This does not necessarily mean continued ownership of the assets by the energy companies, however. In future, a more asset-neutral approach may be expected to emerge.⁶ Indeed, this trend is already in evidence, as ownership of generation is diversifying. Initially, this was seen with a wave of independently owned wind farms. More recently, the trend has continued as millions of consumers have invested in solar generation. Looking forward, a similar pattern looks set to emerge with growing installation of domestic scale batteries. Asset ownership is becoming more diversified and decentralized to the extent that, increasingly, each house/business or, with aggregation, cluster of houses/businesses could be considered as an asset.

As an example of a possible model for the future, Statkraft has built a successful business in Germany based on aggregating renewable generation plants from smaller developers, and offering trading and risk management services. They have over 9.5 GW of wind and solar energy from more than 1300 sites under contract, which dwarfs its small portfolio of hydro and gas generation in Germany. As a result, Statkraft is the largest direct selling company in Germany and one of the biggest traders in the German day-ahead and intraday markets, without owning any wind assets there. It is notable that their “asset-light” approach is concentrated on portfolio management and trading and risk management, rather than a full focus on retail and the needs of household customers.

Ongoing market design changes in Europe are increasing the potential for this model to be applied more broadly. Now that renewable energy has a significant role in many markets, the emphasis is increasingly on integrating renewables into the market rather than insulating them from it. In the European Commission’s recent Clean Energy Package,⁷ for example, we are seeing proposals for balance responsibility and, prospectively, removal of priority dispatch for all but the smallest renewable installations. In addition, there is emphasis on future support regimes for renewables structuring payments around their revenues from the wholesale market. Entering into arrangements with an aggregator to provide trading and risk management services in the vein described above is one option available for dealing with greater market exposure.

Therefore, having access to a portfolio of resource across generation and demand, integrating commercial arrangements with the assets of others into this portfolio, will be an important feature of the future energy company, as well as a valuable service to others in the market.

But the nature of risks within the market is changing. The growth of renewables has increased price risk but has also brought volume risk to the fore. Thermal plants now have real uncertainty over when and how much they will operate, as running patterns flex around renewable generation output with near-zero short run marginal costs. The challenge lies in that the industry broadly continues to trade the same products as 10 years ago, which suited the risks faced at that time, but are not geared toward the risks of the future.

For example, a decade ago, most CCGTs would be able to predict reasonably well their likely running patterns for the coming weeks, months, and even beyond, based on expectations of typical demand patterns and fuel prices relative to coal generators. But today, a CCGT’s output is dependent on wind and solar levels, which are only known in the nearer-term, and so it does not know its likely hourly production profile significantly ahead of real time. Unlike the situation 10 years ago, the CCGT now has volume risk, as well as price risk, changing the basis for forward energy trading. The spark spread relates to a profile of generation that has not been seen in most of Europe for 5 years. A negative spread just means that the market is trading the wrong products.

New trading instruments are available, though, in the form of options. This is a natural product to complement trading of firm energy. Generation capacity can essentially be considered an “option” to produce energy. While all production capacity represents such an option, some resources offer greater flexibility than others in how the option can be exercised and how frequently. In an increasingly decarbonized system with high levels of low carbon generation, energy market volatility could be significantly greater, increasing the value of such options.

The appropriate response is to ensure that market participants are able to trade energy “options” in the form of a sufficiently broad range of products mirroring the various types of services the market requires. Multiple option variants could be developed to reflect different requirements, such as deliverability and flexibility, and to suit the capabilities of different types of capacity. Our own suggested approach develops the concept of capacity as an energy option and proposes a bilateral model for the trading of energy “options.”⁸ Under a bilateral approach, options for use of a resource can be sold by the provider to other parties who may require flexibility to balance their own positions (e.g., as a complement to variable generation resources or to help manage retail positions).

Moving forward, traders need to find means of packaging risk and managing complexity in ways that will continue to bring in capital for new projects. The new risks need new market instruments, such as the energy options discussed above, to manage volume risk and complement the markets for delivered energy. With a system of energy options, parties with flexible assets could sell options for access to their flexibility to others, such as retailers who are then able to exercise the options when needed to access energy and help manage price volatility. This gives:

As an alternative to trading hedges, another possible route for risk mitigation is offered through physical hedges. Tesla provides an example of an integrated model, which now spans electric vehicle, solar PV panels (since the acquisition of SolarCity⁹), and electricity storage through its Powerwall product. Through its Supercharger network, Tesla (for now) offers free fast charging for its EV owners; and the addition of solar and storage to the mix offers the possibility for customers to break links with traditional utilities and instead rely on Tesla for all their energy needs. Importantly, this is all under the banner of a well-recognized and established brand. Customers buying into the Tesla product range will have a long-term relationship with the company, given the lifetime of the underlying products themselves. Tesla has the ability to define these relationships such that it can access the flexibility offered by the fleet of EV charging activities, storage, and generation assets of its customers. It also has a way in to become the energy supplier for its customers and their Tesla products. Therefore, through its brand and products, Tesla hopes to make big waves in the energy market.¹⁰

This is a powerful new resource. It allows utilities to obtain a much clearer understanding of consumer preferences and behavioral patterns and, therefore, the needs and requirements of their customers. To make the most of this opportunity, utilities need the ability to effectively access, analyze, and process the new sources of data to harness the valuable information that they contain concerning consumer behavior. Based on this, utilities will have the ability to develop propositions that are suited to the needs of the consumer and so capture value. This, in turn, may open opportunities to bundle energy with other services. This theme is picked up further as part of characteristic 5 below.

