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

!{LinkedContent-author-by}

Benoit Laclau

EY Global Energy Leader

Experienced energy leader and advisor.

15 !{ArticleDetails-ReadTime} 7 Jun 2018

!{ResourceList-Close}

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

Energy companies are on a countdown to reinvention. The industry has long known that radical transformation is coming. Revenues have been under pressure from the rise in renewables; in 2017, wind and solar accounted for nearly half of global capacity additions, outpacing fossil fuels as the cost of renewables continues to fall.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.
  • Tipping point methodology

    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. 

Tipping points have game-changing consequences

These tipping points mark when everything changes for energy companies. 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:

  • Increased complexity in integrating and managing distributed energy resources. Energy companies 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 existing business models.
  • 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 run a reliable, efficient and safe grid.
  • New financial and regulatory models will be needed to manage the “information” grid”, maximizing the return on asset investments, as traditional funding sources erode due to flat or declining sales.
  • Energy companies must deliver greater value to their customers whose expectations, influenced by experiences in other sectors, are on the rise.

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 – energy companies 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.

  • Rethink generation: For the new energy world, this will mean investment in new technologies and distribution capabilities to integrate more intermittent renewables, support distributed energy resources and accommodate an influx of EVs. It will also mean engaging directly with renewable developers through power purchase agreements.
  • Fast-track e-mobility: As EVs become mainstream, energy companies must work with automotive and technology companies, governments and regulators to service e-mobility solutions and make electric transport viable.
  • Connect with customers: Energy companies need to morph from supplier to partner and to reimagine the way they engage with customers. They can focus on improving the customer experience, whilst also expanding their offering in areas such as smart home appliances, solar power and EVs, in conjunction with external providers.

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 energy companies preparing for the imminent tipping points of their sector is to make smart “no regrets” investments now while planning for a very different future. They should:

  • Invest in digital grid infrastructure: However the future energy ecosystem will evolve, it will be built on digital technology – the investments energy companies make now, will determine how well equipped they are to reap the benefits of digital applications tomorrow. They 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. Companies 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 energy companies could encourage more innovation. Now is the time for them 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 this 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.

Explore digital transformation from every angle

EY insights on digital transformation can help you unlock new value and create the enterprise of the future. 

Discover more

!{ArticleSummary-Heading}

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

!{AboutThisArticle-Heading}

!{LinkedContent-author-by}

Benoit Laclau

EY Global Energy Leader

Experienced energy leader and advisor.