CREATIVE

12/14/2019 DESTRUCTION
TERM PAPER
DISRUPTIVE INNOVATION IN
ELECTRICITY SECTOR

Prateek Gupta
1827623
ELECTRICITY CONSUMPTION MADE SIMPLE, AFFORDABLE &
GOOD ENOUGH!

INTRODUCTION

Robert J. Gordon, distinguished macroeconomist and economic historian at Northwestern University,

presented an interesting scenario: if a person fell asleep in 1870 and woke up in 1939, he would hardly
recognize a world revolutionized by five major inventions — electricity, urban sanitation, chemicals and
pharmaceuticals, internal combustion engines, and modern communication. Microsoft founder, Bill
Gates, who said in a blog post that the "digital revolution changes the marketplace's very structure." Many
others point out that this is a shift which has turned many of the world's industries onto their heads, the
energy sector that is popular among them.

Electricity markets are not main commodities – not oil like coal or gas. We are really a clearing house for
various resources, either coal, or natural gas, or renewables, or nuclear, or biomass. Power markets are
also establishing connections among different energy markets. For example, while most countries are no
longer using a large amount of oil to generate electricity, transportation electrification and electric cars
have made this link possible. In fact, the electricity system is set to undergo such profound changes that it
will become virtually unrecognizable from a twentieth century perspective. The change will not happen
overnight – indeed, it is likely to take decades rather than years for the full implications to become clear –
but it will affect virtually all aspects of the industry and its users. The primary driving forces are
decarbonization and decentralization of electricity generation. More efficient pricing will encourage the
introduction of innovations that threaten to disrupt both retailers and grid operators ' existing business
models. The study examines the effect decarbonization and renewable DER development are likely to
have on the electricity sector and reviews regulatory policy goals that policymakers need to manage the
energy transition to a zero-carbon economy.

In many markets, the rise of the digital economy has led to disruptive innovation of business models. This
has shaken dominant corporations and helped customers. New types of generation have also disrupted the
electricity markets. Although this disruption was not entirely organic or spontaneous, the electricity
markets were also disrupted by new generation types. Instead, in stirring this disruption, government
intervention and entrepreneurialism played an important role. The future is uncertain and the direction
unclear, one possibility is that business models will evolve to strengthen our interconnection. Those
businesses could dismantle supply chains in the 21st century and connect us directly, allowing users to

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sell unused (or cheap) energy through digital trading platforms, such as an Airbnb for electricity. They
could also interconnect the electricity grids that first connected us in the 20th century, which would help
facilitate trade with those in more remote locations. Another possibility is that business models that
isolate us and bet on electricity markets position will thrive. These could help consumers and local
communities to become self-sufficient by producing and storing their own electricity, helping them to
reduce their costs by going off-grid. A mixture of models will most likely emerge involving demand
response, processing and trading.

The sector needs to adapt to two important features of these new models in order to realize potential
benefits. The first feature often involves the provision of "distributed energy resources (DERs)" by
producers both producing and consuming, which increases connectivity between electricity market
participants. DERs are small-scale, usually renewable, power generators that are localized or distributed
across a country, rather than concentrated in one location. Second feature, by increasing the capacity of
renewable generation, a "intermittent" or variable supply problem is exacerbated. More efficient pricing
will encourage the introduction of innovations that threaten to disrupt both retailers and grid operators’
existing business models.

DECARBONIZATION

In its course of development, the global economy of the world has experienced several energy
transformations, moving from wood to coal, followed by oil and then natural gas. Until now, most of the
improvements were motivated by convenience and cost-competitiveness, although not among the
important considerations were the environmental dimensions of fuel selection. The industry understands
the need to move towards a low-carbon future in the face of global climate crisis. There is currently a
significant shift to renewable energy sources in each nation as an environmentally sustainable and
climate-friendly alternative to power generation. The decarbonisation of the power sector means reducing
its carbon intensity; that is, the emissions per unit of electricity generated (often given in grams of CO2
per kWh).

There can be two innovative paths to decarbonization of industry which can help companies for efficient
and sustainable ways to produce. First is called decarbonization through electrification which means there
are several strategies to achieving industrial process decarbonization. Electrification of existing heat
treatment processes is one of the most important. Second is achieved by decarbonization through fuel
substitution. This approach is to replace the fossil fuels themselves by creating a climate-friendly,
sustainable alternative to industrial coals and gases. Industries can tackle this approach by using

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“Biogreen technology”, which is a method of high-temperature pyrolysis that allows biomass, waste and
residues to produce biocarbon and heat gasses. Through this method, in industrial applications, energy-
rich and environmentally friendly process products can replace natural gas or conventional coal.

A much stronger push for electric mobility, electric heating and electricity access could lead to a 90%
rise in power demand from today to 2040, compared with 60% in the New Policies Scenario, an
additional amount that is nearly twice today’s US demand. – World Energy Outlook 2018, IEA. To fulfil
the future demand electrically powered technologies is the key to decarbonization. Renewable energy
technology creates a new room for innovative technologies that allow heating and processing of bulk
products by electricity alone. By providing the same results with emission-free, fossil-free operation,
these technologies support decarbonization. Like fossil-based systems, electricity-based solutions can be
free of gas and coal price fluctuations and face the rapid decline in the cost of renewable energy sources,
this approach becomes an increasingly competitive decarbonization strategy. Global companies are
therefore revising their sustainability strategies in order to move away from fossil fuel consumption and
to find innovative solutions.

