the European Commission published its Green Deal and its proposals were approved by the European Parliament on 15 January 2020.”

“The energy sector will play a key role in the energy transition that is fully committed to reducing greenhouse gases. It is therefore of the utmost importance for the European energy market to be fully integrated, interconnected and digitised. Dynamic retail contracts, peer-to-peer trading, energy communities and other retail innovations are ways to achieve this goal. But, as Leonardo pointed out, we still need to think carefully about how these new business models can be put into practice, the implications for the various stakeholders and how this should be translated into national laws and regulations,” he concludes.

What did the participants think of the workshop?

“75% of CO2 emissions are energy-related. As an energy company, it is therefore a privilege to contribute on such a large scale to solutions to the climate challenge that we are all facing today. These solutions are not always self-evident; on the contrary. They may even call existing business models into question. Being able to engage in an open debate with current and future stakeholders is not only enriching, it also contributes to internal reflections on how to tackle and achieve the energy transition.”
Frank Schoonacker, Director of Corporate Affairs, EDF Luminus