Business models for small scale renewable energy production

Business models for small scale renewable energy production

Preface: Since the beginning of 2012 the county administrative board of Östergötland has been leading a regional as well as an international network partnership consisting of the East Sweden Energy Agency, Träcentrum, The Swedish forest agency, the Podlaska regional development foundation. Vidzeme planning region and the Estonian University of Life Sciences. The network has been financed by the Swedish Agency for Economic and Regional Growth Tillväxtverket and by the Swedish Institute. The aim of the network has been to find ways of improving the conditions for small scale renewable energy production. One of the obstacles identified is the lack of suitable business models for small scale renewable energy production. This report is sort of an entry to the business model challenges that lie ahead to be solved.

Introduction: The Energiwende is a German term defined as a process towards a future without nuclear power, and Germany are in many ways a pioneer in this area. To achieve this Energiwende, the society has to use renewable sources for energy production to a greater extent. When the use of fossil energy decreases, the German utilities and energy suppliers will have to adapt their business models because of the change in the energy market. Energiwende has become a synonym for the process of a successful conversion to renewable energy and the phase-out of fossil and nuclear energy. The EU-directive on energy market liberalization completely changed the market and its conditions and in the last two decades the European utilities have been facing major changes in their markets and environment. Electricity from renewable energy plants has priority in the grid and is often supported by feed-in-tariffs in order to realize the Energiwende. Hence, big power plants have to be operated under partial load for long periods of time and because of that they cannot reach their full potential. As a consequence the classic utility business model based on producing electricity in large-scale production plants and then selling it to customers, often over long distances, is seriously challenged. In the paper Small Scale, Big Impact Utilities New Business Models for Energiwende Marko identifies several challenges facing the European utilities that emphasises the need of rethinking the classic UBM and to develop new BMs for small-scale distributed renewable energy generation (DREG). One problem concerns the development targets for renewable energies. The usage of renewable energy in the electricity industry has increased over the last couple of years due to political decisions and directives, and today electricity from renewable sources has priority in the grid. However, the volatility of wind and solar generation creates problems in balancing the demand with the generation of energy and operating the conventional power plants in part load. To solve this problem it is important to make it possible to forecast the generation of renewables. Another problem that arises when more renewable energy is being produced is that the conventional power plants have to reduce their output when the renewable power plants start to produce. This will lead to more part load phases and less efficiency. Another challenge is the cost pressure and aging of conventional power plants. If the conventional power plants have to be shut down for longer periods or operated under partial load they cannot reach their full efficiency and the cost of their electricity production rises. A third challenge that Marko highlights is the change of customer interests and their bargaining position. Because of the renewable energies entrance on the electricity market the conditions have changed. More actors and investors have entered the

industry and there are operators of renewable power plants of very different sizes. However, the traditional utilities and electricity traders are still key players and with all these actors the competition on the market is much more fragmented than before. Additionally, the customer today is more involved since he is often also a producer. Thus the bargaining position for the utilities is weakened. The last challenge in Marko s article concerns the industries cognitive barriers concerning distributed renewable energy generation. The electricity industry is important for a state and its economy. The main goal is to create a stable system that secures the energy supply along with a reasonable price for energy. However, now the energy market is facing more complex and innovative BMs that requires the utilities to adapt and change. Due to this paradigm shift in the electricity market where renewable energy is entering the market the traditional utilities and their BMs are being challenged. Business Models: There is no general definition of a business model and there are many different interpretations and ways of using it. The first time the term business model was used in academia was in 1957. Since then, the term has seen many different interpretations and definitions. A business model basically explains how a company is doing business. It explains how value is created and captured for the customers, the company and its stakeholders. Even though there is no common definition, there is however some elements that most researchers seem to agree on when it comes to the function and content of a business model. For example, it is widely accepted that business models emphasise a holistic approach in explaining how companies do business, that organisational activities influences and are important in the conceptualisation of business models and finally that business models is striving to explain how value is created and captured within the company. Marko chooses to use Osterwalder & Pigneurs definition of a business model: A business model describes the rationale of how an organization creates, delivers, and captures value. This definition is based on nine building blocks that cover the four main areas of business: customers, offer, infrastructure and financial viability. These building blocks also constitutes Osterwalder & Pigneurs framework for analysing business models, called a business model canvas, which will be presented later on. The nine building blocks are as follows: 1. Customer Segments defines the different groups of people or organizations that the company aims to reach and serve by its products or services. 2. Value Propositions describes the bundle of products and services that create value for a specific Customer Segment. 3. Channels describes how a company communicates with and reaches its Customer Segments to deliver a Value Proposition.

