The energy transition initial lessons for utilities and regulatory frameworks Siemens The Future of Energy

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2 The energy transition initial lessons for utilities and regulatory frameworks Siemens The Future of Energy Executive Director Martin Graf, MBA Energie-Control Austria (E-Control) May 7 th, 2015

3 European energy markets are distorted by diverging European and national policies Objectives: cost-effective market orientated innovative cost-efficient The European Climate and Energy Targets until 2020 ( 2020 Targets ): 20% reduction of European greenhouse gas (GHG) emissions in comparison to % reduction of final energy consumption in comparison to 2005 ( energy efficiency ) 20% renewable energy share (RES) of EU-wide total energy consumption The European Climate and Energy Roadmap until 2050: 80% reduction of European GHG emissions in comparison to 1990 while ensuring security of supply and affordability and accessibility of energy ( energy trilemma ) The European Climate and Energy Objectives until 2030 ( ) 40% reduction of European GHG emissions in comparison to % reduction of final energy consumption in comparison to % renewable energy share of EU-wide total energy consumption 07/05/2014 E-Control 3

4 Nevertheless a lot has been reached until now although EU-progress towards the 2020 goals Source: European Commission, 09/2014 E-Control 4

5 ..the lessons from the past years show that the energy transition is not going smoothly The transition towards a low carbon economy is more costly than necessary due to diverging policies and incompatible national support schemes. The completion of the internal energy market (IEM) is faltering as member states pursue national energy objectives. Political uncertainties are hampering investments in necessary (cross-border) energy infrastructure. Wholesale prices are declining, while prices for households and small businesses are augmenting due to political costs (i.e. RES levies) RES generation and weak electricity demand is putting a squeeze on traditional generation and on necessary base load plants. The energy import dependency is increasing, endangering security of supply and leaving Europe more vulnerable to third countries. 07/05/2014 E-Control 5

6 A set of key trends and systemic changes are changing traditional energy patterns Solution to volatility Power-2-Heat Big Data Data Privacy&(Cyber-)Security RES Virtual Power Plants DSM Smart Meter System Balancing Smart Prosumers Power-2-Gas E-Mobility Smart Grid Source: European Commission, 2014 E-Control 6

7 Endconsumers Energy Market In hand with these changes additional customer needs and preferences emerge yesterday today tomorrow margin competition know-how monopoly central generation + fossil generation follows demand low complexity; little competition competition through customer relationship know-how distribution distributed/central + RES Increasing complexity; new market entrants competition by solutions distributed + RES demand follows generation high complexity client-specific energy solutions Recipients Customers Prosumers - security of supply - low energy prices economic energy prices energy efficiency / autarky participate in energy transition eco-balance / sustainability reduction of complexity smart energy solutions (products, services) comfort Development of additional customer needs and preferences E-Control 7

8 Traditional utilities are in an urgent need to face up to challenges which diminish their profitability Climate Change & CO 2 -ETS Phase-out of Nuclear Power (Germany) Self-generation & Prosumer Stagnating Demand & Energy efficiency European Financial and Economic Crisis Low (or even negative) Energy Wholesale Prices RES-Promotion & Penetration Political Intervention & Re-Regulation Shale Gas Generation Overcapacities E-Control 8

9 Prominent example is the split up of E.ON which separates itself from its former core business Source: Thomson Reuters, FAZ, , Calculation based on company annual report 2013 E.ON SE - Renewables - Distribution - Customer Solutions Uniper - Thermal Power-generation - Global Commodities - Exploration & Production renewable E.ON KPIs*: - ~ FTEs - EBITDA: ~ 5.3 Bn. - Debts: ~ 31,0 Bn. - Profile: attractive growth conventional E.ON KPIs*: - ~ FTEs - EBITDA: ~ 4.0 Bn. - debt-free - Profile: free cash flow driven E-Control 9

10 A broad change in utility s business models is yet to take place to respond to changing needs Stage 1 Optimization Stage 2 Experimentation Stage 3 Business Model Innovation Stage 4 Commercial Roll-Out optimization of existing (ailing) business segments focus on closely-related but yet not exploited business areas (i.e. energy efficiency) search for and identification of potential strategic partners realization of pilot projects (i.e. smart meter, smart grid, e-mobility) exploitation of new innovative ( smart ) business models commercial evaluation of market potential organizational implementation commercial largescale roll-out of smart products and services incumbent companies Developing customer needs remain unsatisfied by current offerings potential for new market entrants E-Control 10

11 Today s energy related system challenges can be condensed to 5 key action areas Energy Market Design and RES-Integration Network Tarife System Energy Grid-Infrastructure Energy-Efficiency Austrian-German Wholesale Energy Price Zone E-Control 11

12 The European Commission aims to address these issues under the concept of an Energy Union Energy-Union Energy Security, Solidarity and Trust Internal Energy Market Modulation of Demand / Energy Efficiency Decarbonisation of the energy mix Energy Research and Innovation E-Control 12

13 Thank you for your attention. Executive Director Martin Graf, MBA E-Control 13

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15 Concluding Remarks The European energy transition pays nearly no attention to heating and mobility. Greater focus is needed on achieving climate and energy objectives in a costefficient, market-driven and cost-effective way. Market-distorting subsidies (both for conventional and renewable generation) pervert markets. Free-riding of the system should be avoided. Increased attention must be given to no regrets moves such as energy efficiency and demand side services in order to deal with intermittency and peak demand. Lower cost routes to deliver climate and energy policy should be exploited. A strong, coordinated and consistent policy approach on a European level is necessary to face up to the energy challenges of the future and provide predictability for private investors. E-Control 15