New regulations and opportunities in the decentralized energy market can be good for the planet and business.
January 2020 was the warmest January since temperatures started being systematically recorded more than 140 years ago, according to both the US National Oceanic and Atmospheric Administration and Europe’s Copernicus Climate Change Service (C3S).1 Future generations may not only face more extreme weather conditions, such as hurricanes and floods, but also a worldwide sea level rise of around seven meters due to melting Greenland ice.2 Over the last years, the arctic region has been heating up two to three times faster than the rest of the planet.3
However, the international community struggles to find pathways to a more sustainable use of energy, the largest source of greenhouse gases, which are driving climate change. The 2015 Paris Agreement, intended to curb emissions and keep global warming to well below two degrees Celsius above pre-industrial levels, does not seem to have an immediate impact on national economies. On the contrary, many countries are emitting more global greenhouse gases; emissions rose by almost two percent from 2017 to 20184 and are projected to increase by 0.6 percent in 2019.5
Yet, the foremost challenge that humankind currently faces – a “deep decarbonization” of national economies – may be tackled by three strategic options. The first is the use of carbon capture and storage (CCS), a technology which traps carbon dioxide emissions directly at the tailpipe of power plants and injects it into the ground. However, many CCS projects have been stopped because of resistance from local residents, environmental concerns, and doubts about its environmental and economic viability. The second option is a reduction of total primary energy consumption of humankind. However, only a few countries on Earth have succeeded in decoupling economic growth and energy consumption over longer periods of time, despite innovations and increases in energy efficiency.6 The third option and the most promising path of decarbonization is that of renewable energies supplying the majority of electricity to our economies. Since 2009, the costs for solar energy based on photovoltaic cells decreased by around 80 percent, whereas wind turbine prices fell by 30 to 40 percent, according to the International Renewable Energy Agency (IRENA).7
Global energy supply becomes renewable
The combination of emission reduction targets with a competitive, market-oriented regulation of the electricity sector and incentives for green energies has led to an unprecedented rise of renewables. National governments have established regulatory systems that reward clean energy sources, and corporations and entrepreneurs have seized opportunities in liberalized markets. This has reduced the dependency on fossil fuels and has accelerated the deployment of decentralized, climate-friendly energy resources.
For example, in Germany and Italy the availability of feed-in tariffs led to a boom in the deployment of photovoltaic power – much of this small scale and individually or community owned. Some countries, such as Denmark and Germany, which both have a long history of renewable energy deployment, have put renewables at the center of their energy and electricity policy. Emerging economies – such as China and India, characterized by rapidly growing power demand – have become global leaders in renewable technologies, including in manufacturing and deployment.
The developing world is also leapfrogging into a decentralized energy supply infrastructure, comparable to the jump from no telephone service to handheld devices while bypassing the line-based telephony stage. Here, micro-grids and solar storage kits for individual households co-exist at the periphery of the central grid, substituting the further rollout of the public transmission network. This decentralized infrastructure, formerly perceived by rural residents as second-class service compared to an official grid connection, often provides more reliable and stable power supply than the central distribution network.
High annual renewable installation rates may initially make small differences to the respective countries’ overall power mixes, given the size of the existing supply portfolio, but the scale of these investments has indeed affected technology adoption internationally by driving down the price. Progress in developing and commercializing new storage technologies – in particular solid-state batteries with a higher energy intensity than lithium-ion batteries – will be likely to accelerate the usage of batteries not only in automobiles, but also in stationary applications around the smart home.
The least expensive solution to increase flexibility and efficiency during the transformation is demand-side response. As a platform model, it does not require an expensive supply infrastructure but builds on existing assets, exploits their flexibility potential, enables peak-shaving and thus brings down peak costs. It will counteract many of the issues raised by the intermittency of renewable energy resources, such as solar and wind, at much lower costs than installing new generating capacity with conventional sources of power. This strategy has succeeded in power markets such as in the US with Pennsylvania-New Jersey-Maryland (PJM), where almost 10 GW of active load management was used to reduce demand during the hot summer months – the equivalent of around ten units of conventional power plants.8
Regulatory flexibility as enabler of new business models
The conventional energy system tended to have separate sector regulation, for example in electricity and gas, and was top-down optimized with few incumbent players. As the energy system decarbonizes and decentralizes, the convergence of heat, mobility, and power on the distribution level allows for coordinated regulatory instruments and actions to create new markets and platforms in ways that are cost-effective to customers, but also nimble and adaptive enough to enable, rather than undermine or block, innovation, new business models, and customer wishes. For example, peer-to-peer trading and exchange between residential energy micro-producers and consumers still face regulatory hurdles in many countries.
