« Back Reflection 11.12.2017

The disruption of electricity and the new roles in energy supply

Tomi Yli-Kyyny, CEO, Caruna:

Looking to the future is no easy task for power distribution companies as burning issues require our attention daily. Nonetheless, there is no doubt that the industry’s operating environment will transform. In ten years’ time, where will the energy industry stand?

In 2030, electricity transmission grids will have been rebuilt as weather proof, but the production of electricity will be weather dependent. The capacity of Finland to produce electricity will lag far behind peak consumption. Distributed generation of energy will increase, and electricity must be transmitted both ways. Customer behaviour will change: The customer will become not only a consumer of electricity but also a producer and storage holder. Technology will be an integral part of everyday life, and the Internet of Things (IoT) will be everywhere. The roles will be re-divided between the various players in the industry, because not even regulation can protect structures that lack competitiveness.

It is noteworthy that in our industry, technology has more disruptive force than policymakers. For instance, electric vehicles are already rapidly growing in popularity. Consequently, the problems related to storing electricity must be solved as soon as possible.

Megatrends shaping the market

Out of the megatrends driving the disruption of energy, climate change is probably the most critical one. To fight climate change, we need to increase energy efficiency, quickly adopt best practices and move towards sustainable energy solutions with determination. The energy policies and emission reduction targets set by the EU also affect Finland. Accordingly, Finland’s energy strategy aims at growing the share of renewable sources of energy and domestic production: By 2030, Finland’s degree of energy self-sufficiency should be at 55 per cent, and renewable energy should cover half of total consumption. Carbon dioxide emissions must be reduced by 39 per cent, and the import of oil should be cut to half. These objectives will be difficult to meet, and the recent revisions to subsidies offer no relief. What measures will be required here in the Nordics, where the easy steps have already been taken?

Digitalisation is disrupting the market and increasing customers’ expectations towards services. For example, Tesla and SolarCity are already following a new kind of business model, which includes the recycling of batteries and the leasing of solar panels. The customers’ expectations no longer follow the dividing lines between industries, and the so-called service gap is growing: Customers want clearly defined, clean products and simple prices that they can understand. Moreover, they want service providers to help them improve their energy efficiency. There is still work to be done in measuring up to these expectations.

In the years to come, the key concepts in the industry will include smart grids, demand side management and electricity storage. Fingrid, the Finnish national electricity transmission grid operator, has started a project aiming at creating a data hub, which will facilitate demand side management for consumers of electricity. This will enable consumers to become active players in the electricity market if they wish to do so. With the data hub and consumption data from smart meters, solutions such as mobile applications for controlling heating and lighting in the home can be created.

Another megatrend affecting the business outlook for distribution companies is urbanisation. In Finland, for instance, more and more inhabitants are moving to the areas in southern and southwestern parts of the country that are covered by Caruna’s distribution network. This is a line of development that is difficult if not impossible for distribution companies to influence.

The new value chain of electricity supply

So who will play which part in the electricity market of the future, and what will be the incentives for the various players? At the moment, nobody knows what the new paradigm of the market will look like. The current operators in the industry have differing views and wishes regarding the future.

Finnish Energy, the branch organisation for the industry, has stated that the outlook for profitable retail of energy has weakened. Indeed, an increasing number of technology-enabled services that offer customers added value are being developed. What is more, actors from outside the energy industry are interested in creating smart energy solutions for homes. However, according to Finnish energy, it is more difficult for new operators to find a niche in the Finnish market than elsewhere, because local energy companies are close to their customers and closely involved in developing the field. Also, the price that Finns pay for energy is low in relation to the level of service provided by the companies.

According to the Finnish Ministry of Economic Affairs and Employment, as a result of the lifting of restrictions on the retail market for electricity and the following increase in the prevalence of demand side management and decentralised production, the role of distribution service operators will change: The maintainers of the grid will become the drivers of the market’s development. This means that in addition to providing a well-functioning grid for the operators in the market, distribution companies will be in charge of developing smart grid properties further. Fingrid, then, has argued that a green electricity system requires strong transmission connections. The grid must be strengthened so it can support the temporal and regional shifts in the production and consumption of electricity. What will be the outcome of these lines of development? Who will sell electricity in the future, and in the end, what will be the product that is sold?

The size of the market is not going to grow, but the profits are likely to be divided in a new way. If consumers become small-scale producers, the share of traditional operators will be cut down even further. The winners of the future may be found among completely new operators, who offer consumers services that are independent of the grid. In any case, the player who is best at analysing and refining data will hit the jackpot. The market model is centring around retailers, and distribution companies may well end up with an even stronger focus on B2B business. But is a one-stop-shop for electricity-related needs enough for customers, or will there be demand for an even simpler, more holistic service model for living?

There are plenty of questions, and responding to them requires an industry-wide dialogue. It is essential that we form a holistic vision of the future, elucidate the division of roles between the various players, and strengthen collaboration within the industry.