The Effects of the Emergence of Renewable Energies on Business Models in today’s Power Industry: A Primer

by Romy Abou Farhat and Alexander Pfeiffer

The rapid growth of decentralised renewable energy (RE) technologies, such as wind and solar has already influenced change in the traditional centralised power supply business models around the world. It has complemented fossil fuel generation to meet the increasing electricity demand in some regions, and disrupted traditional energy markets and business models in other regions where electricity demand is stagnant.

Renewable energy and centralised generation

The world’s centralised electricity systems are under pressure to stimulate change in the way they operate by balancing the growing challenges that form today’s Energy Trilemma. They are required to decarbonise their energy systems as countries have agreed to do so under the 2015 Climate Change agreement in Paris. At the same time, however, they are committed to provide a constant and reliable supply to meet the growing global energy demand and to increase energy access by addressing affordability.

This growing pressure on traditional utilities has given rise to a wave of profound changes. Many utilities are currently undergoing a phase of transition by splitting up, consolidating, or restructuring their entire business models to keep up with the market and regulatory challenges and and adapt to these ongoing changes in the power sector. One transition pathway many utilities choose is to gradually move their operations to new markets by increasingly acquiring renewable energy assets, whilst at the same time reducing their fossil fuel portfolio. A striking example for such a complete change of business model emerging from the deeply altered energy markets is the split and spin-off of the German energy giant E.ON’s operations into a clean energy and a fossil fuel operations division in January 2016. What triggered this separation is the former company’s fossil fuel assets being deeply affected by the country’s government’s energy transformation strategy (“Energiewende”), which gives renewables priority access to the grid at fixed prices (feed-in tariffs).

The increased share of renewable generation in the mix, however, has been creating challenges both in their grid-integration, as well as in building more-flexible systems that are able to balance variable sources of energy whilst reducing costs. A couple of countries such as Denmark and Portugal have addressed these challenges and successfully achieved the large-scale integration of renewable energy to their grid, thereby increasing penetration of renewables to up to 43% of wind power in Denmark and 24% in Portugal in early 2016.

They are not alone: other countries have also responded to these challenges and incorporated a set of new strategies and technologies into their policy agenda, including:

  • Development of smart grids

  • Construction of new transmission and interconnection grids

  • Increase in flexible electricity consumption and generation

  • Improvement of energy efficiency of current transmission and distribution

  • advanced forecasting of supply and demand

  • Implementation of cogeneration systems

  • Integration of heating and cooling systems

  • Innovation in energy market structures and financial flows

  • Implementation of policy drivers and regulatory incentives

  • Integration of the power industry with the transport industry

1280px-BANGUI_WINDMILL,ILOCOS_NORTE_2Bangui Windmill, Ilocos Norte, Philippines. Photo credit: Obra19

Renewable energy and decentralised generation

Typically, with the growing liberalisation and diversification of electricity generation sources, traditional centralised power systems are being transformed into more complex and interconnected systems. The most recognised example of decentralised generation is microgeneration, small-scaled distributed generation of electricity through renewable energy technologies (i.e. solar photovoltaic, or PV) with capacity of usually less than 50 kW. This type of electricity generation directly empowers consumers to choose and control the way they consume electricity. Key drivers behind these innovative business models include advances in clean technology, declining costs, policy and regulation incentives, and even changes in social behaviour and perception. Together, these factors are driving energy entrepreneurship and filling some of the gaps and defects of traditional systems through models that ensure security and affordability of energy supply and a decarbonisation of energy systems.

Microgeneration has started to take off in markets around the globe, especially in countries that traditionally lack access to electricity for a large share of their population, such as Bangladesh, which is currently the world’s largest market for residential solar PV. Several other developing countries (such as Kenya, Uganda and Tanzania in Africa; China, India and Nepal in Asia; Brazil and Guyana in Latin America; small islands in Australia, Malaysia) are also experiencing strong growth in the deployment of distributed technologies, as such technologies can offer consumers affordable and efficient low-carbon electricity and increase energy security where the electricity from the grid is unreliable or inaccessible.

Developing and least developed regions are not alone in experiencing a large increase in the uptake of residential microgeneration: developed regions in Australia, Europe, Japan and North America are seeing similar trends. In these regions, such trends are driven by the emergence of new retail pricing policy frameworks and business models that turn microgrids into profitable energy service providers and not only technology solutions.

Solar valley
Credit: Marygrikas

 

Industrial investment in renewable energy

The industry sector in all regions of the world has long been generating large portions of power onsite with an increasing use of renewable energy technologies for heating, cooling and electricity generation, using mostly bio-energy sources such as waste from agriculture, forestry and livestock. To encourage the further uptake of such renewable energy technologies and increase the competitiveness of industrial businesses, in 2015 the European Commission initiated “IndustRE”, a project with the aim of identifying innovative business models and regulatory needs for the market uptake of renewable electricity to increase flexibility in energy intensive industrial electricity use.

Beyond the EU, large corporations across the globe are strengthening their commitments to renewable energy. Today, an estimated 2,000 companies have publicly pledged to reduce their carbon emissions using renewable energy and energy efficiency. More than 50 of the world’s largest companies, such as Google, Facebook, and Apple, are part of the global business initiative RE100, where the participating companies commit to purchasing all their power from 100% renewable energy sources.

In the United States especially, large companies have been moving beyond social responsibility and have been viewing renewables as business opportunity. Interestingly, corporate buyers are driving the market for renewable energy today by acquiring growing shares of renewable energy power or contracting their own large-scale renewable energy projects. For instance, in 2015 Apple constructed two solar farms of 40 MW combined in southern China. The output from these installations exceeds the electricity used by Apple’s offices and retail stores in China, making its operations carbon-neutral. Other large renewable energy purchasers around the world include municipalities, the US military, and mining companies.

Accelerating a transition towards a sustainable energy future

Renewables are already seen today as mainstream sources of energy. They have been experiencing a rapid growth that has created new markets for both centralised and distributed renewable energy across the globe. This has been driven mainly by reductions in costs of renewable technologies, improved policy initiatives and access to financing, and a growing demand for energy. Growing numbers of companies, investors, cities and citizens that have set renewable energy targets are driving change in the market.

These are all signs that a global energy transition is underway. Renewable electricity provided an estimated 23.7% of global final energy consumption in the beginning of 2016, a growth in capacity and generation that is still ongoing and expected to increase in the future.

Flexibility is a key component of a power system that incorporates large shares of intermittent renewables – particularly wind and solar – since it ensures that these energy sources can be leveraged whilst keeping the lights on. Another core aspect for accelerating and widening the horizon of the low carbon transition are future policies and regulation. Policies should be designed to discourage investment in fossil fuels and reduce risks from investments in renewable energy. Policy support is also key for driving cost reductions and supporting flexibility and innovation. It is therefore crucial for scaling up renewables, which can help to close the energy access and security gap.

Romy is an Imperial College London M.Sc. student in Sustainable Energy Futures.

Alex is the head of Young European Leadership’s delegation to the COP and a doctorate student at the Institute for New Economic Thinking (INET) at the Oxford Martin School.

Read more analysis from Young European Leadership’s COP22 delegation here