Energy decentralisation: why is everyone talking about it?

The decentralisation of energy markets around the world is accelerating. Its effects are most noticeable in countries where behind-the-meter (BTM) energy generation, in which a business or household produces its own energy, has become entrenched. In parallel with the rise of renewables, we are seeing systemic changes to the way energy is produced, distributed and sold. In foregoing the traditional centralised energy network, with its small number of predictable sources, countries around the world are testing innovative new approaches.

Decentralised Energy Exchange or “Virtual Power Plants”

In Australia, where rooftop solar has surged to account for 16% of all renewable energy generation, the government, big businesses and start-ups have come together to launch a pioneering new flexible energy marketplace: Decentralised Energy Exchange (deX). The venture is challenging the common concept of households being solely energy consumers, here they can also be active suppliers.

How does it work? The deX exchange system operates as an energy marketplace. At times of a power demand surge a call goes out to participants, triggering households to auction excess self-generated or battery-stored power back to the grid at market-determined prices. The deX system aggregates energy-generating households and businesses based on their locality, such that their combined energy supply is large enough to represent multiple virtual power plants which the grid can call upon. The aim of the scheme is to promote investment in renewable energy, reduce costs and stabilise the electricity grid (Guardian).

Peer-to-peer Energy Trading

In Germany, where the halt of all nuclear energy generation programmes in 2011 shifted the focus firmly towards renewables, we are seeing the development of household peer-to-peer energy trading networks. These networks are in some cases being sponsored by traditional power companies as they attempt to secure their futures in the emerging energy economy.

How does it work? A start-up Shine, incubated by RWE, is one of such network facilitators. The system allows users to optimise their own use of solar energy with a home energy management kit and connect to others for buying and selling the locally-generated power. Through this process, consumers are encouraged to improve their understanding of energy usage and how the investment in renewable sources can help them to be more independent.

Internet of Energy

The UK’s dominant energy provider, Centrica, is concentrating on large energy users and investing heavily (£700m over 5 years) behind its Centrica Business Solutions arm. This business provides Demand Side Response (DSR) systems, Combined Heat and Power (CHP) generators, solar panels and battery storage units, all enhanced by an energy IoT insights platform, which is seen as a key enabler of the new business.

How does it work? Centrica acquired a startup, Panoramic Power, which provides wireless sensors and an analytics platform. Together, the system allows for full visibility of a business’s energy estate, promoting improved cost management and operational efficiency, as well as enhanced engagement with energy usage. Centrica is now able to make bespoke recommendations based on the data in terms of what benefits the addition of new technologies could bring, including return on investment. Jorge Pikunic, MD for Centrica Business Solutions summarised: “Speaking to customers from a variety of sectors, we know that they are looking for ways to improve their resilience and opportunities for growth. Energy can play an important part in helping them to tackle these issues but we understand it can be challenging to know where to start.”

The traditional centralised power generation model is being disrupted and the shift towards more distributed, flexible and autonomous methods of energy production and distribution is coming into spotlight. This rapid move towards decentralisation comes about as the world today experiences uncertainty over future energy prices, a move away from older and more polluting energy sources, and increased occurrence of natural disasters highlighting the dangers of the reliance on a single power source.

As energy market changes accelerate with the adoption of innovative new technologies and fresh business models, both business and consumer sectors are embracing this new energy frontier.

Rapid growth of Behind the Meter (BTM) energy generation and storage in the commercial market

Businesses are increasingly opting to generate their own energy on-site, as enhanced energy-storage capabilities together with Demand Side Response (DSR) systems provide more opportunity for them to access the benefits of business continuity, enhanced resilience, reduced costs and even revenue generation.

On-site energy generation and storage is also getting cheaper as the underlying technologies mature. As the price of self-generation falls, businesses are more likely to consider it, especially as it also eliminates national grid energy transmission and distribution costs, which make up a significant proportion of retail power prices.

The challenge for on-site generation has always been the high up-front capital expenditure required to install the technology. Increasingly, however, distributed energy providers are offering financing arrangements with payback linked to energy savings and revenues created by selling power back to the grid through DSR. DSR works by connecting a business’s energy assets, the grid and an energy management platform to help organisations benefit from the increased energy use flexibility, trading energy with the grid at the times of under/over-supply. This includes both reducing energy use at times of peak grid demand (e.g. by coming off grid or by switching off machinery) and feeding generated energy back into the grid to meet high demand. New business models and financing arrangements like these should be one of the critical keys to unlocking energy decentralisation in the business market.

In addition to price and financing incentives, we are also seeing technological improvements in batteries such that the challenge of the intermittency of renewable on-site generation is being overcome. Batteries are becoming so effective that businesses can now store solar-generated energy to either be sold back into the grid at times of peak demand or used to power business operations even under overcast skies.

Despite the regulatory incentives in favour of renewables taking a hit in recent years, we expect these commercial incentives to rapidly drive energy decentralisation, particularly in the business market.

Aggregated virtual power plants, EVs and the automation of energy trading in the consumer market

The process of decentralisation will be slower in the consumer market, but we see several technological advances that should drive decentralisation along similar lines to the business market.

First, smart energy grids, such as deX in Australia, will enable the aggregation of energy-producing households. This in turn will create virtual power plants for national grids to call upon to balance power supply and demand in the network. Once households can be aggregated together in this way, they will be able to produce enough of a critical mass of energy for the grid to rely upon them as active participants in a decentralised energy market.

Second, for households to store renewable self-generated energy effectively enough to participate in a dynamic energy market, a significant improvement in domestic batteries is required. We expect one source of this to be provided by Electric Vehicle (EV) companies who are investing heavily into the initiative. According to Blackrock, EV sales will reach 25% of the global auto sales by 2030 due to the plunging lithium-ion battery prices. The battery technology built into EVs can provide a dual-purpose for households. Not only will they be used to power cars, but they can act as flexible energy storage to be dispensed into the smart grid when required. Nissan are paving the way; together with one of the UK’s biggest challenger energy suppliers, Ovo, it will offer a “vehicle-to-grid” service to buyers of the Japanese carmaker’s new Leaf model from next year.

Third, to remove the friction which many households feel in relation to the energy market, it is going to be necessary to lower the level of interaction required for households to participate in a decentralised energy market. The savings/earnings households can make by trading self-generated energy with the grid will not alone be sufficient to incentivise a behavioural shift whereby people trade energy themselves. Instead, AI trading bots, like those utilised by investment bank trading floors, will be required to drive household participation. Households can then set their buy and sell price thresholds (or just sit back!) and allow a bot to trade on their behalf throughout the day, turning energy from a cost into an income.

All this future gazing leads us to a highly decentralised business and consumer energy market, enabled by renewable energy technology, DSR systems, dynamic smart grids, EVs and AI. Investors and innovators should see the changing market as a huge opportunity, with some of the biggest technology and business model disruption destined to happen here. Meanwhile traditional energy providers must change their approach, and harness this change to remain relevant in the future.

If you need help with industrial changes, Sia Partners can help. Learn more about our services in the Energy & Utilities Sector.