Energyworx provides an example of a company harnessing big data for use in utility sector applications.¹¹ Energyworx converts data delivered through smart meters and sensors into propositions that its clients can act on. Utility clients benefit from Energyworx’s high granularity information about individual consumers’ energy consumption through faster and more accurate billing to consumers, more precise demand forecasting for planning generation, or better targeted pricing and marketing depending on their customers’ installed energy equipment. Equally, prosumers benefit, for instance, by being better able to judge whether they should consume or redistribute their energy or by being able to compare their energy efficiency against other users from the community.

Big Data methodologies and enhanced connectivity of devices will also revolutionize day-to-day operation of the system. With the increased complexity of a decentralized system, the challenge of efficient operation will multiply. Efficient optimization requires better data on the state of different devices and their ability/willingness to respond. Additionally, more powerful tools are needed to allow data to be turned into intelligence and control. But in many regards, data are not available today in timescales that support such optimization. For example, it is remarkable that the settlement timetable for domestic customers has barely changed since the time when urgency in data transfer meant using first class instead of second class postage.

The modernization process in energy has begun. Domestic “smart metering” is gathering pace. However, it is rudimentary and far from being universally applicable. There are beacons of positive development, though. For example:

The full “Internet of Things” vision may be overkill for the energy system for now, as electricity costs for most applications are low and transaction costs are material in that context. However, it is clear that existing information gathering and monitoring tools in many markets are not yet fit for the decentralized future. Capitalizing upon the functionality offered by rapid advances in IT and communications technologies offers the chance to forge a model for the future focused around the customer.

However, for the demand side to become truly active by changing consumption patterns in response to system conditions, users will not want continuous active involvement. For most domestic consumers, the potential saving even from very sophisticated decision-making is low. Typically, households in Europe pay around €2 per day for electricity in total, and the saving from optimal consumption patterns is a fraction of that. With (flexible) electric heating or vehicle charging the value increases. For example, to charge a 30 kWh electric vehicle battery, the saving based on typical day–night tariffs in United Kingdom could be €5 or more per charge. But these decisions will still need to be automated if users are expected to take optimal decisions everyday. This requires energy companies to offer excellent, user-friendly, and robust automation tools, which allow users to retain control.

Therefore, decentralized decision-making must become automated, and the customers’ experience should not be affected. In this vein, in the United Kingdom, npower has partnered with Nest Labs,¹⁴ who specialize in smart thermostats and smoke/CO detectors.¹⁵ The Nest Thermostat learns from the user and programs itself based on this, while also allowing remote control via smartphone. This provides the consumers with energy for heating based on learning from observed patterns of behavior, while also offering control where desired.

German company beegy¹⁶ offers another example where consumers enjoy automated integration of a suite of smart energy technologies behind a streamlined interface. Their service consists of managing a home’s PV panels, Tesla Powerwalls, and EV charging points through a single beegyHUB, whose activities the homeowner can track through a web portal or smartphone app. The company consolidates all beegyHUBs Germany-wide into a single beegy Community. Algorithms allow users to store their energy or feed it into the Community when their consumption dips below their generation capacity. Alternatively, when their consumption exceeds their domestic generation and stored energy, users can also draw on the Community for electricity—at a flat rate that beegy locks in for 20 years. The company also offers its clients constant monitoring of their equipment, providing a 20-year warrantee for all products. Alongside this specific German example, the chapter by Löbbe & Hackbarth describes examples of innovative companies in Germany.

Heating represents another area where smart technologies could enable demand-side response. Glen Dimplex, the world’s largest manufacturer of electrical heating equipment, has been focusing since 2015 on this issue through the RealValue project, in collaboration with partners from Ireland, Germany, and Latvia. This 3-year project, funded through the EU’s Horizon 2020 program, aims to demonstrate how Smart Electrical Thermal Storage (SETS) can, along with a management platform and interface for end users, meet domestic heating needs while also acting as energy storage capacity for the electricity industry.

The trend of twinning automation and user-friendly apps with energy applications is clearly on the rise, with early movers seeing and benefiting from the access to and engagement with consumers that it offers.

Ultimately, most successful mass-market business models involve a combination of high volume and low margin sales accompanied by opportunistic niche sales with higher value. To be sustainable, the higher value sales need to be based on predicting and then meeting customer wishes. The bundling of services may be within the energy sector or extend beyond. For example, cars or appliances may come with an energy supply agreement.

Again, Tesla is an example here. Its branding is an essential part of its proposition and its customers feel that they are buying into the brand. Strong brands from the nontraditional, newer entrants into the energy sector may hasten the demise of traditional integrated energy companies, whose own brands have, in some cases, been tarnished by concerns regarding misselling to or profiteering at the expense of their customers. Trust in conventional utilities has been negatively affected, as a result.¹⁷

A successful energy business must build a strong relationship with its customers, including trust on both sides, and has to build a good understanding of its customers’ needs. It must come to think of its relationship with customers as part of its asset base, noting that, in a long-term business, assets must be carefully managed to not be exploited.