When energy customers go off-grid, will utilities be left in the dark?

By

Benoit Laclau

EY Global Energy Leader

Experienced energy leader and advisor.

15 minute read 7 Jun 2018

Show resources

The countdown is on to when the utilities sector reaches three tipping points on a journey to a new energy ecosystem.

Utilities are on a countdown to reinvention. The energy industry has long known that radical transformation is coming. Revenues have been under pressure from the rise in renewables; in 2016, clean energy accounted for almost two-thirds of net new power capacity around the world.[1]

The maturing of renewable energy technologies, the proliferation of distributed energy resources, the falling cost of battery storage, and changing, more empowered consumer behavior are shifting how we produce, use, value and trade electricity.

Together these forces have put the energy sector on a path to three critical tipping points:

Until now these milestones on a journey to a very different energy ecosystem have been vague future events. But now EY, together with one of the world’s leading global analyst houses, has calculated the interaction and amplification of 10 convergent technological trends to determine when these tipping points will be reached.

These dates will vary across global regions, because the trends driving change in the energy sector are different for different markets. But what is certain across all is that change is coming sooner than most of us previously expected.

Grid cost parity is 2021

  1. Tipping point 1 – when off-grid energy reaches cost and performance parity with grid-delivered energy – will arrive as early as 2021 in Oceania.
  2. Tipping point 2 – when electric vehicles (EVs) reach price and performance parity with combustion engine vehicles – will follow from 2025 across the globe.
  3. And tipping point 3 – when the cost of transporting electricity exceeds the cost of generating and storing it locally – will hit the US Northeast region first in 2039.
  • The energy industry is at the start of a period of unprecedented change, one that will fundamentally change the market place (presenting new challenges as well as new opportunities). Three tipping points will mark the emergence of a new energy system.

    Tipping point one is when self-generation reaches cost parity with grid-delivered electricity. To determine this date, we calculated the projected demand for electricity, future generation mix and cost of delivering electricity via a central grid between 2015 and 2050, and then compared it to the predicted cost of self-generating electricity using solar PV and battery storage.

    To help determine when these costs would reach parity, we worked with a leading global analyst house to model the expected adoption and interactive impacts on electricity demands and costs of 10 core distributed energy and information technologies: solar PV; battery storage; electric vehicles; microgrids; home and building energy management systems; P2P electricity exchange; smart meters; artificial intelligence; grid-edge technology; and cloud.

    The study also identified two further tipping points for the energy industry:

    • Tipping point 2: when the price of battery electric vehicles reaches cost and performance parity with traditional cars with internal combustion engines
    • Tipping point 3: when the mere cost of delivering electricity (i.e., the unit-cost of electricity transmission and distribution) exceeds the cost of self-generated electricity

    Because drivers vary across markets, the tipping points will hit different regions at different times. So far, we’ve developed models for Oceania, Europe and the US, with more to come. The American energy sector is complex and highly regionalized, making it difficult to get one clear picture of what is driving change. To provide clarity we’ve determined the tipping points for five US markets – ERCOT, Westcoast, Midwest, Northeast and Southeast, with a focus case study on California. We’ll update our models and clock every six months as technology and regulations change.

Tipping points have game-changing consequences

These tipping points mark when everything changes for utilities. They herald the dawn of a radically different energy ecosystem – where self-generation is an affordable option for everyone, when EVs become mainstream mobility options and when consumers become “prosumers”, producing their own energy and leading to the proliferation of localized energy generation.

This will create game-changing consequences for utilities:

  • Increased complexity in integrating and managing distributed energy sources. Utilities will face more performance issues, as well as rising costs to maintain the grid.
  • Combined with the rapid drop in the cost of self-generation technologies, this will accelerate the defection of consumers and allow non-traditional competitors to steal market share, putting pressure on the business model that underpins utilities.
  • The expected large uptake in EVs will create additional load on the electricity system but charging, if managed well, could transform energy usage patterns and improve grid utilization by absorbing load during periods of high variable renewable energy output.
  • The energy market place will need to be digitally transformed as energy becomes more demanding, local and dynamic, requiring greater intervention at a distribution level to manage power quality.
  • New financial and regulatory models will be needed to manage the “information” grid.

Such radical changes bring energy companies to a crossroads.

It’s not enough to say that business as usual will no longer be an option – utilities will confront existential questions unlike any they’ve encountered until now. Perhaps the most important one will be: “What should we do next?”

Opportunities for reinvention

Change needn’t be a threat. The new energy ecosystem offers the opportunities for reinvention that many energy companies have been seeking, after years of eroding revenues. The potential for new paths to growth are waiting - for those that get ready in time.

  • Microgrids: As generation continues to evolve toward a more diverse and decentralized network of intelligent flexible units, energy companies can help build community microgrids, connecting and managing the energy inputs from many different self-generating households.
  • EVs: Utilities could take a bigger role in the EV industry, investing in infrastructure that allows EV batteries to help stabilize the grid.
  • Emerging technologies: Energy companies could develop new digital applications that create virtual marketplaces to trade energy in new ways. Technologies such as blockchain and smart contracts will underpin this new transactive energy ecosystem.

The truth is that as technology evolves and sectors converge, the resulting business possibilities will grow exponentially and take forms that we cannot even imagine today. Twenty years ago, did telco bosses envision that one day we could control almost our entire lives from a handheld smartphone?

Instead of trying to predict the future of energy innovation, energy companies should focus on building an agile, collaborative business that is ready to quickly pivot to take advantage of new technology and trends. Our advice for utilities preparing for the imminent tipping points of their sector is to make smart “no regrets” investments now while planning for a very different future. Utilities should:

  • Invest in digital grid infrastructure: However the future energy ecosystem will evolve, it will be built on digital technology – the investments utilities make now will determine how well equipped they are to reap the benefits of digital applications tomorrow. Energy companies need to make strategic investments in digital grid enabling technologies, such as smart meters and advanced distribution management systems (ADMS), and the skills required to operate them.
  • Evaluate new business models: In the new energy ecosystem, revenue growth will come from enabling self-generation, growing digital-enabled energy services and the EV ecosystem. Utilities will need to consider potential business models supported by digital grid investment, such as EV infrastructure and microgrids.
  • Engage the regulators to shape a future role: In most markets, the regulatory models that shape energy investment are yet to catch up with the sector’s transformation. Different models of incentivizing utilities could encourage more innovation. Now is the time for energy companies to drive the discussion around their future roles to ensure relevancy and remuneration in the long-term.

Tomorrow’s energy winners are taking action now

The tipping points that mark the journey to a fundamentally different energy ecosystem are almost here. The energy companies that prepare will win in the new energy ecosystem – however it evolves. The key is to embrace the potential of change by taking bold steps now. Those that do will do more than simply survive, and thrive.

[1] Renewables 2017, International Energy Agency, 2017

Summary

Three tipping points mark the start of a new energy ecosystem. Utilities that prepare now can thrive in radically different conditions.

About this article

By

Benoit Laclau

EY Global Energy Leader

Experienced energy leader and advisor.