The future of energy companies

The future of energy companies

Two forces shaping the energy world will both lead to bigger companies running lost of small assets.

Two forces are pulling at the energy companies.
1. The race to the bottom
2. The rise of the prosumer

To survive in the race to the bottom energy producers will be involved in a continuing consolidation in the energy market. On the other hand the energy production landscape is becoming more and more fragmented by decentral generation.
The two forces will come together in the IT infrastructure of the main producers. This IT infrastructure will link decentral production and storage with intermittent renewable energy and the remaining fossil fuel based production.

1.  The Race to the Bottom

The producers of power are in a race to the bottom, who will be selling their MWh against the lowest margin. In this race to the last euro above cost price the necessity to merge with other energy companies will be strong. This consolidation of market power in a few major players has slowed down recently for various reasons.

• E.on and RWE are trying to divest some of their assets to cover for the losses incurred as a consequence of the “Energywende”
• Vattenfall is selling of some of its assets to free up capital to invest in renewable energy and to pay for the take over of Nuon

It is not likely that this slow down means that the trend will be reversed.

• Gazprom and ENI/Distrigas recently entered the Dutch end-user-market increasing the level of competition, reducing margins even further and probably re-affirming the need for further consolidation.

The race to the bottom will lead to the creation of a small number of very big energy producers.

2.  The rise of the Prosumer

The urge to reduce the speed at which the average global temperature is rising (without being able to stop this rise) has meant  that governments have spend inordinate amounts of money on the encouragement of renewable energy.Renewable energy in the shape of wind and power have as a clear disadvantage that they are intermittent and require a back up by other energy production assets or energy storage. This obviously does not apply to (well managed) geothermal heat pumps. The move to intermittent renewables  has encouraged the research into and the development of smart grids.

Smart grids enable the existence of various (small) production units. These small production units have benefits:

• Users of energy do not want to be reliant on fossil fuel and its current high and volatile prices. De-central production is not necessarily cheaper but it reduces exposure to the volatility of prices (the costs are more predictable).
• Users of energy are worried about future government regulation making the use of fossil fuels very expensive. A move away from fossil fuel reduces that exposure.
• Clients of producers (or the clients of these clients) demand a reduction of CO2 emissions related to the product they are purchasing. As long as energy producers have a substantial portion of their generation capacity in fossil fuels it will look better if a company actually produces some of its own energy in an environmentally friendly way.
• Small is beautiful in the eyes of the consumer. (In case in point why support for major windfarms is not as big as one might expect)

The rise of the prosumer will reduce the market share (in terms of MWh produced) of the big energy producers

The trend towards bigger companies and a lot of smaller production units however does all come together in the IT systems of the major energy companies.

Energy companies will be the IT interface

The main role for energy producers in this decentralised world will be the provider of the IT interface linking all the small de-central production units and the energy storing units with the consumers and the major production facilities such as the major wind farms and the remaining fossil fuel (gas) powered generation units.

To be able to fulfill this role the energy companies will require size so as to be able to respond to fluctuations in demand and supply.

This means that the two forces shaping the energy world will both lead to bigger companies running lost of small assets.

Smart grids and the changing role of utilities

Much of the focus when discussing smart grids has been on hard-ware, such as  heat pumps and energy storage opportunities offered by electric cars. It has struck me that not sufficient importance is given to the IT infrastructure and the operational intelligence required to actually run a smart grid.

Smart use of smart grids

Energy utilities are in an ideal situation to take a leading role in the development of smart grids as long as they remain agnostic about the elements that form part of the smart grid. The moment energy companies try and start dominating the heat pump and energy storage market they will be focussing on the wrong thing.

The money is in the smart use of the smart data supplied by the smart meters of the smart grid.

It will enable the energy company as a spider in the web to determine when to use what asset and optimise its revenue.

The money is in the data

This means that energy companies should be focussing on the collection and interpretation of data. Data has become  a most valuable asset judging by the valuation of Facebook and the same applies to energy companies.

Privacy objection are temporary

Collection and use of data has privacy implications. These privacy implications stopped the rapid introduction of smart metering in The Netherlands, It is however my impression that the majority of internet users are gradually coming to terms with the benefits of the web knowing what our preferences are. It would not surprise me if people actually start liking the fact that automatic marketing systems create offers for them in line with their preferences; and even if we do not like it, data collection about us appears to have its own unstoppable momentum.

Smarts grids means lower costs

The collection of data by energy companies has definite advantages to consumers because it will lower their energy bill.

It will lower their energy bill because:

1. the smart use of energy will reduce the amount of overcapacity that energy companies now have to  maintain and
2. it will lower their energy bill if they can respond to the pricing incentives that a good smart grid system can send to the clients connected to it.

Lower costs by moving the demand curve

Currently energy prices are set by energy companies using their cost efficient power generators first and their least efficient  reacting to more or less fixed in-elastic demand.

The price is determined by the least efficient generator.

The moment demand becomes more flexible energy companies will see their revenues drop as consumers will take less energy when they try and increase prices. It will no longer be the most inefficiency/expensive power generator determining the price.

The price will be determined by  the flexibility of the consumers fixing .

How to make money out of lower costs

Unable to set the price energy producers will see their income reduced, to make up for some of  this loss they can position themselves at the heart of the smart grid and make money as a result of that position.

1. By enabling consumers to get the best price out of the market some of that benefit will stay with them.
2. By optimizing the use of the various hardware parts of the grid. Energy companies will be paid for that service and,
3. By supplying energy to the grid (using their efficient wind parks and gas powered generation capacity)
4. By reducing its own costs as a smart grid will enable an energy producer to reduce its overcapacity.

Smart grids, in other words, offer energy companies an excellent opportunity,