New Business Models for Utilities. Own consumption regulation and decentralized storage systems as basis for new business models

New Business Models for Utilities Own consumption regulation and decentralized storage systems as basis for new business models Berne, March 2015

Agenda Part I: Challenges for utilities 1. Developing and implementing a new strategy 2. Analysing the market 3. Analysing the needs of clients 4. Market disruption Part II: Approach for new business models 5. The market is evolving 6. Opportunities for new business models 7. Integration of decentralised energy solution systems 8. Success by focusing on customer needs Part III: Paradigm shift 9. Paradigm shift is about to happen 10. Dealing with the paradigm shift 2

Part I: Challenges for utilities 3

Challenges for utilities 1. Developing and implementing a new strategy New: Focus on customer and client needs Customers Products Markets are subject to constant change Utilities are facing many challenges: Energy transition Market opening Market Strategic Decisions Developing and implementing a new strategy includes anticipating trends: Market Technology Regulation Needs of clients Competition Earnings Company Organisation/ Processes Embrace change as an opportunity! Developing strategies means thinking in scenarios! 4

Challenges for utilities 2. Analysing the market (1) Changes in the wholesale market are affecting the established production technologies Base/Peak-Relation Annual averages Merit Order D 2020 Last: 50% Wind, 30% Solar Forecasted forward prices Loss in value for pumped storage power plants and peak load power plants Power plants with no or low variable costs are pushing the established production out of the market Source: power solution, Energiemarkt Info, Nov 2013 (Daten 2004 bis Okt 2013) Source: Verbund, Energy Fundamentals, Reuters, EEX 5

Challenges for utilities 2. Analysing the market (2) Energy Strategy 2050 = glut of solar power (Solarstromschwemme) Source: Prof. Dr.-Ing. M. Popp, Kurzzeitspeicheranalyse Schweiz, Study for Swiss Utility Solutions AG, 2014 Explanation Production PV / Run-of-the-river / Wind according Energy Strategy 2050 based on solar / wind / water conditions in June 2008 Findings Maximum load in low-voltage grid Daily peaks of PV up to 10'000 MW possible distributed storage systems are a must 6

Challenges for utilities 3. Analysing the needs of clients (1) Reliable and cost-effective supply of electricity Socket parity in Switzerland is about to be reached (socket parity in Germany already reached) PV electricity production = Decentralised production Germany Production cost PV 2013 Cost of procurement from utility (+1.0% p.a.) Increasing price gap Production cost PV (without subsidy) Own consumption regulation = grid escape (Netzflucht) Subsidies are leading to higher PV production The own consumption regulation increases the incentive to invest in PV. Decentralisation means diminishing solidarity in the grid (total cost of the grid has to be borne by fewer end user).[1] Source: based on Fraunhofer ISE, Studie Stromgestehungskosten erneuerbare Energien, 2012 (adaptiert durch SUSol 800 Volllaststunden für PV angenommen) [1] depending on capacity charge 7

Challenges for utilities 3. Analysing the needs of clients (2) Batteries: Increased security of supply and improved cost-efficiency Today grid-parity, tomorrow battery-parity Batteries will become competitive Procurement from utility/ cost of PV Cost of procurement from utility (+1.0% p.a.) Price gap supports the use of batteries Cost of PV (incl. 30% KEV-funding) Cost of battery Increasing price gap supports decentralised storage Current cost of molten salt batteries: (2013): CHF 750/kWh Decreasing prices for batteries can be expected Battery-parity could be reached around 2020 Battery cost reductions have only just begun Source: Own calculations (based on 5 kwh salt battery) Important for utilities: Small batteries (2-5 kwh) will be competitive first (from prosumer's point of view) 8

