A new report exploring what net zero could mean for the energy sector has identified five core business models to harness the £21 billion it believes is set to be unlocked annually by 2050.
The Utility 2050 project was a partnership of energy professionals, financiers and academics.
A report of the project’s findings has been published and found there are growing pressures in the retail and wholesale markets caused by the transition. It concludes there needs to be a “deeper rethink” of the business models that make up the energy market and the regulation which supports them.
Furthermore it found the energy sector has an “innovation dilemma”, meaning it is challenging to plan for and regulate the market even 2-5 years ahead despite the “pressing need” to make decisions in the face of deep uncertainties.
Through its research Utility 2050 has identified up to £21 billion of new value per year will be available by 2050 to electrify utilities.
This value falls into six “pools”, with the largest and most robust being energy service provision which includes heat and transport electrification with associated energy management and efficiency gains.
The report outlines five core business models which it believes can capture the £21 billion and drive the transition:
- New electrifier
A traditional utility which is helping customers to switch to electric heat and mobility. Rather than allowing demand to just expand, electric utilities can become involved and promote the transition with domestic consumers by offering heat and mobility tariffs which may come with rewards for flexibility, along with other deals and contracts for associated kit such as heat pumps and electric vehicles.
Early signals of this can be seen in Ovo’s heat pump trial and Octopus Energy’s smart EV tariff.
- Peer-to-peer
Peer to peer trading of energy is now possible using digital platforms that allow individual consumers to choose their own mix of generation. This also allows distributed energy producers to buy and sell electricity in a local energy network, maximising local renewables via collective self-consumption. While the report recognises peer to peer offers more independence, it points to recent trials by Piclo and EDF underlining the requirement for a licenced utility to manage trades.
- Energy service company
Energy service companies aim to reduce the consumer risk of investing in retrofit, storage and microgeneration. Energy measures can be financed from bill savings over the long term or be supported by a mix of grants and low interest loans. Though entrance into the retail market is “hampered by current regulation”, ESCO’s can combine many aspects of flexibility, generation and electrification.
- Third party control
A third party, such as a price comparison website, takes decisions on consumers’ behalf, like automatically switching energy supplier. With system digitalisation and real-time pricing, faster and more automated switching is becoming more and more common. In future, third parties could aggregate flexibility and combine other services into ‘lifestyle’ bundles. It also claimed third parties could even take decisions on retrofit/ heat options for homeowners.
- Pure low-carbon generator
Producing low-carbon power and selling directly to large customers or wholesale market. This business model represents utilities in the wholesale market exploring new ways of financing and operating wind, nuclear, and CCS enabled generation.
Speaking to Utility Week Stephen Hall, one of the report’s authors and an academic fellow at the University of Leeds, said for him the question was whether the current market is the right construct to drive decarbonisation.
He said: “When we think about the evolution of new business models and new consumer segments we have to, at the same time, question whether a retail market for consumers is the right construct to drive decarbonisation and whether or not we can manage some of the risks of people being disengaged or overly advantaged without a deeper look at what the retail market does.
“The same is true, but in a different way, for the wholesale market.”