A – Energy as limited and valuable resource
A politician stated in an interview that a very large part of mankind’s problems would be solved if we had cheap and CO2-neutral access to energy.
I pondered this sentence for weeks for namely two reasons: because it is a typical solution for the current crisis, and because proposals and ideas for the current energy crisis are often very romantic. The vision is great and worth striving for, yet I resist the wishful thinking that the situation could somehow resolve itself.
The fact of the matter is that our current energy policy, combined with the world’s crises and the behavior of market partners, is causing distortions. Above all, the design of the energy market in combination with the dependence on imports is the cause of the current crisis.
There is no doubt that the energy crisis is causing incredible damage because it is putting energy-intensive industry and commerce, as well as transport and, above all, countless private households, in dire straits. However, the crisis is also forcing us to make transformations that we would not otherwise have been prepared to make, especially not at this pace and it’s giving rise to business models based on higher energy prices.
This following statement is difficult to make, but quite fundamentally, we should say goodbye to the idea that energy is no longer a scarce commodity. It is rather romantic to expect that an ingenious idea and a quickly available research result will lead to energy suddenly becoming very cheap in the near future as a result of innovation and remain so permanently. Climate change and the transformation of the system alone mean that a sustainably low energy price can only be achieved by converting the entire system to renewable energy.
B – What makes the energy market
Nevertheless, energy has some aspects that make the market so unique.
- The product energy has always been strongly standardized. Take the saying “electricity comes out of the socket”: it shows how emotionless the product is, how interchangeable. This has also always led to rather low branding; the product is so difficult to charge with emotion.
Of course, this is changing with climate change and the energy crisis, however, the product is far from being the energy itself although new energy companies and brands are highly emotional. The product can now be anything: a system, a service, a technology, even the service of hardly consuming any energy.
- Energy is only valuable if it is not sufficiently available at a point in time. Especially energy peaks and callability in a short period of time have to be considered, this drives prices and goes as far as negative prices.
- Energy has a physical location, although the interconnection of power grids and location independent tradability for us it seems like energy can seamlessly transcend borders. If you look closer, new developments such as fast-charging car parks, especially with buses and trucks, how vital physical location is. It’s important to note that storage options, either at a physical location or mobile, are a fundamental issue, and especially the scalability and energy density within mobility.
- Energy is so interchangeable that it has hardly any distinguishing characteristics such as quality, because energy only has artificial attributes, like CO2 footprints and production locations, but after consumption, the trace of energy is no longer noticeable. The only thing that remains is the data.
C – Energy linked to data
However, the fact that data and information represent the decisive value is not entirely new. Energy traders, like stock traders, work not only with energy or the documented right to energy supply, but also with information about supply and demand. The better a utility’s forecasting ability, the more profit it is able to make by stocking up on cheap long-term energy on the exchange and selling this profitable quantity to many customers.
The business of energy has changed so many times. Let’s consider the EU taxonomy. With it, comes the classification into ‘good’ and ‘bad’ energy and the determination of green electricity tariffs. The concept of energy categorization is difficult and can also be seen in the German KFW program for residential buildings and especially here with the accompanying re-evaluation and the primary and secondary energy and what of it is eligible or not.
If one observes these changes over a longer period of time, it can clearly be seen that in the long term there is no way around regenerative and CO2 -neutral energy here, although in some cases it will take time to find the right assessment. Importantly, there is another constant in the energy transition, and that is the digitization of energy.
Admittedly, in phases of very low energy prices, digitization can also falter because investments are less then worthwhile. Managing a not very scarce and cheap commodity through digital technologies is less worthwhile than managing an expensive commodity.
The digitization of energy is also more predictable if analogies are drawn to other markets and the peculiarities and characteristics of energy are taken into account. The origin of energy must be digitally recorded, i.e., location and time and the associated carbon footprint. Transport, storage and the conversion of the energy carrier must be stored and thus digitized, including the associated losses.
The second aspect will be the use, because today’s politicians worldwide are already demanding a differentiation according to use. We see this in industrial energy prices, bans on pool heating, i.e., use of energy with differentiation according to importance and according to consumption for luxury or system-critical, such as a hospital.