Challenges for utilities 4. Market disruptions Market disruptions due to regulation Market disruptions and effects on Business Models for Grids Flow of energy becomes bidirectional: stability of voltage on distribution-grid-level no ancillary services for low-voltage grid Decentralised production together with own consumption regulation leads to reduced sales and higher costs (grid reinforcement) New players in the market: Telecom companies Utilities Reduction of switchable loads: Electric heating Water heater Market disruptions and effects on Business Models for Energy Profitability of own production at risk Impairment (power plants and long term procurement contracts) Reduced Sales Lower specific consumption/higher efficiency Own production Increased complexity of balance group management Weather-dependent power generation (own production as production by customers) Flow of energy becomes bidirectional Sales and procurement are mixed up A client is also a supplier 9

Part II: Approach for new business models 10

Approach for new business models 5. The market is evolving (1) Utilities are deciding today about their role and standing in the future market Yesterday Today Tomorrow Unidirectional flow of energy Bidirectional flow of energy Utility as active player within the decentralised elements Transmission grid Transmission grid Spectrum potential developments Distribution grid Distribution grid Decentralised elements = Distribution grid controlled by the utility = Decentralised, semi autonomous grid segment Utility as insurer 11

Approach for new business models 5. The market is evolving (2) Grid parity of storage incl. decentralised storage changes the market for utilities Phase 1: no grid parity Phase 2: grid parity of PV Phase 3: grid parity of PV incl. storage End-user (with/without PV) Grid Prosumer Grid Self-sufficient Prosumer Grid Residual demand Residual demand 100% 30% > 70% 100% 70% < 30% 100% energy procurement from utility Own consumption regulation Is the PV-production at the same time as the need of electricity: own consumption Otherwise the residual demand or a surplus of production is balanced by the grid Prosumer covers the electricity needs by PVproduction and storage the residual demand or a surplus of production is balanced by the grid Funding model Growth controlled by funding PV-production profitable Growth can be partly controlled by tarifs PV-production and storage profitable Growth can t be controlled No reduction of sales High peak loads High investments in grid infrastructure Reduction of sales (grid and energy) High peak loads High investments in grid infrastructure Massive reduction of sales (grid and energy) Depending on utility (and regulation): o Maximum peak load o Investments in grid infrastructure Until 2013 2014-2018 from 2019 onwards (forecast) 12

Approach for new business models 5. The market is evolving (3) Own production regulation changes the market for utilities No grid parity Centralised system of electricity supply Grid parity of PV Centralised system of electricity storage Grid parity of PV incl. decentralised storage Decentralised system of electricity supply Micro-Grid Konsument Enduser Enduser Enduser Prosumer Konsu- Prosumer ment Decentr. Konsument storage NS Distribution NS Distribution Distribution MS MS NS MS Transmission HS Transmission HS Transmission HS Import/ Export Centralised production Centralised storage (PSPP) Import/ Export Centralised production Centralised storage (PSPP) Import/ Export Centralised production Centralised storage (PSPP) End-user are producing electricity due to financial funding (KEV) Mainly bi-directional electricity flow on transmission-level Centralistic" model Bi-directional electricity flow on all grid levels Own consumption affect centralised production and import/export Grid-extension and enlargements of centralised storage required Increased own consumption due to decentralised storage New forms of cooperation between prosumers and end-users (local energysupply-solutions) Increased effects on centralised production and import/export 13

Approach for new business models 6. Opportunities for new business models (1) Client behaviour is decisive No grid parity Centralised system of electricity supply Grid parity of PV Centralised system of electricity storage Grid parity of PV incl. decentralised storage Decentralised system of electricity supply Solutions currently discussed Centralised solution (smart grid) Grid extension and enlargement of centralised storage Import/export No continuous development Insufficient consideration of risks Insufficient consideration of customer needs Alternative: decentralised solution Considering potential of decentralised PV-production and storage Continuous development (scalable, no high upfront investments) New role for local utilities required (local energy manager) Knowledge about the role of decentralised storage and the effects of own consumption 14

