Abstract
How Decarbonization, Decentralization, Digitalization and New Players Are Changing the Power Industry
No one really knows how fast the transition to a low-carbon economy will move, but one thing is certain—electricity is at the heart of this transformational change, with power demand increasing in the building, transportation, and industrial sectors. This growth is creating new challenges and opportunities for how to meet demand while addressing climate change and accelerating the transition to a low-carbon economy. Technological innovation will be key to driving the deep decarbonization of energy intensive sectors such as power, mobility, buildings, and industry; and where direct electrification is not feasible, green synthetic fuels or hydrogen produced from renewable electricity have the potential to tackle “hard-to-abate” sectors.
The power industry has been experiencing a disruption of unprecedented scope and speed in the way electricity is generated and in the associated business models. In a way, much of the industry was caught unprepared by the move from large fossil fuel powered plants to distributed renewable generation and by the need to manage revenue downturns, while meeting the demands of environmental and technology conscious consumers. These rapidly emerging trends of decarbonization, decentralization and digitalization require fundamental changes to the structure of the energy system as we know it and the design of appropriate market structures identifying cross-cutting benefits and costs, to recognize the full value of all generation options.
If this were not enough, the power industry is also facing a new competitive threat—the entrance of traditional oil and gas companies (IOCs) into power markets. Historically, IOCs had considered a move into electricity as a step too far, with the sector seen as oversupplied and highly politicized. However, the recent decision by Shell and others to sell electricity directly to retail customers is yet another example of how quickly the sector is changing. Why are IOCs entering the electricity markets?
The need to address climate change and play a role in the transition to a low-carbon future is one obvious reason, but there are many more, including the state of the energy landscape. Global markets are flush with natural gas and at the same time we are seeing record investments in new supplies of liquefied natural gas (LNG). Like all commodities, natural gas goes through cycles. However, this is more than just cyclical behavior—markets are facing a downward super cycle—where record oversupply coincides with record investments in new supply. This was a challenge even before the COVID-19 pandemic, which has also drastically reduced demand. In a buyer’s market, it is logical to try to get closer to final customers, establishing long-term agreements to reduce risk. An integration along the value chain also gives IOCs access to new business areas such as smart mobility, connected home services and/or demand side response. For traditional utilities and retailers, whose business models are already under pressure, this represents a dangerous competitive threat.
In this context of increasing competition, technology innovation will be even more critical for both incumbents and new players, not only as a means to gain a competitive advantage but also to accelerate the transition to a low-carbon economy at scale. Success is possible, but to achieve it, technological innovation must be complemented by:
Redesigning policy and regulatory frameworks: Advance and reform regulation to enable full integration of distributed energy resources, spur innovation, and define new roles for distribution network operators and end-consumers as active market participants. Define clear and stable decarbonization targets. Design market structures identifying cross-cutting benefits and costs, to recognize the full value of all generation options—a key step in reaching decarbonization targets an optimizing cost, while guaranteeing security of supply.
Deploying enabling infrastructure: Define clear market-wide rules around ownership and cost-recovery of physical assets, decarbonization targets, data ownership and cybersecurity. This will reduce the risk of stranded assets, allow planning security, and provide needed legal protections.
Redefining customer experience: Incorporate the new reality of a digital, customer-empowered, interactive electricity system. Simplify and tailor services.
Embracing new business and public-private partnership (PPP) models: Pursue new revenue sources from innovative distribution and retail services. Shift from asset-intensive business models to service provider platforms. Spur innovation and the ability to educate all stakeholders on the challenges and opportunities inherent in the energy transition. Bolster clean energy solutions by de-risking investments and lowering the cost of capital.
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