international analysis and commentary

Twenty energy years from now

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It is a sunny morning today, June 4, 2038. Sweet warm rays of sun are filtering through the window and I can taste the healthy flavor of clean air. My hologram-based iPhone xx is showing the “Today” screen and my curiosity is piqued by a spinning hologram with the words “Nice Memories”. I snap my fingers and the iPhone randomly projects a memory of mine, dated twenty years ago: it is a picture of me, in May 2018, drafting a paper for a special issue of Aspenia on the energy transition.

I remember when I wrote that paper: I saw effective improvements in the future of energy but, at the same time, I had some concerns about it. So, looking back now, I feel really stunned: twenty years have passed in the blink of an eye! My head spins as I start reflecting on how the last twenty years have reshaped the energy sector: rather than just a transition it has been a real revolution.

“Matteo, your car is waiting for you downstairs,” calls out my Siri hologram. A driverless electric vehicle has just stopped in front of my house. I look downstairs and think to myself: “Was the transition really seamless?” At a first glance, it could seem so. I turn my eyes to the other side of the street where a high efficiency solar plant was built in 2019 to substitute an existing ccgt thermal plant, only to be replaced again, last year, by a nice green park where I now see kids playing in the warm sun. No need to use solar panels if your window is coated with thin film photovoltaic cells!

Seamless is the electric world in which we live now, but – believe me – implementing the new electric system was an extremely complex process, and rich in nuances. It was a historic challenge that overshadowed the huge build-up and worldwide cabling of the global electric system over the 1800s and 1900s.

PREDICTIONS, RIGHT AND WRONG. Rereading the paper I wrote twenty years ago for Aspenia, I note that on one hand I was right to predict that an increasingly high volume of “zero marginal cost” power generation resources would have endangered the incumbent utilities’ traditional business model. Today, nobody sells electricity by volume; rather, it is sold on fixed-charge “all-you-can-eat” type of contracts, or bundled and indirectly priced into the value of services that retailers and utilities provide to final consumers. Want proof of how far the world has come? Today, no player in the market even calls itself a “utility”. After the forced break-up of Google (mandated by the antitrust commission), the board of Alphabet – by then the biggest global supplier of electricity – decided to start calling its energy division “Simply” in order to underline the company’s mission to make its clients’ lives hassle-free.

On the other hand, in my 2018 Aspenia article, I was among the many experts who proved too conservative in estimating the actual system costs of accommodating such a large share of highly volatile renewable generation while seamlessly powering billions of clients in a stable, secure and flexible way. Battery deployment on a large scale was necessary to solve the problem, and the economies of scale were slower than anticipated in lowering the costs because of commodities shortages. In addition, we all miscalculated the sunk costs related to assets that became stranded as a result of the energy transition – mainly conventional thermal and nuclear plants, but also some portions of the distribution grid itself.

THE BENEFIT OF HINDSIGHT. In hindsight, I can now see that there were four major issues that made it possible for us to win the energy transition challenge over the last twenty years: renewables-centered market design, service-based retail plans, aggregation of virtual resources and the sharing economy.

In 2018, we were all expecting a growth in renewables; we knew that was the only way to achieve carbon neutrality and we were rightly anticipating further reductions in the costs per mw installed. But very few of us – including CESI – saw the magnitude of the green transition in terms of its impact on the power system.

The drop in the cost of photovoltaic materials and wind turbines made variable renewables viable at any latitude. Furthermore, investments – both in developed and in developing economies – rapidly shifted away from traditional fossil fuels to renewables. Over the past two decades, European renewable generation skyrocketed from less than 35% of total electricity supply in 2017 to more than 85% today in 2038.

Looking at market structures, the main problem in 2018 was that competitive wholesale markets (which priced electricity by kwh) were becoming increasingly ineffective in producing valid price signals for optimal allocation of resources and investments. How can you establish a market price when almost all suppliers are bidding at zero marginal cost? These markets had been introduced as a significant innovation in the 1980s-90s and conceived around the idea of competition among fossil fuel plants. When conventional generation sources began to get out of the equation we started experiencing extremely low wholesale prices in most “day-ahead” markets throughout the year, reducing profitability to every market participant. This meant markets were failing to provide the right signals to investors, including the ones willing to install new renewables.