DECENTRALIZATION

In many ways, decentralized generation is the opposite of the traditional model in which one large plant
supplies energy to a whole region. This means installing a very large number of small-capacity systems,
all linked to the power grid, natural gas distribution network, or urban heating / cooling networks to
generate energy from local renewable sources. This approach of generating energy, based around
renewables, is more environmentally friendly and meets actual local energy demand.

Electricity grids are platforms in the sense that they have traditionally agreed contracts with both power
plants and energy retailers to establish transactions between those parties and ensure that sufficient
generation capacity is available to meet consumers ' needs. The grid is also a two-sided platform in that
the other side valued greater involvement on each side of the platform. Retailers and their customers
value additional capacity for production and a degree of flexibility in that capacity as they improve
security of supply and reduce the risk of blackouts. In this sense, the grid might meet a two-sided
platform market definition. While the product (the grid) shares the characteristics of a two-sided market,
it is not, of course, a competitive market because the grid's activities are protected as statutory regulated
monopolies. This means that retailers, consumers and generators have no real choice about which
platform to use (although generators at least have the option to locate their power plants on different
grids). DER's rise has posed a risk of bypassing both retailer platforms and the grid operator platform. As

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discussed above, retailers can be bypassed either by consumers choosing to buy and sell via a different
intermediary (e.g. an aggregator) or directly trading on a platform. There is also a risk of bypass,
however, for grid operators. For example, as prosumers can self-supply, they can become increasingly
self-reliant, particularly where they can add storage capacity to their generation capacity. This may take
them off-grid for a large proportion of their needs, whether completely or at least.

There are a number of drivers behind the growth of distributed energy. Firstly, industrial and
environmental policy offered strong support for increasing the share of renewable electricity resources,
not only through centralized production, but also through consumer-level policies such as net metering
and feed-in tariffs, which are essential incentives for prosumers. Secondly, increasing electricity prices
made it more desirable for customers to start producing their own power, both to reduce the amount they
purchase from the grid and to sell to the grid at a higher price. More broadly, small-scale distributed
generation is an ideal option for developing countries like India where there is no grid infrastructure for
transmitting electricity from centralized power stations to homes.

Furthermore, prosumers and consumers can set up local micro-grids that will again have the impact of
taking them off-grid for a large proportion of their needs, and possibly for a long time. Besides catering
for localized generation demand (whether by necessity or preference), their smaller size also provides
increased resilience at a time when environmental disasters are increasingly threatening to disrupt supply
from the main grid, which is inevitably exposed to more risks than a micro grid.

THE IMPACT ON CONSUMERS – THE PROSUMERS AND CONSUMERS

Ultimately, the disruptive effects of the most efficient of these innovative business models should provide
consumers with better value for sustainable energy. This creates an opportunity for countries to negotiate
as smoothly as possible their way through the energy transition. And, as with so many shifts in transition,
the impact on all households are unlikely to fall equally. Distributional effects that occur in a number of
ways that must be understood by regulators with an objective of balanced regulation.

Impact of prosumerism : Prosumerism growth itself may have an effect on wealth distribution as it is
not easy for all customers to become prosumers. Solar panel installation either has a substantial upfront
cost or includes access to credit, none of which will be low-income household options. Installation is also
easier where consumers own their own homes and therefore an investment that increases the value of the
property can be considered. To renters, it may not be possible to secure the continuing value of the
investment if the landlord is unwilling to buy it at the end of the tenancy.56 Home ownership by low-
income households is much lower than households with higher income. Home ownership within flats and

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other multi-unit structures (more common among low-income consumers) may also pose problems as it
will require a degree of cooperation within the block with other homeowners. Therefore, DER threatens
increasing inequality by establishing a' prosumer split' without careful policymaking. One possible policy
approach is to isolate the distributed generation concept from the home itself. For example, households
may be able to invest in remote generation distributed. This would still be the consumer's own supply, but
it would be concentrated elsewhere, perhaps where solar or wind energy is less dependent.

In addition, the transformation of the electricity generation sector, caused by the state taking a
constructive role in creating and shaping new markets, can spark disruptive innovation in downstream
electricity markets.

MEASURES TO ENCOURAGE THE DISRUPTION IN ELECTRICITY SECTOR

Pro-active regulatory steps to drive the energy transition : Governments and regulators also have a
role in ensuring that the infrastructure of an effective marketplace is in place. First, this means motivating
customers to consider what they are buying and at what cost. Second, there is the issue of how to control
small-scale prosumers' generating capacity that is ready to be unleashed if this sharing economy's
potential can be successfully integrated into the broader electricity market.

Competition agencies will need to be alert and pro-active : Compete to innovate and adopt new
technologies or business models is the most productive response of incumbent suppliers to disruptive
innovation. However, responding in an anti-competitive fashion may be the easier or cheaper option.
Competition agencies therefore have a key role to play in ensuring that disruption stimulates competition
that benefits consumers, rather than avoiding the need to compete. By facilitating the entry into the
generation and flexibility markets of millions of small prosumers, the P2P sharing economy model
potentially creates a highly competitive price-taking seller fringe. Merger control will also have a role to
play. The acquisition of innovative start-ups by an established incumbent can be part of a strategy to
compete by adopting new technologies.

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