How will the choices made today affect European utilities tomorrow?

By Serge Colle

EY Global Energy & Resources Industry Market Leader; Global Power & Utilities Sector Leader

Global energy advisor. Connecting clients with EY insights, services, assets and the broader energy ecosystem.

5 minute read 7 Jun 2018

Europe is on a countdown to a critical tipping point for the energy sector – when self-generation and storage of electricity reaches price parity with grid-delivered energy.

rid parity will mark a rebirth of Europe’s energy sector – and it will arrive in 2022. The arrival of grid parity marks when European utilities must face fundamental change: old business models will enter an irreversible decline, and new opportunities will emerge.

But Europe’s utilities may be better positioned than those in other regions for the massive changes that lie ahead.

  • Many of the technologies now transforming energy, transportation and other sectors were either first pioneered in Europe or are now being driven forward by companies based there.
  • Regulatory pressure, an increased uptake of renewables, and ambitious carbon-reduction targets mean that many European utilities have already begun to pivot their business models.

An industry-wide wake-up call 

The European energy industry will look back at 2022 as the birth date of a fundamentally different energy system. We are counting down to a tipping point. When we reach grid parity, grid defection becomes an economically viable option.

While we don’t expect large numbers of consumers to leave the grid, the ability to do so will accelerate the pace of technological and consumer-led changes that will drive the development of the full potential of a digital, decentralized energy system.

The role of the electricity network won’t change overnight. Utilities will still connect electricity supply and demand, though their role as integrator of multiple, distributed sources will significantly increase, and be complicated by the addition of battery storage.

The critical question for European utilities will be about how they prepare for and then move forward from the consequences of grid parity.

Will networks choose to do only what is needed to ‘cope’ with new technology — for example, by reinforcing the grid? Or will they be bold enough to seize its full potential? For example, battery aggregation, which would allow utilities to manage the intermittency that renewables bring, may be the killer application they need.

The choices that utilities make now — to be on the defensive or to ‘go on the offense’ — will determine their future role in the new energy world.

The choices that utilities make now - to be on the defensive or 'go on the offense' - will determine their future in the new energy world.

Tipping points beyond grid price parity

Beyond 2022, two further tipping points that will mark the decline of the utilities' traditional business model (based on generating and selling electricity) are not far away:

  • Tipping point 1 — When off grid energy reaches cost and performance parity with grid-delivered energy — expected by 2022.
  • Tipping point 2 —  When EVs reach price and performance parity with internal combustion engine vehicles — follows shortly afterwards in 2025.
  • Tipping point 3 — When the cost of transporting electricity exceeds the cost of generating and storing it locally — will be reached in 2040.

Rapid advances in digital technology may see these tipping points arrive even earlier than predicted.

  • 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 1: 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.
    • 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.

When tipping point 2 arrives — with more and more of us driving and charging EVs — the grid will be under increased pressure, and significant new infrastructure, such as charging stations, will be required to enable the much-needed decarbonization of our transport.

This highlights the urgent need for European utilities to prepare now by developing a long-term digital grid investment strategy to:

  • Plan to build or upgrade grid assets to ensure they are digital-ready
  • Adopt or acquire the capabilities to maintain and maximize networks that are digital from end to end

Opportunity to converge with adjacent industries

EY modeling suggests that mainstream adoption of EVs by 2025 could make up as much as 30% of the electricity demand lost through growing grid defection and energy-efficiency measures.

But opportunities will stretch beyond providing energy for these vehicles.

Consider the potential: millions of EVs will mean millions of batteries that could be integrated into the system, providing more opportunities to manage and optimize the grid.

Smart grid technologies, such as advanced metering infrastructure could allow charging stations to be integrated with time-based rates that encourage off-peak charging. This also offers potential for utilities to use data around how and when people charge their EVs to guide future investments or collaborate with adjacent industries on new commercial opportunities.

In the future energy world, the value of the network will lie in its data, not physical assets. Utilities must understand the implications of this shift.

The competition for data among industries will be an important one. And whoever has the best brand and the most intelligent applications will win.

The competition for data among industries will be an important one. And whoever has the best brand and the most intelligent applications will win. 

Regulators must innovate too

The potential for Europe’s energy sector is exciting. But these tipping points also raise critical questions, including who – government or industry - is responsible for infrastructure such as EV charging stations. Regulatory issues will need to be resolved early to ensure that consumers and the industry both reap the benefits of the energy transformation.

With many European utilities still experiencing huge cost pressures, governments may need to contribute to the huge investment needed to upgrade the electricity grid and to build new infrastructure, such as EV charging stations. 

The evolution of the energy sector will also bring to a head the debate around traditional usage-based charging models for electricity.

As more people leave the grid, utilities will need to collect rising costs of maintaining it from a shrinking customer base. This will further push up costs for remaining grid users. Meanwhile, an influx of distributed energy onto the network will put pressure on the grid, with few arrangements in place to determine how to charge for this type of usage.

Now is the time for serious discussions about shifting to a purely capacity-based model. Arguments that removing the link between consumption and cost will threaten emission-reduction targets will not hold once self-generation via non-carbon-based sources becomes commonplace.

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If Europe is to continue to be an energy pioneer, more incentives will be needed to encourage further innovative investment.

About this article

By Serge Colle

EY Global Energy & Resources Industry Market Leader; Global Power & Utilities Sector Leader

Global energy advisor. Connecting clients with EY insights, services, assets and the broader energy ecosystem.