WE’VE COME A LONG WAY. The 2038 electric system we now take for granted values generation resources according to the type of service they can provide to the system. As government incentives have been phased out, volatile renewables compete over auction-like long-term power purchase agreements. In the meantime, renewables are also remunerated through private contracts directly arranged between companies and energy producers. Such mechanisms give reasonable certainty of economic return to investors and keep the prices as low as possible for clients, simultaneously providing them with predictable medium- to long-term costs.

The modern system is now capable of sourcing its increased flexibility requirements (i.e. the electricity we suddenly need when a cloud covers the sun or the wind stops blowing) from many different technologies: utility-scale storage plants, distributed resources (batteries or demand/response solutions), some highly efficient gas turbines that are still around, and large interconnectors transferring clean energy across neighboring countries on modern – mainly hvdc – energy highways. These sources compete to provide the system with the energy needed to balance demand and supply in real time, by matching the natural volatility of power demand with that of the sun or the wind. By valuing each resource based on its instant availability and flexible “load-following” capabilities, today’s flexibility market is where most new technologies and market players find the highest profitability for their assets, creating a veritable value pool.

The retail market too underwent a disruption. Back when I was writing for the June 2018 issue of Aspenia, we thought the world was going to go in the direction of “full customer empowerment”. We figured domestic “prosumers” were going to be able to make real-time decisions about their energy usage. That turned out not to be exactly the case – at least not for most clients. Today’s consumers are certainly sensitive to protecting the environment, but they also demand an easy, hassle-free life; they are more than happy to leave it to a supplier’s algorithm to optimize their real-time energy consumption, based on price signals on ancillary markets.As producing electricity became cheaper and cheaper, a pure volume-based tariff soon became obsolete and inadequate. Like in many other sectors where fixed costs account for a substantial percentage of the total cost of service, today the cost of supplying electricity is much better reflected – and collected – through a fixed fee. And that fee is calculated almost regardless of the volume of electrons flowing into copper wires. That is what consumers pay in 2038.

Recalling what happened in the telecommunications business in the early 2000s, utilities and retailers moved away from pay-per-use contracts and switched most of their offers to monthly fixed-fee full electrification packages. In 2038, utilities sell a full service plan. Along with driving electrons, the plan includes a hardware and software platform to meet the consumer’s need for reliability, sustainability, home entertainment, smart appliances and also mobility.

To give a simple example, the plan I subscribed to back in November 2037 includes – in a fixed monthly tariff – the lease of photovoltaic panels for my rooftop, a battery storage pack placed in my basement to maximize self-consumption, and a full set of home automation smart devices (thermostats, smart lighting, etc.). All of this, plus reliable service and limitless extra electricity from the grid too. In such a plan, the value of flexibility is leveraged and extracted by my energy suppliers thanks to my having consented to hand over partial control of my assets and appliances. By signing up for this full electrification package, I have thus allowed my energy suppliers to provide flexibility services and sell them wholesale to the grid.

The benefits and opportunities of this model are clear on both sides of the electricity meter. As mentioned before, on the consumer side, we now enjoy “hassle-free” electricity supply: the lights are always on and we feel part of a new sustainable, efficient and high-tech environment where algorithms are dealing with all the boring and complex details of real-time optimizations. On the supplier side, such contracts make client retention easier: they tend to last longer and thus enable the sale of additional services through the digital hardware/software platform provided to clients (such as entertainment, connectivity and advertising).

However, for a utility, most of the value lies in the benefits drawn from managing user-owned assets. A utility can sell their aggregation on to the wholesale balancing market, as highly profitable flexibility services. This model was developed alongside the rise of prosumerism: in return for providing electricity, the aggregating utility has access to its customers’ installed battery storage capacity (including those on board their electric vehicles) and to their demand-response devices, that can be exploited as a sort of virtual power plant. In this way, the utility provides grid-balancing services to network operators, usually without any discernible impact at the customer’s end. By combining behind-the-meter “virtual” distributed resources (including fleets of electric car-sharing vehicles) and enormous utility-scale storage systems, aggregators can offset the risk of variable renewables’ long-term purchase agreements and trade valuable power on flexibility markets.