4. Customer Relationships describes the types of relationships a company establishes with specific Customer Segments. 5. Revenue Streams represents the cash a company generates from each Customer Segment 6. Key Resources describes the most important assets required to make a business model work 7. Key Activities describes the most important activities a company must do to make its business model work 8. Key Partnerships describes the network of suppliers and partners that make the business model work 9. Cost Structure describes all costs incurred to operate a business model Source: Osterwalder & Pigneur, Business Model generation (2009) 1 The problem with defining a BM has direct impact on the definition of a Business model innovation. BMI can be seen both as a process and a as a result of a BM-change. Additionally, there are different opinions on how to define the object of innovation. Some see BMI as an innovation of one, two or more BM-elements, while others argue that BMI stands for the innovation of the complete BM. Marko chooses to interpret BMI as the process of improvement and change of at least one element of the BM. When a company changes its business model it is often a gradual change and it does not have to mean a fundamental change of the company s value propositions. Usually a change of a business model contains one or more of the following forms: introducing alternative and the creation of new and innovative building blocks, modification through small and progressive adjustments or the creation of alternative building blocks. According to Chesbrough (2010) a company s business model makes it possible to define the value proposition, identify the value chain which is required to deliver the offer to the customer and to visualise the position that the firm has in the relation to suppliers, customers and competitors. Thus a business model is vital to understand how a company s system works. Business models also have a competitive purpose. If a company develops a business model that is revolutionary and hard to copy it gives a competitive advantage within that industry. Hence, distinction is the key to survival and a good business model should illustrate why and how the company will survive in the future. Today the utilities and their BMs are facing a lot of challenges. Earlier, the utilities role was simply to buy and provide the grid with electricity, where they have found themselves in a very passive role. This in turn has led to the utilities losing market shares and revenue because of the growing diffusion of DREG- units. As if that was not enough there is also an imminent risk that the domestic energy demand from the gird will decrease due to new technological innovations like energy saving in buildings and energy management. Consequently, a growing interest in BMI, preferably in combination 1 http://www.businessmodelgeneration.com/downloads/businessmodelgeneration_preview.pdf

with renewable energy technologies, can be distinguished. Marko highlights a few papers on BMs that he considers to be relevant for small-scale energy units of which one of the will be presented in the following paragraphs. The first paper he addresses is written by Sauter & Watson (2007). They combine the customer s and the utilities role in installation and operation of small-scale distributed generation. The result is three different deployment models that will be briefly presented below. These models represent possible ways for the utilities to find their role as partners for energy supply in the future. The first model is called Plug and Play which means that the consumer is willing to invest and operate a micro-scale unit in order to become partly independent of the utility. In the Company Control model the consumer has a passive role. The utility operates a couple of mini-generators in order to substitute a large central power plant. The last model Community Grid is based on consumers and institutions of a smaller geographical area coming together to build and operate a micro grid consisting of smallscale generation units. In this way they have control over their units and of balancing the production and the demand in the grid. The conclusion that Marko draws from this is that the most important conditions for BMs in distributed energy supply has already been examined but there is a lack of practical examples and details. He points out that the diffusion of technological improvements and infrastructural systems along with services that are not related to utilities provided by third party partners are important for the possible activities in the energy market. Business Model Canvas: Osterwalder & Pigneur (2010) have designed a framework, called A Business Model Canvas, to identify and analyse business models. It is based on Osterwalder s four pillars: product, customer interface, infrastructure management and financial aspects. These in turn builds on the nine basic building blocks: customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partnerships and cost structure. The business model canvas and the four pillars can be used to analyse and compare different business models. The first pillar is product and it deals with the value proposition of a firm. The value proposition refers to products and services provided by a firm to its customers. It is important for companies to consider and reflect upon if the products and services they provide add any value to the customers. For managers it is also important to keep in mind that value propositions can t be made or delivered, only offered. The second pillar is infrastructure management which deals with suppliers, partners, resources, activities and capabilities in order to turn value propositions into real services and products. To be able to understand how a firm can get a competitive

