Managing Director & Senior Partner
Europe’s power utilities are entering a period of great uncertainty and change, with seismic shifts transforming the energy landscape. Energy security concerns and related worries about price and political volatility are driving governments across Europe to reexamine the source of energy supplies.
Meanwhile, the climate imperative has moved up the agenda, with European policymakers expressing clear political support for the move to a low-carbon society. European Union targets for 2020 aim at reducing greenhouse gas emissions by at least 20 percent from 1990 levels, applying energy-efficiency approaches to cut usage by 20 percent compared with projected levels, and having 20 percent of EU energy consumption come from renewable sources—collectively known as the 20-20-20 targets.
In the face of these security and environmental concerns, one scenario is a partial continuation of the status quo: carbon reduction targets would be met by expanding the use of both large-scale renewable-energy and conventional technologies such as nuclear power and by developing both large-scale renewable-power generation and carbon capture and storage, which would allow for the continued burning of coal for electricity.
In this paper, however, we focus on another potential development for European power generation: prospects for a distributed-energy system in which decentralized and renewable-power generation eventually displaces conventional power plants, reducing the balancing role of the transmission grid and shifting intelligence to the distribution grid through the creation of local and regional energy systems. This scenario is much more disruptive because it transforms many of the industry’s common beliefs. It does create many more opportunities for business model innovation. However, it also presents severe challenges to the leading incumbents.
Meanwhile, the regulatory landscape is also evolving rapidly. With political will gathering behind the ambitious 20-20-20 targets, renewable energy is entering the portfolios of power generators at a rapid pace. Promoted by a wide range of subsidies, renewable energy is claiming increasingly large proportions of the power supply. Solar power and onshore and offshore wind power have emerged as prominent sources of energy, with many—such as solar—coming from distributed-generation plants.
At the same time, the old centralized systems that deliver a one-way supply of electricity to consumers will be increasingly displaced by localized generation, and the future power landscape will include a larger proportion of small-scale sources, such as cogeneration through combined heat and power (CHP) plants. Moreover, some energy will be produced by consumers themselves, through a distributed network of power that incorporates everything from rooftop wind turbines and solar panels to CHP microplants (micro-CHPs) in consumers’ cellars.
In the process, conventional power generation will assume a less prominent position in the hierarchy of energy technologies, with centralized power plants facing lower use as the demand for and availability of cleaner sources increase. Meanwhile, power utilities will be required to strengthen their role in balancing increasingly complex ranges of fluctuating energy sources, especially renewables and microgenerated power.
Utilities will also need to develop new business models to maintain the profitability of traditional power generation. These will include increasing the flexibility of their generation fleet, or power plants, to enable them to profit from price fluctuations and, potentially, from fees for providing backup capacity rather than from hours of power sold in the day-ahead market. Utilities must act to bolster revenues as their traditional-generation business model fades with the reduction in annual running hours of power plants. They will also need to invest in smaller decentralized technologies, “smart” flexible power plants, and sophisticated energy-management systems so that they can capitalize on the increasingly diverse range of power sources coming into play.
Some liken these trends to the history of the information technology industry, which moved from the mainframes that dominated computing in the 1970s to client-server and networked computers in the 1980s and 1990s and then to the open systems that exist today. Cloud computing allows users to share software and data over the Internet, without a centralized processing system.
And if the evolution of the energy sector is starting to reflect that of the IT sector, the IT sector is also invading the energy sector’s territory, particularly through a further transformation in how power is managed—the implementation of smart grids. Smart grids (which use digital technology to allow greater visibility of energy use and power flows), supported by smart meters, allow bidirectional communication between utilities and customers, facilitating a two-way flow of electricity. Smart grids therefore create the possibility for more flexible pricing mechanisms and the opportunity for both private and corporate consumers to contribute to the power supply as “prosumers1 Notes: 1 The term “prosumers” is used to indicate market participants who are both producers and consumers of power. At some points in time they feed power into the grid, and at others they need additional power. ,”1 Notes: 1 The term “prosumers” is used to indicate market participants who are both producers and consumers of power. At some points in time they feed power into the grid, and at others they need additional power. who switch between net production and net consumption of power.
This paper, based on extensive research, interviews with industry experts, and forward-looking analysis conducted by The Boston Consulting Group, examines these disruptive changes and the factors shaping the new decentralized-power landscape. We also discuss the implications for utilities and the risks and opportunities they face as the power sector undergoes its biggest transformation since Thomas Edison’s invention of the light bulb.