The energy system we built over the last 100 years or so is in for a big change. In fact, the change looks close to a complete restart of the way we produce and distribute electricity for our everyday purposes. The obvious role model and primary example is Germany’s Energiewende, the transition of the entire German energy system away from coal and nuclear towards renewables. The nature of the Energiewende until now is that of a bottom-up, decentralized change strengthened by the German Renewable Energy Act set up in 2000. However, it all can be traced to a little town in the Black Forrest called Schönau and its “electricity rebels”, with Ursula and Michael Sladek developing the idea of “Rebel Electricity” under the impression of the nuclear fall-out in Chernobyl. In 1994 the Elektrizitätswerke Schönau went on-line and became the country’s first renewable energy provider with its own communal grid and organized as a cooperative. This informal and almost unnoticed start of the Energiewende some 20 years ago set the rules for how the transition towards renewables were about to unfold – and this up to the present day. In Germany only 5% of installed MW of renewable energy is in the hands of the “Big Four“: E.ON, RWE, Vattenfall, EnBW – with E.ON and RWE being also part of the UK’s “Big Six“. The rest is coming from private households, farmers, communal providers, project planning groups and investment funds. Similarily in the US, the recent rise in solar power production is also predominantly in the hands of the middle class: ordinary people investing in their own energy future. This has even caused a stir within the US Republican party with interesting new alliances between right-wing and left-wing libertarians.
At the same time, traditional suppliers are feeling turbulent times. Amidst all the fuzz about the UK’s Big Six misleading their customers about recent price increases, RWE nPower increasingly looks like being on the road for large-scale disinvestment. This fits with RWE’s and also E.ON’s grim outlook in the wider picture, where RWE is said to slash about 6.750 jobs until 2016 and E.ON – probably the planet’s largest electric utility – is hit hard by the drive towards renewables in its German homemarket. From looking at the history of the Energiewende until now, it is pretty clear that this comes as the most severe attack on the business logic of big utilities. The old energy system, however, is fighting back. In Germany there is a debate whether renewables should be charged a fee for a “base load ensurance” to the big utilities. As renewables still have a storage problem, coal-fired power plants and nuclear are still needed to provide security of some base energy supply. If this would become legislation, the feed-in tariffs for renewables would directly subsidize the big utilities’ existing power-plant infrastructure. In the UK, David Cameron is said to strip out green levies which push up energy bills. And at COP19, the just finished climate conference in Poland, the Global Electric Initiative announced that its members, the big utilities, “expect fossil fuels to continue to be the basis of generation capacity from 2015 to 2035.”
What we see here is a fine example of path dependency and failure to acknowledge that there is a new economic trajectory in the energy sector. While players like E.ON and RWE are fighting for conservation of existing structures and business models, Google is investing heavily in renewables, amounting to $1bn and exceeding 2GW of generation capacity. Google is not alone here, Microsoft and Apple also are joining in the renewable energy market with Apple building “the largest privately-owned clean energy facilities in the U.S. and more importantly, they represent an entirely new way for an internet company to source and think about power.” Creating electricity from renewables is not rocket science. Above all, it is fairly good and profitable business and it opens up totally new business opportunities. They may lie in the provision of clean electricity for corporate data centers, in some form of renewable energy management in the B2B market, but also in creating smart energy solutions for end consumers. Just think for a moment what the power of social networks, mobile applications, and well designed IT hardware in the form of tablets, smartphones or other digital devices can deliver for the concepts of smart homes or even smart communities. Internet and IT companies understand that customers don’t want to buy kWh of electricity but the services you can power with them. It is their normal business logic and they got their pockets full of money to invest heavily in a new energy system.
What is working also against the old system and their utilities is the technological development. The storage problem of renewables will be solved in the near future. Companies like Younicos in Germany or MIT spin-off Ambri are already showing solutions with new types of batteries, in the case of Younicos with very reasonable costs: for an 80GW grid around 200 of its battery parks would be sufficient for working around the base load issue, with an initial investment of about €3bn. Also the power-to-gas technology in the form of “renewable methane” looks increasingly feasible for both storage and setting up small-scale regional economic cycles around local energy production. The most severe driver of change might be the cost curve of renewable energy itself. Whereas onshore wind energy already is competitive with coal, photovoltaics (PV) will reach that point within the next 15 years. Given the huge boost to PV not only in Germany but also in the US and China, the sun really never sets on renewables. For the big utilities this has severe implications. They will hardly be able to avoid insolvency at one time, especially in Germany with E.ON and RWE having to pay for their nuclear legacy, as R. Andreas Kraemer points out. But also for other utilities in other countries the future does look grim – if they stay in their old business logic of centralized electricity production and sale of kWh. Maybe a feasible solution is to remunicipalize their grids and some of their other assets, building new communal energy companies which can partner more easily with energy cooperatives by ordinary citizens. Remunicipalization or some other form of “nationalization” may be unavoidable in any case as utilities’ lack of investment in newer and smarter grids endangers supply security – and they most probably won’t be able to invest in the future either for all the reasons given here.
Connecting the dots, the next 15 years will see a dramatic change in our energy systems with IT newcomers to energy like Google and Apple, companies from storage industries, remunicipalized utilities, and households & citizens’ cooperatives as the big winners. The big utilities increasingly look like Dinosaurs after impact.