Article | What impact does the rising demand for renewable energy have on incumbent energy and utility players?

Article | What impact does the rising demand for renewable energy have on incumbent energy and utility players?
2nd November 2015 Atheneum Team

The rising demand for renewable energies is a strong trend that will continue to grow over the coming decades.

Energy can have different forms: heat, fuel for transport, or electricity.
The field where the increasing share of renewable energies will have the largest impact is electricity, so we will mainly concentrate on this sector, although biofuels, wood, wood pellets or biogas will also develop in the near future and impact their respective markets.

First led by a purely environmental driver (the need to produce electricity without greenhouse effect), renewable energies were mainly introduced in developed countries that could afford mechanisms of payment for a higher price of electricity. The different structure of this market created new actors: wind park developers, farmers owning a few wind turbines, private households covering their roofs to produce PV electricity.
When the market eventually became large enough, utilities became more interested and are now leading the renewables market, but not as much as they are dominating fossil or nuclear electricity production and distribution.
Some utilities, such as German utility e.on, have decided to concentrate on the production of renewable energies and to get rid of all fossil and nuclear productions. This clearly shows the interest in this form of production, but the impact on the market will certainly be deeper than just shifting from one fuel to another.

Due to improved technology and mass production effects, the prices for wind energy or photovoltaics have dropped significantly and have now reached grid parity (the sales price of electricity on the free market) in many situations. This price reduction will continue, and in parallel, the cost of fossil fuels will increase with the increased pressure of climate change.
Therefore the electricity, which was built around large utilities managing large power plants, will be impacted by these changes more radically in the coming years.

One important aspect regarding renewable energies is the free fuel. The cost structure of a renewable energy project is made up of investment costs on one side, thus fixed once the project is completed, and maintenance costs on the other side. In particular there is no variable fuel cost which can change in a completely uncontrolled manner based on, for example, the dollar to euro rate or on tensions in the Middle-East.
In a certain sense, this is very similar to mobile phones. Important investments and operating costs are mainly linked to maintenance, marketing and sales. Within a few years, the market of mobile phones has turned increasingly to flat rate fees that match more closely this cost structure. First, the flat rates were for a defined number of hours of communication, and now, unlimited flat rates are common. It is therefore very likely that, as a parallel, we will see offers for flat rates of a given amount of green energy, and then in a few years, an unlimited amount.

Another important aspect is that renewable energy is of human size. A nuclear power plant is 1 GW and thus very centralized, and calls for a structure such as a utility to be able to finance and operate it, and have a large customer base that can absorb all the production.
On the other end of the scale, a PV panel can be installed onto a rooftop and produce the energy to fuel a household. Provided you add batteries, which store the electricity during sunny periods for use when there is no sun, and you can virtually disconnect the house from the grid.
A famous car and battery provider recently made an announcement in that direction, pricing the battery pack for a house below 4000$.
We are already very close to the flat rate for electricity!
The same goes for a village or a small town that builds a few wind turbines, a biogas plant or wood pellet plant to provide combined heat and power and a few PV panels. The town then becomes energy independent, or at least relies on the grid only to ensure the balance of its energy, exporting when too much energy is produced and importing when the demand is higher than production.
Therefore, both on the individual houses side and in some larger communities such as towns or companies, it will be possible to produce its own electricity, at a price that is quite known and fixed as it is mainly based on investment.
In that respect, utilities as we know them will have to change because they will lose a customer base from which they are currently making a high profit. Furthermore, in order to balance their business, they will have to increase their prices for remaining customers, thus leading to a higher rate of lost customers. It is feasible to imagine that they may install renewable energy production devices and operate them. They could also provide services based on smart use of electricity, or shared devices to reduce the cost of storage and make it more efficient…

Finally, the current grids were designed for centralized power plants (coal or nuclear, for example), which then distributed their energy towards the consumers at the end of the line. On a concrete and physical level, this will of course have an impact as there will be less need for high voltage power lines with the increased share of distributed electricity. This has already been observed in many countries where the development of renewable energy was hindered by the structure of the existing grid, which required new investments.
The shortening of the distance between the production and the consumption points will also tend to reduce the losses on the grid. Losses in the transportation grids are for example currently estimated at 2.5% in France.

Of course, not all electricity can be decentralized and there will still be a need for larger centralized production plants such as the hydro power plants, which are currently operating, or the offshore wind power plants, which are developing in many countries in Europe and elsewhere.

Altogether, the conjunction of a price structure with no fuel cost, the possibility for the end user to own its own production plant and the potential to decentralize production closer to the needs of energy mean that renewable energy will have an impact on the structure of the market and the key actors will have to adapt to the changes which, as with recent changes in domains such as the phones or photo industry, will be very rapid once the economics – in this case, the price of electricity produced by renewables – allows for evolution.