advantage in the market, one has to be aware of the product strategies and the internal structures and resources within the firm. The third pillar is customer interface and deals with the relationship with the customer, which customer segment that is important and which distribution channels that are used. The goal is to identify and reach segments with products and services that customer needs and wants and to establish a close customer relationship. The fourth pillar is called financial aspects. It is vital that a firm s cost structure matches the ideas behind its business plan. A business success is in many ways determined by financial factors and the revenue streams can be seen as an indicator for what the customer is willing to pay. Marko s Business Models: Marko presents five new BMs for small scale DREG that challenges the classical utility business model and which could be generally applied in the electricity industry. The two first are suggested for mass costumers and the last three for individual customers. The BMs are based on analyses of different customers, already existing BMs and new technology for renewable energy production. BM1 Combined Heat and Power Plant Contracting: The first BM is based on the financing of a biomass/biogas fuelled CHP plant by a contracting model. The customer operates the CHP plant by himself on his site and pays for the obtained heat and power. Included in the price are the costs for installation, fuel, service and maintenance. BM2 Fuel Cell Contracting: The second model focuses on customer segments with a higher technological or ecological awareness and the willingness to use a high-tech-device for their heat and power supply. Like the first BM it is based on a contracting model but due to the technological complexity of the system, in this BM the utility provides a full service, including operation. To optimise the output of electricity, a thermal storage should be integrated in the system for buffering the produced heat. BM3 Complete Service Package: The third BM includes all services needed, from energetic analysis and planning of the energy system, to project management and installation along with operation, monitoring and maintenance. This means that the composition of the package needs to be arranged with and adapted to the individual customer. Potential customers could be companies operating medium-sized properties, small industries as well as municipalities. BM4 Heat Intensive:

This BM is mainly developed for individual customers with a high heat demand who also produce biomass waste and heat waste. There are two variants of the BMM; in the first variant the utility acts as planner, installer and additional primary energy carrier supply partner. The other is a complete service variant with an electricity and heat supply contract. BM5 Power Intensive: The last model is a concept for electricity intensive businesses in the field of trade, small-industry and commerce. It is particularly suited for firms operating machine tools, production and handling equipment as well as firms that need process heat mainly powered by electricity, but also department-stores and supermarkets. For the customer the main advantage is the reduction of electricity purchase through self-production along with the optimization of the firm s energy system. Biogas Business Models: The business models presented in the following paragraphs are examples of already existing business models for developing small-scale biogas plants. A Business Collaboration Model (BCM) is defined as an alliance between two or more organisations who decides to share technological, commercial or financial resources with each other to obtain competitive or operational advantages. There are several BCMs related to biogas production. Some of them will be presented below. According to Chavez and Torres (2014) a BCM needs to take human and technological considerations in account besides the commercial, financial and operational aspects. Cluster: A geographic concentration of interconnected businesses, suppliers and institutions in a particular field. Generally clusters are considered to increase productivity with which the companies can compete nationally and globally. However, the success of a cluster depends on and requires an understanding of the region and its economic processes. Coopetition: Cooperation between competitors; a combination of creating value and its division. Some of the advantages that can be foreseen are cost reductions and technological transfers. The model involves different actors such as suppliers, customers and competitors. The fact that companies in the same market work together may lead to the exploration of knowledge and new products. A possible disadvantage is a competition for market-shares between the companies. Synergy: A synergy is the interaction of multiple elements in a system to produce an effect different from or greater than the sum of their individual effects. The synergy can lead to increased revenues, cost reduction and a combined talent and technology. On the other hand a synergy can lead to ambiguity in roles and responsibility if they are not clearly defined between the stakeholders.

