In our latest world energy markets observatory (WEMO), we looked at the disruptive forces of new start-ups on the larger suppliers and discussed what they might mean for the utilities industry as a whole.
However, it isn’t just providers who are looking to change the status quo. Our research highlighted that large corporations are searching for ways of generating their own energy and becoming self-sufficient, with the implication of leaving the Grid. But what does this mean for utility retailers and what responses do we foresee from them?
The Grid Runaways
There has been a growing appetite by corporations to produce clean energy for their own consumption. Take the case of Microsoft. The software giant has set up wind farms to provide electricity for its data centres. This essentially means moving away from the Grid for all, or part of its energy requirements, and puts Microsoft into a type of consumer segment that we call grid runaways.
So what factors help the growth of the grid runaways, both in the business and household markets? One is the promotion and culture that Microsoft is setting. However, it is the cost benefit of self-energy production that really matters, and as long as cost-effective and workable solutions are evolving, the growth is inevitable.
The renewable generation LCOE (levelised cost of electricity i.e. the present value cost of electricity over the generation life cycle) has now hit record lows. In 2015, onshore wind LCOE was approximately £30/MWh and this is expected to decrease by another 26 per cent into 2025. Photovoltaic (PV) also continues to drop. Large scale PV projects have had LCOEs of around £44/MWh, with expectations that costs will fall further by 59 per cent in 2025.
At the same time battery storage is taking off in the market. Battery costs have decreased by 80 per cent from 2010 to 2016, with expectations that they will be at £140/kWh in 2020. The automaker Tesla also claims that further reductions are coming, anticipating that costs will drop below £74/kwh by 2030.
These reductions in costs have allowed for integrated solar and storage solutions to become available for both business and household energy consumers. In the UK house hold domain, installations of home Solar PVs doubled between 2012 and 2014. In 2017, there have been 770 thousand Solar PVs registered for Feed-In-Tariffs, itself a near 50 per cent increase relative to 2014.
As further technology efficiencies and cost reductions follow, the probability of growing numbers of grid runaways increases. Even though electricity consumption is predicted to increase nationally – mainly due to vehicles becoming electric-powered and heating being transferred from gas to electrical – it doesn’t mean the demand on the grid will rise equally. Grid runaways will impact the network volume of energy sales, causing a net effect of either stagnating or falling revenues for energy retailers. The response should be finding alternative revenue streams and keeping a very close eye on costs.
Energy Services, new sources of revenue
The grid runaways are an evolving segment of the energy market. They are a network of producers and consumers that will continue to have interfaces with the grid, as they over and under produce relative to their consumption. They will also have interfaces amongst each other, as changing customers preferences mean they begin to purchase energy from local energy producers.
Utilities have a role to play in this context. In one domain they can become trusted intermediaries, and through another can provide services tailored for home or business energy management.
As intermediaries, they can build on the peer-to-peer theme, where energy customers decide who they receive energy from or who they sell their self-produced energy to. Utilities can facilitate a market place such as this by creating communities, managing relationships and transactions, and offering complimentary services such asset maintenance, insurance and regulatory advice. Retailers such as Vattenfall, through its Powerpeers platform are already operating in this market place.
Utilities can also go into the homes or businesses of the grid runaways and provide energy management systems. Smart Homes are at the heart of this. Our research shows that the European smart home market is destined to grow to nearly £16.7 billion by 2021 – it is currently at nearly £4.4 billion.
For grid runaways, the smart home services must be tailored to their self-producing needs. For example, the energy management system could guide them on the best use of own vs. grid energy. Such a service should be coupled with innovative tariffs and unique customer offerings that enhance the trust in utilities as an advisor and service provider.
Keeping a close eye on the costs
The utility industry in the UK is intensely competitive. In 2013, the large suppliers owned 95 per cent of the market. They now own 82 per cent.
With more choice, consumers are switching. At an aggregate level, 17 per cent of consumers switch suppliers in the UK, using comparison websites more by the day. With smart meters ramping up and switching becoming easier, this is bound to grow.
Therefore, even if utilities are exploring opportunities to find alternative revenue streams, they still need to keep a close eye on the costs.
Some utilities will continue with their traditional approaches of outsourcing, implementing innovative ways to procure, and use partnerships, but we believe some will also begin to take a fresh view by adapting long term cost reduction transformations. Usually labelled as taking a “zero-based” approach, this means becoming more agile, adapting a cost-conscious culture, increasing accountability and enhancing visibility of expenditure. Cost reductions need to become cultural mind-sets within utilities, with commitment from the top. Those who are to be successful, will look to embed a sustainable paradigm, rather than embarking on short-term, quick cost reductions.