- How is decentralization of energy affecting the industry?
- How can utilities co-exist with communities and individual prosumers?
- How can fair energy prices be guaranteed in this new economy?
by Lexie M. Ryan
Edmund A. Walsh School of Foreign Service, Georgetown University, USA
“Decentralization is spreading and forcing utilities and regulators to reevaluate traditional business models and pricing structures.”
The global drive toward decarbonization is altering the value of traditional methods of energy production; people care more about the effects their energy has on the environment, and are increasingly willing to opt for greener, local fuels when presented with the choice. Improvements in solar PV production methods are deflating the price of turning a house’s roof into a power production facility while also increasing the efficiency of the panels. The digitalization of the energy sector is enabling greater end-user engagement, while blockchain technology helps ensure energy platforms between communities and users quickly and securely manage transactions. The growing desire for consumers to have a bigger say and role in their energy production, coupled with advancing technology enabling this process, means decentralization is unlikely to lose steam.
Not every customer wants more say in how the energy they use is produced. But unanimous support is not necessary to keep the momentum rolling. In a political democracy, not everyone votes – in a democratic energy system, we may see similar apathy with some energy users. Even the consumers who want a bigger role in their energy production may have priorities and habits that are misaligned with grid requirements and will have to adapt. For example, consumers may need to alter their energy use to fit renewable energy production. Despite these complications, decentralization is spreading and forcing utilities and regulators to reevaluate traditional business models and pricing structures.
The establishment of new financial models for decentralized energy has the potential to cause the most pain for utilities. Negative pricing – already seen in California and Germany – will become increasingly common. On top of this, utilities are facing increased competition to produce and provide electricity with non-traditional entities, such as communities and individual clients. Because of this, utilities’ roles and business models are shifting. In the next few years, utilities and grid operators may devote more resources in upkeeping microgrid infrastructure, and ensuring the resilience of connections between community grids. Utilities may also earn money based on storage installations and upkeep. Crucially, utilities may still provide energy from centralized, traditional power plants to offset the intermittencies of renewable energy production. Lastly, utilities may help manage data that connects microgrids.
It falls upon regulators to make sure prices in this new energy economy are fair and accurately reflect priorities. How can the price of different energy sources best reflect its value? Who will meet idle costs of centralized power plants? How should data best be securely processed? How can prices be fair to consumers in rural microgrids that are unable to distribute costs between many users? These are just a few questions that regulators will have to take into consideration.
Unpacking two of these questions demonstrates the complexity of the task at hand; for example, how to determine an energy source’s value, and how to make prices accurately reflect value. Distributed resources in the grid’s congested spots have a higher value than production in places of low demand. In an economy where consumers increasingly make value-based decisions, rather than just comparing prices, energy produced by renewable sources has a higher value (and sometimes lower fuel cost) than energy from fossil fuels. At the same time, centralized power plants that are expensive to maintain can help offset the intermittencies of distributed renewable energy for the time being.
Determining the most efficient way to adapt the existing system to fit the demands for decentralization without breaking it will require the initiative and collaboration of everyone involved. Progress requires change, and change begets disruption: disruption to business models, to traditional pricing structures, to consumer habits and mindsets. These challenges are daunting, but initiating the transition to a cleaner, greener, more resilient future is worth the effort.More EUW Blog articles