The electricity sector has entered a phase of unprecedented change. Three of the industry’s pillars are moving simultaneously: generation, consumption, and trading arrangements. These changes will bring about new and exciting opportunities for those who dare to embrace the challenge of environmentally-friendly, distributed and stored energy, electric vehicles, and innovative trading options, writes Roger Lilley.
First published by EE Publishers.
By Roger Lilley
In Consumers, prosumers, prosumagers – How service innovations will disrupt the utility business model, Fereidoon Sioshansi helps readers grasp the spirit of the times, the importance of the stakes and the uncertainty of the outcomes. The 19 essays, written by experts in their respective fields, in this 550-page book, are divided into three parts: How service innovations will lead to disruptions in the status quo; how regulatory policy will impact the evolution of services; and how emerging business models will transform the electric power sector.
The author of a number of energy-related books, a contributor to EnergyPost.eu and CleanTechnica, and publisher of the monthly EEnergy Informer newsletter, Sioshansi has wide and deep experience and knowledge of the energy sector. Here, he introduces us to three types of electricity user: passive consumers, prosumers, (i.e. those who generate at least part of what they need), and “prosumagers” (i.e., prosumers who not only generate electricity for their own needs, but who store the surplus for later use, or to trade with the utility or another consumer).
Until fairly recently, electricity was a commodity delivered to where we needed it. A power utility provided a supply of electricity to us, and whatever electrical equipment we connected to it presented a load to the utility. The energy consumed by the load was metered by a fairly simple electromechanical device which indicated how much energy we had consumed over a given period. The energy was typically measured in units (kWh) and the period was usually a month.
The monthly electricity bill was calculated by multiplying the number of units consumed during the month by the rate (c/kWh). To pay less for electricity, one could simply reduce the load and use fewer units per month. This load reduction could be done by replacing energy-intensive equipment with energy-efficient types, or to use different energy sources: gas for cooking and space heating, for example.
A new reality
The 4th industrial revolution, which is being ushered in by dramatic developments in digital electronics, will transform the energy market and cause a transition from the old way of buying and selling electricity to a new, liberalised system which offers consumers a new world of opportunities. Electricity generation can now be decentralised without losing efficiency, generation can be clean without a cost penalty, and generated electricity can be traded with the utility or between consumers.
Renewable energies (RE) and battery storage are more and more competitive, grid parity for photovoltaic (PV) electricity is being achieved in many places, and as a result, energy systems are becoming more and more decentralised. These exciting new possibilities are explored in the first part of the book.
While large commercial and industrial customers are generally more likely to engage in the energy transition than residential consumers are, and there is no guarantee that residential consumers will effectively take advantage of these opportunities, the new energy world which offers new opportunities, also adds new complexities.
Those who can navigate the complexities will welcome the opportunities – especially when the value of the new options becomes apparent. There may be some resistance however. The energy sector has to cope with consumers’ suspicion regarding the risk of intrusion or invasion of privacy that comes with smart meters and digitalisation, topics extensively covered in this book.
The second part of the book shows that the regulator’s role will become much more important than in the past, due to the speed and spread of the disruption. In many countries, self-consumption (i.e. consuming self-generated electricity, and referred to as “prosumers” in this book) is encouraged or subsidised by public authorities. It may be that these self-consumers will end up receiving subsidies, paying less taxes on energy, and paying less in network tariff too.
As the whole energy-plus-tax system is, at a given time, a zero-sum game, other less privileged customers will have to pay more to compensate as a number of chapters in this book explain. This cannot be a good outcome for two basic reasons:
- Efficiency:in the long run, it is inefficient to distort economic signals. For instance, net metering may help to encourage self-consumption, but it is very costly for the electric system if the renewable energy is produced when the value of power is low, or potentially negative; and
- Equity:a public policy which ends up making poor or middle-class people potentially subsidising the wealthiest doesn’t make much sense.
Beyond self-consumption, one of the main tasks of energy regulators is to set network tariffs. They must take into account the increased diversity and complexity of network users: distributed generation, self-consumers, storage, demand response operators, electric vehicles, and other behind-the-meter assets. As shown in several chapters of the book, innovative ideas are required to convey the right economic signals and to allocate network costs and/or benefits to those who generate them. Another fundamental task for the regulators is to allow optimal network access to all users, and especially the new kind of users. A fully competitive retail market, with distribution system operators as neutral market facilitators, is an essential part of the market design and will help energy consumers reap the benefits of innovation.
However, any innovation must, in due time, find a viable business model and this is the central focus of the third part of the book. First, the rollout of smart meters and the development of distributed resources will change the way distribution networks are managed. Self-consumption, local energy communities, positive energy areas and microgrids will challenge traditional business models of distribution operators, which will see less energy withdrawn from the grid. The ultimate disruption is the development of independent, non-connected microgrids. It appears that such standalone microgrids will be rare in developed countries with good existing networks, but they will play a major role to electrify the last billion people in the world still without access to electricity, with innovative business models such as pay-as-you-go systems described in the book.
Then, of course, there are all the newcomers, from the simplest business model of low-cost energy supplier to the most sophisticated ones like blockchain peer-to-peer platforms, virtual power plants (VPPs), demand response operators, and others. One very strong newcomer is the transport sector, which may be able by itself to disrupt the energy sector, if bullish forecasts of electric vehicles penetration turn out to be true. The vehicle-to-grid business model has the potential to fundamentally change the way flexibility is procured and managed on electricity networks, and to allow for very large proportions of renewable intermittent electricity sources to be stored during sunny daylight hours when energy is plentiful and cheap.
Energy is a fascinating sector. It is, at the same time, both the source of our prosperity and the main cause of climate change, which may ultimately destroy our civilisation. This fascinating sector, with all its exciting prospects, will affect everyone in one way or another, given the scale of change we are witnessing.
Sioshansi’s new book is a must-read for anyone interested in the evolution of the electricity sector. While the sector’s historical roots are useful for understanding how we find ourselves with the current infrastructure and system of networks, its future will prove to be more dynamic and flexible than anyone could have thought possible. This book will show you how that will come about.
Article first published on EE Publishers, reprinted with permission.