How decarbonization drives a change in the B2B energy market demand – and thus your business model?
How decarbonization drives a change in the B2B energy market demand – and thus your business model?

Decarbonisation refers to the reduction in carbon emissions per unit of electricity generated. This can be achieved by increasing investment in low-carbon and renewable energy sources and moving away from fossil fuel generated energy. It highlights the movement towards cleaner and greener energy production as well as consumption in light of environmental concerns that have risen in recent years.

In 2017, CO2 emission levels had officially doubled from figures in the 1970s; this drew attention to the alarming rate of increase up ahead if changes were not escalated. Although significant progress has been made to decrease these levels, it is not decreasing at a quick enough pace. This means there has been greater emphasis for not only the government but society as a whole to make the necessary changes towards ‘cleaner’ energy. With the aid of government sanctioned measures such as the UK Climate Change Act (2008), decarbonisation has become the number one priority for energy producers, suppliers and consumers.

Consumer behaviour towards energy consumption is following suit, there is increased awareness of the environmental impact and the need for them to be more engaged with the energy industry. This means they have to be more involved in the buying process and more selective about the type of energy being consumed. Consumers are taking matters into their own hands and even drifting towards self-consumption to not only increase autonomy, reduce costs but combat climate change.

This puts pressure on energy producers and suppliers to adapt to the new movement of greener and sustainable energy. They are having to increase investment in low-carbon energy sources as well as increase pressure put on their distribution grids. As we see a move towards decentralised energy generation, the increased competitiveness means it is imperative for suppliers to meet consumers demands. Suppliers have to be more flexible and assure certainty towards their consumers especially dealing with unpredictable sources of sustainable generation. There has been an increase in investment towards smart grids; with attempts to not only expand but optimize grid capabilities. This also calls for increased investment in innovative solutions which would help drive digitization across operations to not only keep up with demand but to offer a better customer self-service.

It is clear decarbonisation is heavily influencing the entire energy industry from consumers to generators. However, some energy companies are steering away from sustainability and sticking to conventional energy generation. This centralized system is still of vital importance to the energy balancing mechanism. This is due to the fact that as much as the change to responsible energy is needed, it is not a minuscule task. High carbon energy sources delivering high voltage transmissions will be required to continue to balance the unequal supply and demand for the foreseeable future.

Aside from the environmental benefits of “going green”, there is significant research to show switching to renewables is more cost effective than conventional. (Deloitte) found that the “mere anticipation of strict CO2 pricing, triggers divestment in CO2 intensive generation”. This is demonstrating the impact of EU climate guidelines increasing the wholesale price of carbon fuelled energy sources. Tax is increased on renewables in attempts to discourage its generation and further use. With renewables being cheaper, it creates opportunities for technological advancement at a lower cost. This would also allow for businesses to improve their position in the industry and subsequently the market.

What is changing the players on the field

The role of conventional energy generators is still at large an essential component of the balancing mechanism. However, with the rise of renewables, energy companies find that a great deal of their operations become obsolete.

We are seeing an increase in merger activity within the energy industry, high profile companies have begun making movements toward adopting sustainable partners. In 2018, energy giant E. ON, sold its remaining 47% shares in Uniper to Fortum to allocate more resources to their renewables division. (Reuters Staff)

Another major driving force points toward the changing energy transition landscape. Across Europe, the move towards sustainability means an increased use of wind and solar plants to generate energy. This also means these electricity grids are having to feed in electricity over increasingly large distances at amounts. With these unconventional power plants producing fluctuating amounts of energy, more and more energy needs to be generated to compensate. A result being that existing electricity networks and transmission grids are not built to carry such quantities and face the possibility of supply congestion. Transmission grids have to adapt to this new transition system to maintain stability which would heavily affect their supplier’s position. This can be done by expanding these grids across borders to balance out the fluctuations.

The role of regulators

Renewable energy production at large is, at the moment, extremely varied and thus their energy output is small compared to the demand load. (Deloitte, x) graphically demonstrate the gap between wind/solar generation peak load and demand peak load with a residual load gap to be covered by conventional energy.

It's rare for renewables to create a “prolonged yield loss”, a shortage in the production of energy compared to estimated production, but when it does occur, large spread areas need to be covered alternatively. This is also referred to as a dark doldrum, where solar/wind generation is low or there is none at all. It results in the energy supply being taken over by conventional power plants aiming to close the gap and cover the residual load. Thus, it creates a need for a balancing mechanism and a new role for regulators to ensure energy generation is available when needed.

In addition, with the levelized costs of renewables decreasing over the years, it is reflected in the decline in auction prices. It is now becoming cheaper to both produce and consume renewable energy. This is the result of not only government subsidies but the growth of merchant markets. This involves transforming brownfield sites into wind turbine sites to serve renewable energy to the spot energy markets. These spot markets are projected to see a steady spot price increase over the next few years with renewable energy auction prices decreasing simultaneously. (Deloitte) This has implications for renewable generators who might find it more profitable to utilise merchant markets to market their renewables than through government subsidies.

The regulatory environment itself is expected to experience changes that affect the current business model. Following figures that indicate the decreasing return on equity for grid operators; the third regulation period saw a drastic percentage decrease for existing assets from -6% in the 1st period to -28% in the 3rd period. This has triggered an expected change towards a new regulation system predicted to take place after the third period, it is referred to as Yardstick Regulation. This system aims to put pressure on monopolising energy companies to cut costs by basing prices off of their competitors' costs. This new regulation provides incentives to drive down costs and consequently increase profit margins for firms. Alongside this new pressure placed on earnings, regulators are also pushing for more investments in both smart grids and projects for green investors to boost new revenue flows.

Grid Expansion

As we’ve seen, there has been more pressure placed on smart grids with the need to be more flexible and secure energy supply. The term grid expansion refers to the development of these grids in line with changes in the energy transition landscape. With the growth of renewables, wind and solar plants are having to distribute as well as transport across-borders. Alongside this, the changes to customer behaviour, as previously mentioned, call for increased digitization and innovative measures to satisfy the new age of involved consumers. This means there is a need for reconstructing and expanding the grid to ensure delivery in both a widespread and digitized way. There is still a long way to go with grid expansion as renewables are still quite volatile and supply congestion is still an existing issue. However, with congestion management measures in place and increased government funding/regulation to ensure security of supply, there is room for grid expansion as well as innovative technologies.

With the changes to customer behaviour and pressure placed on earnings by the government, grid expansion and increased competition, energy companies need to establish new ways to capitalize off this changing energy landscape. This will involve off-grid solutions that expand a company’s portfolio to cater towards the end-customer. There is a change towards becoming a more service-oriented energy company rather than a product. Due to this change, customers are now looking for end-to-end solutions with numerous opportunities to capitalise on their consumption.

What needs to be done for your service?

This becomes a new area for utilities to focus on, either through restructuring or new investments, in order to satisfy their customers needs. A major challenge for many will be digitizing company wide processes and placing control in the hands of the consumer as well as the costs associated. However, there is a long-term competitive advantage to gain from adopting such changes. In addition, with the growth of service focused IT energy companies, it becomes more cost effective and profitable in the long run to become more service oriented.

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