THE DRIVING FORCES DISRUPTING THE ENERGY INCUMBENCY
The electric power industry is rapidly and fundamentally changing on a number of dimensions including generation, transmission, distribution and most important on the customer end. The convergent effects of technological advances, policy measures, the growth of distributed generation, new forms of competition and changes in customer behaviour are having a transformative impact on power markets. Utilities now face, or will soon face, unprecedented challenges as our entire notion of how electricity should be generated and natural gas produced, delivered, and paid for is changing.
A number of forces have come together to accelerate these changes. Climate-change rules are ruling out dirty old power plants with astonishing speed. Since March alone, four coal-fired stations capable of powering 8m homes in Britain have shut. At the same time, plunging fossil fuel prices have led to sharp cuts in energy bills, hollowing out the balance sheets of the incumbents. And some renewable technologies, for years reliant on government subsidies, have become so cheap they can be built with little or no support. Solar panel costs have plunged 70% in five years. The result has been an explosion of what the industry calls “distributed generation”. In place of the few dozen giant power plants that were controlled by the top suppliers, hundreds of thousands of wind turbines and solar panels are springing up.
The key trends affecting utilities business models are as follows –
While the pace of change has accelerated along the industry’s entire long value chain, it is most pronounced in distributed energy resources or DERs – which includes energy efficiency improvements plus distributed generation, particularly from rooftop solar PVs. The former allows consumers to use less; the latter allows them to generate more of what they need. Combined, they are turning an increasing number of consumers into prosumers, eroding utility sales and revenues and threatening the historical business model, which was traditionally based on fixed tariffs applied to volumetric consumption.
Distributed generation is often cited as the biggest threat to the traditional vertically integrated IOU model. Many business and residential customers are taking their energy needs into their own hands and generating their own power. A recent article in The Wall Street Journal cites the example of Arizona-based Sherry Pfister, who leased solar panels for her home, cutting her utility bill by a third. Unless utilities are able to assist customers in managing energy use and provide other value-added services, customers are increasingly going to shift toward the do it yourself energy model.
Complimentary technologies such as storage and electric vehicles will speed up the transition – the costs of battery technology are headed nowhere but down. A number of recent studies by top analysts at HSBC and UBS projected that by 2020, small-scale solar-plus-storage power generation will become economic enough for individual homeowners in Europe that there simply won’t be any market incentive for building more fossil fuel power plants on the Continent. In America, Tesla thinks the costs of battery storage could fall to $100 per kilowatt-hour by the end of the decade. That would drop the combined cost of a home solar array and a home battery to well below the average household currently spends on electricity from the grid.
For decades electricity storage has been a holy grail for the industry. Power is a fleeting commodity. You can’t put in a barrel and stash it underground. For intermittent sources such as wind, this has been an Achilles heel. If the breeze is blowing at times of particularly low demand, National Grid pays turbine owners to turn them off because it has nowhere to send the power.
The dawn of cheap lithium batteries that fill up at peak supply times and discharge when demand spikes means that “spotty” renewables become far more reliable. Whitehall is slowly awakening to the implications. Former energy secretary Amber Rudd said: “Storage could help maximise the benefits and minimise the costs of secure, affordable and clean energy in the UK. I want to see the development of a viable and sustainable storage market at all levels, including in people’s homes”.
Driven by the electric car industry, which has ploughed billions into research and new manufacturing plants, the cost of lithium batteries has halved in three years and is set to continue dropping. At between £2,000 and £4,000, household models are still too expensive for most. Yet upstarts have begun devising solar and storage deals that require no subsidy or upfront investment, the way mobile companies offer free iPhones in exchange for a long-term service contract. This presents a significant challenge for the conventional power generators. They have to find a way to make money by selling a lot less of the product they produce.
Competition from New Market Entrants
New market entrants are another major challenge promising to disrupt the energy IOU industry. There are a number of new entrants making inroads into the sector, from the assumed to the unexpected, including those focused on generating electricity from renewable sources such as wind, solar and biomass, as well as energy management technologies that allow consumers and businesses to reduce their energy consumption, even tech giants like Google, which acquired Nest Labs in January 2014. With its acquisition of Nest, Google also acquired its signature product, the Nest Learning Thermostat, the world’s first “smart thermometer” that programs itself and saves energy. Through the Nest Learning Thermostat, Google now potentially has access to any utility customer with one of these devices installed, and is rumoured to be extending its reach even further into the utility sector, recognising the significant market opportunity it presents. Google is not the only company from another industry encroaching on energy utilities’ territory with new technologies; a whole ecosystem of smart home technology providers has sprung up that allows consumers to monitor and manage their energy consumption. Companies span the technology, cable, and communication sectors – and they have figured out how to do the one thing IOUs have not done or chosen not to do: get beyond the meter and into the home.
In the UK web-savvy supply companies are luring away their customers with cheaper deals and customer service that isn’t terrible. In 2012, less than 1% of British homes were supplied by non-big six companies. That figure is now close to 15%, and rising. More than 40 companies are fighting it out for a share of the household market.
Consumers Relationship with Power
Consumers relationship with power is being transformed – given the changes taking place in the industry, power will no longer be something that is exclusively produced by huge, centralised units owned by large utilities. Power will no longer be something that is consumed in a dumb way. The “we have done it like this for a century” value chain in developed electricity markets will be turned upside down within the next 10-20 years, driven by solar, batteries and in general, changing customer behaviour. In the age of transparency, consumers want a highly personalised and fully automated service and they want the ability to choose how their power is generated and by whom. What is now changing perhaps more rapidly than anyone could have imagined even a few years ago is the nature of the relationship between these energy services and the primary energy upon which they rely.