Approach for new business models 6. Opportunities for new business models (2) Utility as promoter of decentralised energy solution systems Connecting the decentralised storage to the energy system of the utility to improve the stability of the local grid and to optimise the energy procurement for the local clients Storage-set (battery, power-inverter, control-unit, communication-unit) Grid - Energy Services Control-System Sales and installation System design Sales New installations Upgrading existing installations Installation Grid Smoothing peak loads Prevention grid extension Decentralised ancillary services Primary control Voltage stability Isolated operation of sub-grids Prosumer End-user Power producer Energy management solutions Leasing and rental model Operation and maintenance Support sales/procurement of energy Energy Reduction balancing energy Temporary storage of a surplus Arbitrage opportunities Intraday-trading Reduction of procurement risks Control-System New part of utilities (today) Leading role in the reconstruction of the energy-system/ System-manager / Innovator / Partner and service provider for decentralised solutions 15

Approach for new business models 7. Integration of decentralised energy solution systems (1) Integration of prosumer with decentralised storage in the energy management of the utility Prosumer: Maximising own production incl. storage under the premise of grid stability Prosumer EVU: Grid stability Security of supply Control Grid-friendly feed-in Production, Ancillary services Main-Control by Utility Local grid Utility The Integration of decentralised energy solutions in the energy management system of the utility is the key for battery sharing. Possible communication channels: Ripple control system Smart meter Internet-based solutions 16

Approach for new business models 7. Integration of decentralised energy solution systems (2) Interaction of direct an indirect control Interaction of centralised and decentralised control TSO Medium-sized production and loads Number: small Communication: bi-directional EMS Utility Control of a single unit Control of a swarm Smart Grid Intelligent Grid Energy management system (EMS) Utility Communication: uni- or bidirectional Interface Interface Interface Small production and loads Number: large Control Utility TSO 17

Approach for new business models 8. Success by focusing on customer needs Utility as operator and integrator of decentralised energy solution systems (in the long run) Utilities turn into providers of decentralised energy management solutions through battery sharing and corresponding energy management services Decentralised storage devices (batteries) and switchable loads can be jointly used to the benefit of prosumer and utility Increasing relevance of services for the business models of utilities Grid Smoothing peak load Preventing grid extension Reduction of centralised ancillary services respectively provide ancillary services where required Revenues: preserves the grid usage fee and the value of the grid Energy Reduction of balancing energy Providing decentralised and centralised ancillary services Arbitrage opportunities Intraday: temporal decoupling of procurement and delivery Revenues: Local energy-sales, sales of ancillary services, optimised energy-procurement, arbitrage Services Preventing systems without access for utilities (maximizing own consumption) by offering an alternative solution Utility as qualified, local service partner Role as local energy-system-manager Revenues: Sales of systems, installation, maintenance, operation Intelligently linking decentralized systems (production, storage, control) while taking the overall optimum (grid stability and economic considerations) into account gives utilities the opportunity to early position themselves as managers of a decentralised supply systems. 18

Part III: Paradigm shift 19

Paradigm shift 9. Paradigm shift is about to happen From just-in-time production to just-in-time demand today demand production follows demand (just-in-time production) production centralized ancillary services demand production tomorrow local ancillary services demand follows production (just-in-time demand) Local storage (battery) and switchable loads make demand flexible 20

Paradigm shift 10. Dealing with the paradigm shift Step-by-step approach to deal with the paradigm shift (illustration) Steps of development Step 1: Pilot project Step 2: Communication to benefit from excess storage capacities Step 3: Intelligent crosslinking of single systems Building the system step-by-step PV with integrated storage Supplied area Supplied area Content Build up pilot systems Rollout single systems Roll-out linked systems Goal Battery testing Obtain experience and data Obtain experience and data Testing battery sharing New business models Year one Implement and analyse pilot systems Design rollout-phase Prepare commercialisation Analyse market/potential/ competition Identification of partners concept for repositioning the utility Year 2-4 Linking systems step-by-step Testing the market Develop business models Choice of partners Develop entire system Integration in the organisation After Year 4 New business models, new products, new markets 21