Renewables Update

The global energy transformation requires new business models!
Big energy utilities should stop trying to ignore the zeitgeist of modern decentralised energy production in Japanese

18 April 2014 Stefan Schurig, Director Climate Energy, World Future Council

The global transition towards renewable energy can be mapped out in three phases. Phase one is to invent and develop the technology up to a marketable level. Phase two is to make it cheap, or at least cheaper than conventional energy systems. Phase three is to modernise step-by-step the existing energy infrastructure on the basis of a decentralised energy production and a smart distribution system. This means crowding out the use of fossil resources and nuclear power plants through an inclusive renewable energy economy.

While it is clear that these three phases have large overlaps and that certain technologies and countries are at different stages, it is fair to say that we have almost accomplished phases one and two. This is certainly true of power generation technologies from wind and solar energy. Yet it seems that phase three is far more difficult than the first two phases – not because of any related technological challenge but because of the fact that the existing energy companies have not even started adapting their business models to the new world of thousands of small-scale energy producers. In fact, many of the utilities are still trying to artificially slow down the renewable energy uptake. Recent developments in Europe and Germany provide some telling lessons in this endeavour.

Europe was for a long time at the forefront of the globally needed energy transition. It took on a leadership role in confronting climate change. In fact, many experts saw the astonishing renewable energy uptake in the EU as a beacon of hope within the global economic crisis. Between 2000 and 2009 the EU pioneered a new global economy of renewable energy and managed to benefit a great deal from it. Hundreds of thousands of jobs were created in just a few years, not only in manufacturing but in every single part of the supply chain.

Even better, the energy revolution was led by hundreds of thousands of farmers, small cooperatives, home owners and other individuals. Germany, by way of example, increased the share of renewable energy in total energy consumption from 3% in 2000 to 25% in 2010. More than one-third of global renewable energy capacity was built in the EU, accounting for some 130 gigawatts excluding hydropower. Today the EU is only 6.6 percentage points short of the 2020 target of 20% renewable energy share in final energy consumption that was outlined in the 2009 renewable energy directive, a success that is based on the significant progress made in the first decade of the millennium.
However, thousands of micro-energy producers have become a serious threat to the large energy utilities. Just recently Reuters reported that Germany’s utilities E.ON, RWE and EnBW are struggling with the Energiewende, or the energy transition. Again, this is not due to any insurmountable technical challenge but rather because of the fact that the utilities have for too long been in opposition to a modern energy sector and have tried to stick to their outdated business model.
Falling consumption and growing renewable power have cut the German wholesale price of electricity by 60 percent since 2008, making coal, gas and oil-fired plants unprofitable to operate. Some12 GW of nuclear plants belonging to the aforementioned companies are scheduled to be retired by 2020 under Germany’s nuclear phase-out programme. RWE has now to write off nearly $4 billion of assets. The CEO of RWE called this “the worst structural crisis in the history of energy supply.” Crisis? Absolutely! But entirely self-inflicted.
What we are witnessing in Germany and Europe is not so different of what will be the case in other parts of the world. Energy utilities making their money from selling electricity and heat from fossil fuel or nuclear will try to defend their business model as long as possible. But I have no doubt that the massive cost decline of renewable energy will drive us through the various attempts to artificially slow down renewable energy development. I think it is high time, especially for the energy utilities, to reconsider their strategy and to embark on the path to the future.