The New Wave of the Decentralized Energy Market
Ten years ago, the energy market was based around the conventional, centralized generation of oil and coal plants. It was predictable and formulaic. These staples of yesterday’s energy market are no longer the future of energy generation. Instead, we see a global push toward clean energy with wind and solar power, and companies are accelerating their ambitious renewable goals around the world. The market is shifting to an increasingly decentralized and real-time model given the rise of batteries, prosumers, and electric vehicles (EVs). This provides an opportunity for smaller generators and individual investors to join the playing field and for utilities to establish themselves as real-time traders in active energy markets.
A Seismic Shift in the Energy Market
Utilities, investors, and generators alike, not to mention the energy sector as a whole, benefit from this emerging decentralized framework. The 2010s saw a seismic shift in world energy markets. The conversation around clean energy and renewable alternatives isn’t a shiny, new one. However, within the power sector—from coal plants to natural gas sources—the centralized market is not an easy one for small renewable generators to enter. It’s set up to welcome primarily large investors with lots of money and land.
What changed? To start, local and national governments set ambitious renewable targets. Meanwhile, technology innovations and government incentives have made it easier and cheaper to start smaller wind or solar farms—even tiny enough to fit on a consumer’s house or property. Batteries began appearing in cars and then two-way chargers started popping up. This new market exists without a stop button and utilities need real-time market insights to generate, trade, and sell energy effectively. In turn, the cost and barriers to adopting energy trading and risk management (ETRM) has decreased with the emergence of cloud-based Software-as-a-Service (SaaS) solutions, which makes ETRM solutions more accessible to new market entrants.
Given the intermittent nature of renewable assets, our grids are tasked with an even more precarious balancing act. Distributed generation, caused by the increase of renewable assets, introduces challenges for transmission operators and new responsibilities for utilities. As a result, they must engage in sophisticated energy contracting and trading transactions to serve their load efficiently, profitably, and in a balanced fashion on a near real-time basis.
A Market That Operates in Real-Time
Renewables’ intermittency, coupled with increasing demand for electrification, has forced the market to respond. Operating in real-time is necessary, yet difficult for many utilities. With a decentralized model, there’s an opportunity for investors of all sizes to enter the energy market and for utilities to improve their profits. If done correctly, everyone sees benefits.
Take a wind farm, for instance. In the past, a wind farm of 300 turbines would likely provide an opportunity for a small handful of big investors to engage with the market in a way that was profitable to both the wind farm and its investor.
Today, with smaller wind farms of perhaps five to eight turbines beginning to stake their claim, additional investors can now step into the market. These investors may have been interested previously, but lacked the resources to become involved. With the market operating in real-time, utilities with software to support the decentralized market can work with these new players. They can save on costs and incorporate more renewables into their portfolios.
On top of that, rapid battery developments have made it easier to install them almost anywhere. This means every prosumer and EV has the potential to join the energy market. This offers a big opportunity for utilities to start tapping into these micropower sources to balance demands and costs.
New Players Entering the Utility Space
A market that operates in real-time requires utilities to invest in their software. They need everything from better forecasting to reinvented algorithmic trading models. This new trading platform enables small-scale energy generators to join the market and lets utilities embrace these new sources of power.
The decentralized model is a win-win for the market. Smaller wind farms, for instance, can fit almost anywhere and minimize the need for transmission lines. In turn, utilities can avoid spending excessive money on grid equipment or distribution lines, while having more sources to balance loads. Soon, as trading software and charging technology advances, EVs will start providing the same support.
Utilities need to invest in a strategy that considers how the space is changing and that provides long-term suitable returns—that’s the key to longevity within the market. Company leaders need to ask themselves how they can capitalize on the changing energy market. From batteries to prosumers to electric vehicles, the energy ecosystem is shifting to make way for smaller generators and investors to enter the market. Establishing a market strategy focused on this decentralized market allows utilities, investors, and prosumers alike to maximize their stake in the evolving energy market.
—Uday Baral is head of Global Energy Portfolio Management at Hitachi ABB Power Grids.