SOLID PILLARS AND FRESH BLOOD. Back in 2018, some predicted that the grid would be at risk because of consumers getting “islanded”. That was not the case at all. As I said, in 2038, the reliability and the ubiquity of the service is still what matters most. Transmission and distribution assets are still pivotal in the system, both as a last instance resource for prosumers and as a way to deal with the variability of renewable generation.On the transmission side, the grid is stronger and more interconnected now than in 2018. One example that saw cesi in a leading role as advisor was the design and construction – started in 2025 – of the large direct-current interconnection corridors that now run across the Mediterranean Sea. By linking North Africa with the Italian and Spanish shores, they serve to bring the desert sun’s energy up to Europe. Such corridors are now essential to keep our system clean and secure – and they also fostered economic development in northern Africa!

As predicted, the “smart grid” concept has now reached its full exploitation: automation is now embedded in systems able to manage small, peer-to-peer, electricity flows while keeping overall stability. A network of billions of sensors and actuators, part of what is called the Internet of Everything, monitors and controls the grid in real time, without human intervention.

During the 2030s, a favorable market environment made electricity the “energy vector” of choice in almost every industry. From heat pumps for residential heating to electric stoves, most appliances switched to the electrons. Such a shift in fuels had its biggest impact on urban livability, drastically reducing co2 and toxic emissions.

GETTING AROUND. Mobility, however, was among the industries most disrupted by the energy transition. From what I wrote back in 2018, it is clear we already placed a great deal of faith in electric mobility. And we were right. In 2038, more than one out of two newly licensed light-duty vehicles is fully electrified: the cost of batteries – though still threatened by raw material scarcity – is low enough to make them fully competitive with traditional vehicles (and emissions have decreased significantly from the latter as well, thanks to technological advancements). Nevertheless, we were missing part of the picture back in 2018. The pursuit of e-mobility was substantially linked to the concept of one-to-one replacement: as each and every gasoline- or diesel-fueled car wore out, a brand new Tesla or Nissan was supposed to enter into service. The new vehicle was supposed to get the same yearly mileage, expect the same driver behavior, meet the same daily needs. Turns out we are now moving in a somewhat different direction.

As with most recent transformations, digital technology ended up enabling a deep renovation in consumers’ habits. Remote working is now the “new normal”, and daily commuting is less and less common. Also, as we know, the level of pollution in big cities was reaching truly unsustainable levels. The solution most administrations envisioned was to slowly eliminate private transportation in city centers. The whole paradigm of urban mobility thus shifted toward the principles of car sharing and the down-scaling of vehicles.

Again, far-sighted utilities played a big part in this transformation. By becoming car-sharing fleet operators, infrastructure operators or service providers, aggregators and utilities shaped e-mobility to their own needs. They ended up giving relief to the local distribution grid through load management or by selling flexible energy to apartments, grocery stores and energy retailers. Naturally, cesi played its part in the mobility revolution as well. Alongside utilities and administrations, we studied the effective deployment of the recharging infrastructure to minimize its impact on the grid. Moreover, we were involved in the design and testing of the most technologically-advanced charging equipment by evaluating the profitability of business models and judging the outcome once a huge number of electric vehicles are connected to the grid.

EMBRACE THE CHANGE. All in all, looking back, if asked to judge what was farsighted and what was not in 2018, I would say we were still at the edge of the transition then. We were wisely going toward sustainability and innovation, but we were also assuming that the business models would remain substantially similar to the ones we had come to know over the previous 100 years. As soon as new players, new ideas and new technologies made inroads into the market, the very foundations of the power industry were shaken. Those utilities, suppliers, grid owners and system operators that were brave enough to move a step ahead of what appeared to be a foggy future – those that managed to seamlessly integrate technical knowledge and to foster real innovation – were able to embrace the green revolution and make a new, profitable energy future out of it.

From Aspenia International n.79