Collective actions: Two or more parties coming together to realize a common goal. The main advantage is that they are more likely to achieve the objectives together than on their own. A disadvantage could be that it leads to free-driver problems, that some exploit their rights. Cooperatives: Autonomous associations of companies voluntarily coming together to cooperate. The advantages with cooperatives are that it is cheap to register a cooperative and all participants must be active. The cooperative is owned by its members and not by any investor. A Possible disadvantage with cooperatives is that it might be difficult to attract members or shareholders if they are expecting a financial return. The purpose of a cooperative is not to give its members a return on investment, but rather to a service. Successful Examples: Below are some examples of success stories related to the construction of small-scale biogas plants in Sweden, Germany and Poland that have been presented in the Handbook for Small Scale Anaerobic Digestion and Business Collaboration Models and are part of the BIOGAS3 project. Sweden: In Sweden two examples of success stories are presented. The first case is Långhult Habo, a beef cattle producer, where a part of the energy produced is utilized on the farm and the rest is sold to the grid and to a neighbouring greenhouse. The BCM applied here is private funding and support by public subsidies. The main advantage of this model is the low commitment level, the low risk to partners make it easier to form partnership. The strong points for success gained from this case are valorisation of thermal energy for self-consumption and the use of digestate as fertilizer in agricultural activities. The second case from Sweden is Kulbäcksliden, a farm with milk production where the biogas is used for heat and electricity production. The BCM used here is the same as in the first case; private funding and support by public subsidies. The investment costs are kept low by self-construction and consultants. Germany: The case from Germany is taken from GieBen in Hessen where there is a slurry-only anaerobic digestion plant to treat cattle and slurry and manure. The BCM used is private funding and the produced thermal energy is used for self-production and the electrical energy is fed in the local power grid. The success in this case can be traced to the valorisation of both thermal and electricity energy and the increase of the value of the farm. Poland: The chosen example from Poland is an agricultural biogas plant in Kujanki. It was built to produce heat for the neighbouring pig-farm and was later equipped with a CHP unit.

Most of the energy produced is sold to the national power grid. The rest is consumed by the pig farm (25%) and the biogas plant (5-10%). The BMC is private funding and the strong points for success are self-consumption of the produced thermal energy and the adaption of the existing infrastructure. In Poland there are several examples of BCMs that have been successful. Most of them are collective actions with different kinds of cooperation between actors. There are examples of cooperation between a scientific unit and an entrepreneur to use company resources for the implementation of a new project, cooperation between entrepreneurs and a scientific unit and an agricultural holding. It can also be a cooperation based on substrate/education. Moreover, there are examples of biogas plants in the vicinity of farms and in the vicinity of industrial plants. Swedish Local Heating: Small scale production of renewable energy and heating can be produced at farms or in small communities for a limited number of people and properties. LRF has written a guide for local heating where the boiler house is fired with locally produced biofuel, such as wood ships. The heated water is then led to the connected properties through underground pipes. There are many benefits with local heating; it contributes to a good environment, it is safe and economical. When it comes to the environmental aspect of local heating, the greatest benefit is that biofuel is a renewable energy source and thus good for the climate. There is a great need to phase out fossil fuels and replace them with renewable energy like biofuel. Local heating also contributes to keeping the profits and the job opportunities on local level. When it comes to producing and selling heat, the success and profitability is dependent on the business skills of the producer just like in any other kind of business. However, individuals that produce heat to consume by themselves will most likely benefit from it. For houses that use water heating a shift to local heating will definitely be profitable. Future Needs: In the report Economic Evaluation of Biogas Production at Farm level the Rural Economy and Agricultural Societies has examined and evaluated farm biogas plants with focus on technology, economy, biology and service. The aim was to spread knowledge about biogas production from farms and to formulate advisory for the industry. Profitability: The profitability of biogas production is very much dependent on the individual production plant. In this report some of the reasons why many of the plants are unprofitable have been identified. Low gas production: Many of the plants have been stuck in a start-up mode for a long time because of technical problems. Some of these problems have been solved but there

