In the transition to electrification, will flexibility be your greatest asset?

By

Benoit Laclau

EY Global Energy Leader

Experienced energy leader and advisor.

6 minute read 5 Apr 2019

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The flexibility energy companies display in responding to today’s dynamic market conditions will determine their future success.

Energy. Where it comes from. Who supplies it. How we use it. It’s all changing. The global energy sector is on the brink of a consumer-led, technology-enabled transition, and the balance of power is shifting fast.

The energy transition will be one of constant evolution. By 2040, energy demand will rise by almost one quarter, due largely to population growth and urbanization. Renewables are expected to reach 40% of global generation compared to 25% today, as countries pursue decarbonization. Innovations will make off-grid solar and wind generation, electric vehicles (EVs), battery storage, etc., more accessible and affordable. And emerging technologies, such as artificial intelligence, big data analytics, blockchain and the Internet of Things, will support insight-driven decisions that optimize the supply of energy – as well as enabling tech-savvy, discerning consumers and competitors from outside the industry to disrupt traditional business models.

This means that by 2050, the energy system will be virtually unrecognizable to that of today. And in this new world, electricity will increasingly be the fuel of choice.

But, as global energy systems become cleaner, cheaper and more efficient, electrification will upset the energy mix. The use of oil as a transport fuel will face stiff competition from battery technology. Natural gas will replace coal as the world’s second-largest energy source, buoyed by demands from industry and power generation. And renewables will challenge gas as technologies become more economically viable.

Business models, systems and controls will be disrupted, with risks and opportunities mounting. Managing such significant, interdependent changes will demand flexibility from energy companies as they adjust to the new normal. 

Managing significant and interdependent changes will demand flexibility from energy companies as they adjust to the new normal.

Preparing for the consequences of energy transition

The pace of the energy transition is already radically changing behavior. Residential users are today finding solar energy plus battery storage solutions increasingly competitive with grid-supplied energy. Meanwhile, businesses are entering into long-term power purchase agreements (PPAs) with independent generators, rather than utilities, to secure renewable supply. The upshot is more consumers being less dependent on the traditional grid and the emergence of a more distributed energy system.

Electrification of buildings, heat, data centers and the general economic shift from heavy to lighter industries are also adding considerable new load onto the energy system.

But, it is electrification of transport that promises to be the real game changer. Technology improvements will put the performance and price of EVs on par with internal combustion engine vehicles as early as the mid-2020s, while public policy and political mandates are driving EV adoption. In fact, EVs are expected to make up 66% of global vehicle sales by 2050.

With the prospect of greater volumes of electricity flowing both into and out of the network, the entire system will have to operate differently to maintain reliable supply. Digitization, moreover, will heighten the scope for cyber attacks, warranting greater vigilance to keep connections robust and secure.

This means that regulators will also have to shift their focus if they are to deliver agile, risk-based mechanisms that can accommodate the evolving market, enable innovation and safeguard the consumer.

Regulators will also have to shift their focus if they are to deliver agile, risk-based mechanisms that can accommodate the evolving market, enable innovation and safeguard the consumer.

Flexibility and adaptability are critical to success

The changing market is also enticing competition. Technology providers, digital giants, auto manufacturers, retailers, aggregators and intermediaries are all vying for a share of energy customers’ expenditures. These companies are well positioned to scale-up investment and are already starting to put building blocks in place to compete across the electricity value chain – from large-scale wind and solar photovoltaic (PV) projects, to energy storage, to EV charging infrastructure, to connected devices within the home.

Their arrival is prompting introspection from traditional providers. They are assessing their future relevance to consumers who are digitally connected and, increasingly, self-generators of energy. They are considering what they can do differently to retain customers while:

  • Running a reliable, efficient and safe grid at the same time as maximizing returns on asset investments; as traditional funding sources erode due to flat or declining sales.
  • Accommodating rising volumes of intermittent distributed energy resources (DER) into a grid that was originally built to enable one-way power flows from centralized generation.
  • Delivering greater value to customers whose expectations, influenced by experiences in other sectors, are on the rise.

With so much change going on across the industry, traditional energy companies cannot stand still. They must make fundamental changes to the services they offer, their business models and the way in which they configure and operate their grids, if they are to continue to compete commercially.

Flexibility will be a condition of success. Energy companies should:

  • Rethink generation. For the new energy world, this will mean investment in new technologies and distribution capabilities to integrate more intermittent renewables, support DER and accommodate an influx of EVs. It will also mean engaging directly with renewable developers through PPAs.
  • Identify new funding mechanisms. The energy transition will be complex and costly for energy companies. They will need to source new funding and work with regulators to develop frameworks that are flexible enough to encourage and reward investment in a high renewables-based system, as well as make certain that all market participants receive the most efficient, cost-effective and fair outcomes.
  • 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.

To become the business of the future, let go of the past

Ultimately, energy companies need to make conscious, strategic choices.

Some energy companies will be risk takers. They will see the transition as an opportunity to innovate and operate commercially outside the scope of the traditional regulatory framework. They might compete against new players or engage in activities beyond their core competencies. They may also partner with companies from other industries to deliver advanced energy and e-mobility solutions.

Some energy companies will be risk takers. They see the transition as an opportunity to innovate and operate commercially outside the scope of the traditional regulatory framework.

Others will be more conservative. They will stick with current business models but look for ways to enhance operational effectiveness. They must be mindful, however, of stranded assets further down the line and the risk of running a zero-margin business that is dependent on government subsidies.

Some companies will have a foot in both camps. Their two-pronged strategy will allow them to innovate and develop new business models, while keeping their core operations going in the interim.

Whatever their response, time is not on their side. To succeed, energy companies need to transform into the businesses they want to become, rather than cling to what they once were. The operating model they develop must fit the vision of an electrified and decarbonized energy future, which flexes to the constantly changing market dynamics and shifting balance of power.

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Summary

Considerable change is happening all at once in the energy sector. How successfully energy companies flex to these dynamic market conditions will determine their outcomes and competitiveness long into the future. Rethinking generation, identifying new funding mechanisms, fast-tracking e-mobility and becoming much more customer-centric are top priorities. But there is no time for delay.

About this article

By

Benoit Laclau

EY Global Energy Leader

Experienced energy leader and advisor.