D – The rollout of smart meters
Essentially, a lot of investment and therefore a lot of time is needed to create the infrastructure that will enable us to measure energy at this level. Extensive equipment with smart meters is needed to enable the collection and storage of data, which is the basis for this. The IoT enablement of power and energy networks is still pending in many places and is mandatory for many use cases. The rollout of smart meters is no simple undertaking, as can be seen in the calibration law for electromobility or the German Metering Point Operation Act. Worthwhile data-driven applications are based on data derived in real-time, include a recorded history and are closely monitored for any deviations.
The German Metering Point Operation Act is very special because, compared to other countries in Europe or even in comparison with the USA, it has a higher technical complexity, takes longer to roll out as a result, and will most likely also be pioneered internationally. Nevertheless, several European countries have already achieved a clear digitalization advantage and are therefore able to use more data.
As long as we have problems measuring energy, and that applies to the consumption of vehicles, electricity consumption in households and, of course, commerce and industry, and heating energy, it will be difficult to continue implementing efficiency improvements. Every heating control is based on a control loop and even more extreme is that we, as humans, find it so hard to change our behavior unless we understand exactly what the effect is. Annual energy billing is far too unhelpful here, as is an aggregated total of KWh.
When we talk about IoT enablement and data-driven applications, we are essentially talking about first measuring energy in more detail and storing the data, visualizing it and developing new optimization strategies which we can then learn from. At the end, efficient energy management helps shape these many small decisions for energy use without restricting our daily lives.
E – Transformation of the entire system
The biggest challenge currently is the conversion of the entire system, because the consequences are hardly foreseeable. On the one hand, we are so fixated on the power grid because there is no other scalable energy distribution network that can currently distribute renewable energy. On the other hand, the power grid was never designed or built for this, at least not to this extent. The power grid was always designed to connect many consumers with energy over distance with high reliability of supply. It is a simple frequency-based real-time control loop that simply adds – or removes – a power plant if more or less energy is needed.
The power grid has always been designed for constancy, few power peaks, except for a few very large industrial or commercial customers. Here, electromobility challenges the power grid with power peaks, moreover these peaks are not very determinable today.
Electromobility, the proliferation of heat pumps in our latitudes, and air conditioning in hotter climates are shifting all of the growth in power to the grid, away from oil, coal, and gas. On the production side, it happens the same way: predictability is lost, as you can’t guarantee that wind or solar power will be available in sufficient quantities at the right place. In addition, generation is increasingly decentralized away from power plants that can be easily controlled.
Worth noting are the many private households that are currently following the trend and installing a solar system, sometimes with an electric charging station, often with battery storage, and often with a heat pump. These households will all achieve a similar energy profile and, if sized appropriately, a high degree of self-sufficiency.
It is a very special development for the whole energy market that the infrastructure for the power connection, also for measuring only exists to fill a winter gap and for some peaks like heating up a sauna or quickly charging an electric car.
The procedure and this pattern with modern and almost energy self-sufficient houses are not to be criticized here, because each saved energy makes a positive climatic contribution.
Nevertheless, it is to be considered that with this kind of consumer, the achievement of the energy industry is no longer the supply of energy, but the flexibilization, service and the integration. What is vital here is not only energy integration, but also integration into a communication structure.
F – Conclusion for prices, data and new markets
In conclusion we can assume that we are currently in a massive system of transformation in the energy industry. Renewable energies are flowing into the power grid to a scalable extent, and at the same time, with electromobility, the trend towards heat pumps, decentralized energy production and many other innovations, we have a very clear trend towards discontinuity in the grid.
The power grid is becoming digital and data-driven, and that’s not just limited to consumption data being collected, but energy being processed with data in real time. Digitization will lead to both the power grids processing real-time data, but also consumption data, which will then enhance forecasting and planning.
This will result in a completely different market, which is characterized above all by volatile prices, flexibility, and prices for storing energy. Central, however, is a completely new energy market that is IoT-based with data-driven decision-making. In the system transition period, we can expect the energy market to be a consumption model rather than a subscription model. Very likely a new local, very decentralized trading of energy will emerge based on new standard interfaces and markets.
