VII INTERNATIONAL ACADEMIC SYMPOSIUMSmart Energy Systems from a New Energy Policy Approach

Christoph Böhringer (Universität Oldenburg)

Barcelona, February 5, 2019

Do Smart Energy Systems Call For Smarter Energy Policies?

2

YESEnergy policy must provide smarter regulation to drive energy system transformation.

The energy system must get cleaner, more distributed, and digitally coordinated.

Digitalization Decentralization

Decarbonization

Agenda

• Decarbonization and decentralization

• Innovation through digitalization

• Implications for smarter regulation

Carbon Drivers‘Kaya-Identity’ (Kaya, 1990)

IPAT equation (Ehrlich and Holdren, 1970)

Options for decarbonization:• Reduce population and GDP

• Reduce energy as percent of GDP: energy efficiency and energy savings

• Reduce carbon energy as percent of total energy

− Reduce carbon intensity of fossil energy: fossil fuel switching, CCS− Reduce fossil share in energy: nuclear energy, renewable energy (solar, wind, hydro, biomass)

Source: stochastictrend.blogspot.com

Taking Stock of Realistic Options for Decarbonization

Realistic options for decarbonization in many EU countries (e.g. Germany):• Reduce population and GDP

• Reduce energy as percent of GDP: energy efficiency and energy savings

• Reduce carbon energy as percent of total energy

− Reduce carbon intensity of fossil energy: fossil fuel switching , CCS

− Reduce fossil share in energy: nuclear energy, renewable energy (solar, wind, hydro, biomass)

Source: www.longdaysolar.com

Energy Transition 100% Green Electricity

Decarbonization implies green electrification of the energy system via sector coupling:• Power generation accounts for less than 25% of EU-wide greenhouse gas emissions• Transport, industry, and buildings must be decarbonized as well:

− Direct electrification Power-to-heat , Power-to-mobility − Indirect electrification Power-to-gas

EU-28 emission shares by sectors in 2016: Sector coupling – an integrated energy system based on renewable electricity:

Brave Green Energy WorldDecentralization and volatility of RES-Esubject to energy security:• Multi-directional distributed energy system• Expansion of grid (transmission and distribution)• Reserve capacities • Flexibility options

“RES-E only” will not do the job:• Energy savings• Energy efficiency

Digitalization for smart coordination and integration:

Energy savings

RES-E

Energy efficiency

Digitalization

Smart energy system

Back-on-the envelope calculation for Germany (2017)

End-energy (EE) use: 2591 TWh

RES-E capacity to cover EE use: 1400 GW (annual operating time ca. 1800h/a)

Installed capacity: 112 GW

RES-E upper capacity limit: 500 GW

Smart Regulation – An Engineer’s PerspectiveHow to address challenges and coordinate trade-offs in an efficient manner?

Economic dispatch:Mathematical programming:

Smart Regulation – An Economist‘s Perspective

Quantity

Price

Consumer surplus

Producersurplus

First Fundamental Welfare Theorem: Markets assure Efficiency

Market failures may call for (market-based) regulation:• Carbon emission cap-and-trade• Energy security services

Smart regulation =

Let markets work, not bureaucrats

Source: www.cambridge.orgSource: www.gospelnomics.net

Agenda

• Decarbonization and decentralization

• Innovation through digitalization

• Implications for smarter regulation

Dynamic Efficiency: Innovation – Dejá-vu

Source: www.electrec.co

Source: www.addicted2success.com

Innovative technologies and business models:• Productivity gains and economic growth• Creative destruction

Who is afraid of innovation?

Digitalization: Digital Change – Go Digital or Die?

The Kodak MomentU.S. Analog vs. Digital Camera Sales

The Innovator‘s Dilemma (Christensen, 2000) • Catering to customers‘ current needs• Innovating to address future needs

Source: www.flickr.com

The Transformative Economic Power of Digitalization

Digitalization of business processes/models

Drivers of digitalization:• Customers expectations• Competitive pressure• New chances

US$ 0,002

US$ 0,52

Big data = big money• V3 – Volume, Velocity, Variety (+V = value)• Information assets, e.g. Financial Times

http://www.ft.com/cms/s/2/927ca86e-d29b-11e2-88ed-00144feab7de.html

• Price for information on age, gender, mailing address, and educational level:

• Price for information, that a person suffers from allergiesand diabetes:

Digital Platforms – Radical Innovation

UberThe biggest taxi company owns no cars.

FacebookThe most valuable media company produces no contents.

AlibabaThe most valuable trader owns no merchandises.

AirbnbThe biggest vendor of accommodations owns no properties.