are still many plants that do not reach their full efficiency and thereby have a low gas production. Disposal of produced energy: A majority of the production plants have had a low using rate of the total production. Approximately 29 percent of the produced energy have gone to waste, or in other words not been sold outside the company or been used within the business. Energy price: When the plant owners decided to build for biogas production they expected the already relatively high electricity prices to increase or at least stay the same. Instead the prices fell from 0,5 kr/kwh to 0,3 kr/kwh. That means that those energy plants that do not have to depend on the market prices usually are more profitable. The size of the energy plant: There has been a discussion whether the size of the plants have an impact on the profitability or not. The conclusion in this report is that the size of the plant matter to a certain extent, but not when it comes to profitability. However, some of the factors that do affect profitability are presented below. The market/farms energy need: By adapting the power/heath plant to the energy need of the market/farm one can adjust the production and make it more profitable. Access to cheap material to decay: With low energy prices it is important that the raw material needed for the production is cheap for the production to pay off. Biogas production/efficiency: When the plant is installed it is vital to make sure that it delivers gas according to the plan to optimize the production. Management: This point refers to the attitude, willpower and dedication of the producer. Like all businesses the success partially depends on the determination and ambition of the operation manager. Good and relevant knowledge is important as well since biogas production is a new branch of production. The conclusion is that there is a need for a support system for the production of biogas. The advisory must continue to support and spread information on how to make the production more efficient, profitable and adapted to the market conditions. It is also important to solve the beginner s problems that many producers have. These problems are both biological and technical and they need to be solved for the sake of future plants. Furthermore there is a need to develop and improve the system for biogas production in farms. Need for research and innovation: One of the biggest obstacles for the agricultural sector to produce bioenergy has been unprofitability. This is due to the lack of suitable technology, a fragmented industry and

a lack of knowledge about marketing and sales. Not to forget in this context is also the political decisions and their influence in this area. The political decisions affect the price on the market which in turn might affect the demand for the product and thereby the profitability and opportunities within the industry. Actions are needed to stimulate new investments and adjustments to meet the demand and need of the customer. There is a need for more research on the whole bioenergy chain and generally more knowledge, especially if the agriculture sector ought to be not only a producer of food but also a producer of biomass and bioenergy. New business ideas, companies and business plans are necessary for the agricultural industry to be able to evolve and prosper in this area. Regarding the need for more research, the focus should be on the last part of the production chain, such as the refinement of the product and business- and skills development. The product needs to be adapted to the consumer in order to be profitable. There is considered to be good opportunities and potential for expanding the use of locally produced biomass in small to medium-sized plants. In general it is considered to be good potential to increase the use of locally produced biomass in small to medium-sized enterprises, such as farms and local heat plants, but also in smaller CHPs. The agricultural sector is, and will be, an important player in the future when it comes to the future biogas production, primarily by establishing farm plants for production but also as supplier of biomass to other consumers. Further reading: SMALL-SCALE, BIG IMPACT UTILITIES NEW BUSINESSMODELS FOR ENERGIEWENDE, Wolfgang Arthur MARKO Business model generation, Alexander Osterwalder & Yves Pigneur Ekonomisk utvärdering av biogasproduktion på gårdsnivå, Hushållningssällskapet German energy suppliers from the perspective of business model dynamics, Stephan Benedikt Bruns Handbook: Small scale Anaerobic Digestion (AD) Business Collaboration Models (BCMs), Javier Claros Lantbruksbaserad småskalig bioenergi och biomassaproduktion - En agenda för behov av forskning och innovation, SP Report on new business models for SMEs in renewable energy and energy efficiency in MED area, SMARTINMED NÄRVÄRME - med gemensam fliseldad värmecentral, LRF