Utility Week

28 | 19TH - 25TH JANUARY 2018 | UTILITY WEEK Customers Market view T he UK utilities industry is going through a state of market disruption. In Cap Gemini's latest World Energy Mar- kets Observatory, we looked at the disruptive forces of new start-ups on the larger suppli- ers and discussed what they might mean for the utilities industry as a whole. However, it isn't just providers who are looking to change the status quo. Our research highlighted that large corporations are searching for ways of generating their own energy and becoming self-sufficient, with the implication of leaving the grid. But what does this mean for utility retailers and what responses do we foresee from them? Grid Runaways There is a growing appetite by corpora- tions to produce clean energy themselves. Take Microso. The soware giant has set up windfarms to provide electricity for its data centres. This essentially means moving away from the grid for all or part of its energy requirements, and puts Microso into a type of consumer segment we call Grid Runaways. So, what factors help the growth of Grid Runaways, both in the business and house- hold markets? One is the promotion and culture that Microso is setting. However, it is the cost benefit of self-energy produc- tion that really matters, and as long as cost- effective and workable solutions are evolving, the growth is inevitable. The renewable generation LCOE (levelised cost of electricity; that is, the present value cost of electricity over the generation life cycle) has hit record lows. In 2015, onshore wind LCOE was around £30/MWh and this is expected to fall by 26 per cent by 2025. The cost of solar photovoltaics also continues to drop. Large-scale projects have LCOEs of around £44/MWh, with expectations that costs will fall further, by 59 per cent by 2025. At the same time battery storage is taking off. Battery costs fell by 80 per cent between 2010 and 2016, and the expectation is they will be at £140/kWh in 2020. Pioneering vehicle manufacture Tesla claims that fur- ther reductions are coming, anticipating that costs will drop below £74/kWh by 2030. These reductions in costs have allowed for integrated solar and storage solutions to become available for both business and household energy consumers. In the UK household domain, installations of home solar PV doubled between 2012 and 2014. In 2017, there were 770,000 solar PV projects registered for feed-in tariffs, itself a near 50 per cent increase on 2014. As further technology efficiencies and cost reductions follow, the probability of growing numbers of Grid Runaways increases. Even though electricity consumption is predicted to increase nationally – mainly due to vehi- cles becoming electric-powered and heating being transferred from gas to electrical – it does not mean the demand on the grid will rise equally. Grid Runaways will impact the network volume of energy sales, causing a net effect of either stagnating or falling revenues for energy retailers. The response should be finding alternative revenue streams and keeping a close eye on costs. The Grid Runaways are an evolving seg- ment of the energy market. They are a net- work of producers and consumers that will continue to have interfaces with the grid, as they over and under-produce relative to their consumption. They will also have interfaces among each other, as changing customer preferences mean they begin to purchase energy from local energy producers. Utilities have a role to play in this con- text. In one domain they can become trusted intermediaries, and through another can provide services tailored for home or busi- ness energy management. As intermediaries, they can build on the peer-to-peer theme, where customers decide who they receive energy from or who they sell their self-produced energy to. Utilities can facilitate a marketplace such as this by creating communities, managing relation- ships and transactions, and offering comple- mentary services such as asset maintenance, insurance and regulatory advice. Retailers such as Vattenfall, through its Powerpeers platform, is already doing this. Utilities can also go into the homes or businesses of the Grid Runaways and pro- vide energy management systems. Smart homes are at the heart of this. Our research predicts the European smart home market is destined to grow to nearly £16.7 billion by 2021. It is currently at nearly £4.4 billion. For Grid Runaways, smart home services must be tailored to their self-producing needs. For example, the energy manage- ment system could guide them on the best use of own versus grid energy. Such a service should be coupled with innovative tariffs and unique customer offerings that enhance the trust in utilities as an adviser and service provider. Keep a close eye on costs The utility industry in the UK is intensely competitive. In 2013, large suppliers owned 95 per cent of the market. They now own 82 per cent. With more choice, consumers are switching. At an aggregate level, 17 per cent of consumers switch supplier in the UK, using comparison websites more by the day. With smart meters ramping up and switch- ing becoming easier, this is bound to grow. Therefore, even if utilities are exploring opportunities to find alternative revenue streams, they still need to keep a close eye on costs. Some utilities will continue with their traditional approach of outsourcing, imple- menting innovative ways to procure, and using partnerships, but we believe some will also begin to take a fresh view by adapting long-term cost reduction transformations. Usually labelled as taking a "zero-based" approach, this means becoming more agile, adapting a cost-conscious culture, increasing accountability and enhancing visibility of expenditure. Cost reductions need to become cultural mindsets within utilities, with com- mitment from the top. Those who are to be successful will look to embed a sustainable paradigm, rather than embarking on short- term, quick cost reductions. Alain Bollack, vice president, Energy Retail Consulting, Capgemini; and Hessam Badamchi, managing consultant, Energy and Utilities, Capgemini Consulting Grid Runaways are coming Self-generation is going to be an increasingly viable choice for both companies and households, and utilities need to be able to serve this new customer type, say Alain Bollack and Hessam Badamchi.

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