• Interactions and transactions between multiple agents (based on data technologies)

• Network structure for direct exchange of data

• Virtual interface between companies/businesses, clients, partners, employees, peers

• Market places (e.g. Airbnb) , social networks (e.g. Facebook), or industry platforms (e.g. Nest)

Information and Communication Technology (ICT) along the energy value chain:

Digitalization and the Energy System

Source: ITU (2017)

Digitalization and the Energy System

Digital innovation is based on data collection, data analytics, and real-time communications networks such as:

• Artificial Intelligence (AI) and Machine Learning (ML) for increased automation

• Blockchain technologies for secure, decentralized, peer-to-peer transactions

• Internet of Things (IoT) for connecting smart appliances, electronics, mobile devices, and sensors

Examples: AI in energy system management

Digital Market Potential and Business ModelsCategorization of smart meter based business models:Market size for digital technologies in energy:

Source: Bloomberg (2017)

Source: Bischoff et al. (2017)

Digitalization and Value-Chain Disruptions

Monetarization of data provides strategic options:The „owner “ of data can squeeze the incumbent supplierout of the market or relegate to an inferior role.

Example Case „Smarter Thermostat“Vendors: tado - Nest (Google) - Lyric (Honeywell)

Source: www.tado.com

Value-chain disruptions:• Free basic service• Chargeable additional services

The future of energy business?• kWh no longer as the core product• Electricity consumption as data input to open up

a new selling stream for different products• New revenue streams profitable enough to

provide electricity for free

Example: AI/ML-based filling up of detergent stocks for washing machine

Agenda

• Decarbonization and decentralization

• Innovation through digitalization

• Implications for smarter regulation

Smart Regulation: First Things First!

Smart regulation =

Restore economic efficiency

Policy instruments for energy market regulation

Source: Gillingham and Sweeney (2014)

Source: www.marketbusinessnews.com

Decarbonization: Get CO2 Prices Right!EU-ETS emission allowance prices (€/tCO2e): EU emission market fragmentation:

Social cost of CO2 (2010-2050):

Source: Interagency Working Group on Social Cost of Carbon (2013)

• Electricity: €185/t• Diesel: €58/t• Petrol: €65/t • Natural gas: €19/t• Heating oil: €8/t

Source: Agora Energiewende (2017)

Implicit CO2 prices on energy carriers (Germany)

Key impediment to smart decarbonization: CO2 prices are (i) too low, (ii) fragmented across sectors and (iii) incoherent across fuels!

GHG Target:

-20% compared to 1990

-14% compared to 2005

EU ETS

-21% compared

to 2005

Non ETS sectors

-10% compared to 2005

27 Member State targets, stretching from -20% to +20%

Decarbonization: Get Rid Of Overlapping Regulation!Overlapping RES-E policies: everything but the kitchen sink?

Source: EU (2009)

EU Climate policy: a myriad of targets and instruments

Source: Fischer and Preonas (2011)

Additional targets (e.g. RES-E targets or energy efficiency targets) and instruments (e.g. feed-in tariffs or energy efficiency standards) are:

• either redundant (as achieved anyway by efficient CO2 pricing) • or binding and cost increasing (excess cost)

Smarter Regulation with Digitalization

Source: EC-MAP (2018)

Policy and regulatory architectures no longer aligned with a changing energy system:

Reality check of regulation: R&R• Account for decentralization, sector coupling,

and flexibility options• Promote digital innovation towards efficient

energy system transformation • Hedge against risks of digital economy

Smart energy system:• Distributed energy resources (DER)• Digital tools for measurement, reporting

and verification (MRV)• Big data and new (digital) business models

Digitalization Can Power Smarter RegulationSmart energy system:• Digital tools for MRV such as smart meters can reduce transaction cost • Digital technologies and business models such as blockchain can reduce information asymmetries

Smarter – more efficient – regulation via digitalization:• More targeted and responsive policies • Better market control and more effective enforcement• Evidence-based regulation

Example: Network charges – from postage-stamp fee to LMP Example: Blockchain for automated P2P trading (unbundling)

• Anti-trust and competition law: network effects and market power (digital platforms)

• Data ownership and data privacy: data portability rights to avoid lock-in effects

• Liability for product and system failures: digital resilience for cyber (data) security

• Standardization across sectors: common standards and interoperability

• Policy coordination: harmonization of regulatory framework across countries (states)

Challenges for Smarter Regulation

Conclusions

Smart regulation:• Get CO2 prices right

• Get rid of (counterproductive) overlapping regulation

Smarter regulation:• Enable digital innovations

• Use digital technologies for better regulation

• Hedge against digital economy risks

Digitalization

Decarbonization

Energy security

Energy cost (equity)

Energy savings

Epilogue: Smarter Regulation Includes Compensation!We will make electricity so cheap that only the rich will

burn candles. (Thomas Edison 1880)

Without smart compensation:Rien ne va plusBack to the past

Foliennummer 1Foliennummer 2Foliennummer 3‘Kaya-Identity’ (Kaya, 1990)Foliennummer 5Foliennummer 6Foliennummer 7Foliennummer 8Foliennummer 9Foliennummer 10Foliennummer 11Foliennummer 12Foliennummer 13Foliennummer 14Foliennummer 15Foliennummer 16Foliennummer 17Foliennummer 18Foliennummer 19Foliennummer 20Foliennummer 21Overlapping RES-E policies: everything but the kitchen sink?Foliennummer 23Foliennummer 24Foliennummer 25Foliennummer 26Foliennummer 27