Notwithstanding, the new energy world offers a broad spectrum of opportunities to capture value for utilities, large corporations, and even startups. Based on our research, we found that the core competency to succeed in a decentralized system is expertise in digitalization – be it with artificial intelligence for predictive maintenance, granular weather forecasting, legacy device recognition, or chatbots in customer interaction. It was also served by skills in data analytics for the optimization of decentralized assets and remote operating centers as well as deep tech knowledge, for example on trading platforms based on blockchain or other decentralized ledger technologies.
Corporate leaders can prepare their companies (and society) for the energy market transformation by offering tailored services and value propositions. Technological advances and innovations can give start-ups and established companies an opportunity to create competitive differentiation. In a complex and highly dynamic market environment, no single company is able to provide all the elements of its value proposition by itself – entering partnerships and alliances can be key to survival.
The global transformation of the energy sector has just started. Major international institutions as well as many political and corporate decision makers across all continents are taking key roles and responsibilities in the process. However, if global emissions are to reduce at a pace that is at least in line with the Paris Agreement, then the role of decentralized renewable energy must significantly increase. This will require new thinking in energy governance to enable the opportunities of innovation to be fully exploited and deployed.
The companion book to this article, “Decentralised Energy – A Global Game Changer,” was edited by Christoph Burger and Jens Weinmann of ESMT Berlin and their co-editors Antony Froggatt (Chatham House) and Catherine Mitchell (Exeter University). The book is available for free via Ubiquity Press London at https://www.ubiquitypress.com.
About the Authors
Christoph Burger is a senior lecturer at ESMT Berlin. Before joining in 2003, he worked five years in industry at Otto Versand and as vice president at the Bertelsmann Buch AG, five years at consulting practice Arthur D. Little, and five years as independent consultant focusing on private equity financing of SMEs. His research focus is in innovation/blockchain and energy markets. He is co-author of the dena/ESMT studies Vulnerabilities in Smart Meter Infrastructure, Blockchain in the Energy Transition, and the ESMT Innovation Index – Electricity Supply Industry as well as the book The Decentralized Energy Revolution – Business Strategies for a New Paradigm.
Antony Froggatt has studied energy and environmental policy at the University of Westminster and the Science Policy Research Unit at Sussex University. He is currently an independent consultant on international energy issues and, since 2007, a senior research fellow at Chatham House (also known as the Royal Institute for International Affairs). Since 2014 he has also been an honorary fellow at the Energy Policy Group at the University of Exeter. While working at Chatham House, he has specialised in energy security in emerging economies with extensive work in China on the establishment and methodologies of low-carbon economic development. He has also undertaken international research on public attitudes to climate change and energy security. He is currently working in two main areas, assessing the climate and energy policy implications of Brexit as well as evaluating the future of the electricity sector considering decarbonisation objectives and technological developments.
Catherine Mitchell is a professor of energy policy at the University of Exeter, United Kingdom, and is director of its Energy Policy Group. She has worked on energy policy issues since the 1980s. She has been a member of numerous national and international boards and projects. Her current area of interest is appropriate governance for innovation in energy systems. She is also a coordinating lead author of the IPCC AR6 WG3 Chapter on National and Sub-national Policies and Institutions.
Jens Weinmann is a program director at ESMT Berlin. His research focuses on the analysis of strategic decision making in corporations with respect to innovation, regulation, and competition policy, with a special interest in energy and transport. He graduated in energy engineering at the Technical University Berlin and received his PhD in decision sciences from London Business School. His academic experience includes fellowships at the Kennedy School of Government, Harvard University, and the Florence School of Regulation, European University Institute.
1. Levy and Miller (2020), https://edition.cnn.com/2020/02/13/weather/warmest-january-noaa-climate-trnd/index.html
3. Mortillaro (2018), https://www.cbc.ca/news/technology/arctic-climate-change-1.4857557
4. Olivier and Peters (2020), https://www.pbl.nl/sites/default/files/downloads/pbl-2020-trends-in-global-co2-and-total-greenhouse-gas-emissions-2019-report_4068.pdf
5. Friedlingstein et al, Global Carbon Budget 2019, Earth System Science Data, 11, 1783-1838, 2019, DOI: 10.5194/essd-11-1783-2019.
6. Akizu-Gardoki et al. (2018), Decoupling between human development and energy consumption within footprint accounts, Journal of Cleaner Production 202 (2018), 1145–1157
7. See also https://www.irena.org/costs
8. PJM Demand Side Response Operations, https://www.pjm.com/-/media/markets-ops/dsr/2019-demand-response-activity-report.ashx?la=en