Utilities on the hot seat of renewable energy
Over the last 30 years, renewable energy has gone from a fringe movement to a fully-fledged contender in the Utility sector. Thanks to large initial investments by governments interested in cleaner energy, the sector is now growing exponentially. This presents traditional Utilities with challenges. Should they embrace the new wave? Should they focus on the tried and true? One option will see their decline while the other offers many exciting possibilities for the future.
Renewable energy on the rise
Since the 1960s, the global production of modern renewable energy such as hydropower, solar, and wind power has been multiplied by more than five times. Hydropower continues to be the dominant form of renewable energy but its share of the production is slowly declining as newer forms are on the rise.
An illustration of the increased importance of renewable energy can be seen when looking at investments in renewable technologies, which have gone from US$47 billion in 2004 to US$286 billion in 2015 globally, an increase of more than 600%. China is leading the charge with an increase of 3400%. At a capacity of 130 gigawatts (capable of powering the whole of the UK several times over), the Asian giant now has more solar energy capacity than any other country in the world.
In terms of consumption, 22% of the world’s electrical power came from renewable energy in 2013, a number that’s expected to reach 25% by 2020 “thanks to the rapid deployment of wind and solar energy, as well as new hydro,” according to the International Energy Agency.
Consumer independence fuelled by cheaper technology
Consumers used to be at the mercy of monopolistic energy providers with a firm hand on the market but things have changed dramatically. With the cost of renewable energy technology dropping rapidly, consumers of all sizes are now able to gain a measure of independence vis-à-vis large utilities.
For example, more efficient, cheaper technology and a better understanding of how to use it, have contributed to a drop of more than 50% in the cost of building large-scale solar projects such as solar farms, says Peter Rive, co-founder and CTO of SolarCity, a US solar panel and system provider now owned by Tesla.
In terms of installation cost, in “1977, the average global price of installing solar panels was $76.67 a watt” in the US. In 2015, it was 60 cents a watt. As for wind energy, the cost of production has dropped from $90 to $20/MWh between 2009 and today.
This has opened up the market and anyone now has the option of generating their own power. So, how can Utilities remain relevant in this context? They must position themselves as partners or risk being left behind.
The Eneco Group in the Netherlands seems to have heard the message. “Because of these changing roles, our responsibility now goes much further than producing and supplying green energy. We offer added value by providing people with services and resources that allows them to organise their energy themselves.”
Storage is the lynchpin of renewable energy
Utilities used to benefit from a structural advantage. The high cost of building infrastructure ensured a limited number of players with a lock on their respective energy markets. Technology has reshuffled the cards allowing small producers and producer-consumers to step foot in an arena they were barred from until now.
In the last few years, the production of renewable energy such as solar and wind has gone up significantly but until very recently, the growth of these forms of energy was impeded by a lack of reliability (no sun or wind meant no electricity) and unaffordable storage.
Storage is especially key as it:
- evens out power over time
- can provide backup in case the main system fails
- can feed excess power into the grid
- can help even out the cost over time
Thankfully, the costs of stationary storage “are falling and could be $200 per kilowatt-hour in 2020, half of today’s price, and $160 per kilowatt-hour or less in 2025,” says McKinsey & Company, a fact they believe will broaden ownership and allow for the emergence of new business models.
Reinventing business models
Traditional energy suppliers all over the world have been hit hard by up and coming suppliers of renewable energy forcing them to rethink their business models. In Europe for example, the power industry has been hit by what McKinsey’s Sébastien Léger and Thomas Vahlenkamp call a “perfect storm of macroeconomics and industry-specific factors that have led to overcapacity and low prices.”
The result has been catastrophic with large publicly traded Utilities losing half of their market capitalization since 2008 on average, and destroying about 500 billion Euros of shareholder value. “Many structural and asset-related competitive advantages have disappeared,” they say.
Many Utilities see embracing renewable energy as common sense. “Coal plants are no longer profitable to build and are being shut down by the hundreds, while wind and solar are now the low-cost energy providers,” says The Motley Fool’s Travis Hoium. “That makes the decision to buy more renewable energy in the future an easy one.”
Dutch Utility Eneco is a good example of a large supplier embracing a new business model. Even though they’re already leaders in the production of green energy in Europe, they continue to innovate. In May 2018, they turned on the largest battery in Europe enabling a two-sided flow of energy to maintain the balance in the frequency of the electricity grid across the continent. This new battery, developed in partnership with Mitsubishi Corporation, aims to replace fossil fuel power plants, says Hugo Buis, Director Generation & Storage at Eneco.
“As more renewable energy hits the grid, energy storage will be an important asset for utilities and businesses that are trying to control their energy consumption and use energy most efficiently,” explains Hoium. He believes those who take on a leadership role now will be in a very advantageous position in the future as the need for energy storage continues to grow.
It’s not necessary to be a giant Utility to innovate. Fast Company’s 2018 list of Most Innovative Companies in the energy sector is a great overview of how the industry is evolving. Honorees include a local utility provider trying to get its customers off the grid for a small monthly fee, a power sharing community, a floating solar panel system, and a geothermal company reinventing drilling technology to minimize the impact and cost of drawing energy from the ground.
What if storage became irrelevant?
The path towards storage free solutions is being paved with E.ON’s photovoltaic system which uses cloud technology. Essentially, producer-consumers equipped with a photovoltaic system can upload the power they generate directly into the company’s SolarCloud system. “This virtual electricity account can be accessed not only for the energy demand at home, but also in other places,” explains E.ON. In this way, customers can “create their own personal energy world, freely and completely independent.”
Nurturing relationship to remain relevant
To thrive, Utilities will have to be bold and aim to differentiate themselves, explain Léger and Vahlenkamp. “These actions will be needed across a range of levers, e.g., portfolio restructuring, operational excellence, new skill development and innovation, and financing engineering.”
While they replace aging infrastructures, or build new ones more adapted to renewable energy forms of production and consumption, Utilities can offer their customers added-value in the form of affordable home-warranty programs, that protect them against repairs, as well as home services to find reliable and suitable trades people to upgrade their home energy systems.
Green Mountain Power is a traditional Utility provider from Vermont in the US, which has found innovative ways of helping its customers off the grid while maintaining its relationship with them in the form of a monthly fee for services. If customers want to remain attached to the grid but want to invest in renewable energy, GMP is there to help them with the installation of solar panels and battery storage, which they can pay monthly rather than all at once up front.
“By adding batteries to individual homes, the grid gets stronger—in times of peak demand, rather than turning on an extra power plant, the utility can draw from the network of batteries and avoid emissions.” Working hand in hand with customers in this next renewable energy context is ultimately a win-win for Utilities.
The Millennial generation, as more reluctant DIY-ers, present an opportunity as an audience for home services.
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With a complex, heavily regulated environment and aggressive green agenda, the outlook for Utilities in Australia presents challenges but also great opportunities for those wishing to extend their relevance in customers’ homes.