Powering the Future: Decentralising Energy

The energy landscape across Europe is undergoing a remarkable transformation. For the first time, over 50% of the EU’s electricity in the first half of 2024 has come from renewables. (Reuters, edie, Eurelectric). Including nuclear energy, 74% of the electricity produced in the EU is now derived from renewable and low-carbon sources. While there’s a still a long way to go to achieve a fully climate-neutral grid by 2050, this progress is exciting.

But this new energy production system is markedly different from the fossil fuels-based grid of the 1900s, and now features a diverse array of players. Decentralized energy production is growing significantly. For example, in 2022, global installed rooftop solar capacity in 2022 was almost equal to installed utility-scale solar capacity. (SolarPower Europe, PV Magazine) This shift, along with the overall greening of the grid requiring increased flexibility and resilience, demands more complex management.

These are monumental shifts for a 100+ year old industry. Let’s take a closer look at this decentralization revolution and the innovative solutions supporting this transformative journey.

PROBLEM

For the Industry:

Multiplication of players:

• Traditionally, electricity production has been centralized, provided by a small number of utilities (aka power plants connected to transmission networks, distributing electricity over long distances). Both fossil fuels and renewables operate this way, e.g. coal, nuclear, hydroelectric dams, wind farms, solar farms, etc.
• This is now being supplemented by Distributed energy resources (DERs) or Behind the Meter (BTM) electrical devices and renewable energy sources, producing and distributing energy much closer to the end-user. Global rooftop solar capacity grew by 50% from 2021 to 2022 (79 GW to 118 GW respectively) (SolarPower Europe, PV Magazine) With these systems, homeowners can sell excess energy back into the grid, democratizing the role of electricity producer.

Aging & not-fit-for-purpose Infrastructure:

• This puts huge strain on an old system built for unidirectional power flow and built for controllable, non-variable power generation. 40% of Europe’s grid is 40+ years old — with an expected lifespan of only 50 years. (ECFR)
• In the US, transmission construction is so backed up it is projected they will lose out on 80% of the potential emission reductions from the IRA. (Washington Post)
• Today, 10% of generated power is lost due to the grid’s inefficient transmission system. (SSE Energy Solutions)

And there’s only more demand to come:

• Electrification is a key strategy to meet environmental goals, since wind, solar, and other renewable electricity generation are more ready for market than green hydrogen or syngas. There has already been a 50-fold increase in the sale of EV cars between 2012 (200k units) and 2022 (over 10M units) (World Economic Forum) EV battery deployment increased by 40% in 2023, with 14 million new electric cars, accounting for the vast majority of batteries used in the energy sector. (IEA)
• In 2027, the EU ETS will cover buildings’ heating fuels (where natural gas, heating oil, propane, etc, are still used for heating), driving further electrification of another huge segment — around 27% of global emissions come from building energy demand for a sense of scale. (UN)
• Significantly, the boom in AI computing demand is straining grids like never before — doubling North American energy demand from 2022 to 2023. (Washington Post) Utilities are overwhelmed by the rush for grid hookups.

For the Climate:

• It can’t be overstated: Electricity and heat generation are the largest segment of GHG emissions, still accounts for 33% of global emissions. (Climatewatch Data). And Global electricity demand is expected to more than double by 2050 (McKinsey).
• Centralized grids struggle to integrate decentralized resources, slowing down renewable installation: The integration of distributed renewable energy sources, such as rooftop solar, remains slower in centralized grids due to grid management challenges. Decentralized grids can more rapidly accommodate new renewable capacity. For example, Germany, which has a relatively decentralized grid, experienced a 7.6% increase in installed solar PV capacity in 2021, compared to the EU average growth rate of around 5.5% (pv magazine International) (euronews).
• System rigidity can’t make use of oversupply: Centralized models struggle to adapt production based on real-time demand and the fluctuating availability of renewable resources, often leading to excessive energy wastage. At the European level, in 2022 approximately 80 TWh of renewable energy generation capacity was wasted due to grid constraints and inefficiencies matching production with demand​.

Germany and Europe have significantly ramped up investments in the improvement and flexibility of their power grids to accommodate renewable energy sources and enhance energy security. Germany committed around €28 billion by 2023 to modernize its grid infrastructure, focusing on digitalization and expanding capacity for renewable integration. Europe as a whole has directed over €50 billion towards similar initiatives, with the EU’s Connecting Europe Facility (CEF) allocating €5.8 billion specifically for energy projects aimed at improving cross-border grid connectivity and storage solutions. To achieve these goals, it is essential for the grid to be not only expanded but also intelligent and controllable, enabling efficient management and distribution of energy across the continent.

To meet the EU’s rigorous climate and energy objectives, a robust improvement in energy efficiency across the industrial and building sectors is crucial. Despite modest gains — with the industrial sector improving efficiency by 20% from 2005 to 2018, and the building sector by about 1.2% annually — more aggressive measures are necessary. The expected rise in heat pump installations from 180 million today to 1.8 billion by 2050 illustrates a decisive move towards decarbonizing heating in buildings, significantly supported by stakeholders pushing for a shift towards sustainable and clean energy solutions. This transformation is vital for reducing the overall energy consumption footprint and achieving a sustainable, environmentally friendly energy landscape.

WHO

Some of the major players:

Major Utilities & Governments: Centralized utilities, and the governments funding them, face financial strains from the need for significant investments in grid modernization to accommodate an increasing share of renewables. Additionally, during the energy crisis, several European countries struggled to maintain a stable energy supply due to reliance on energy exports. Notably, Germany’s energy system has been significantly dependent on natural gas imports from Russia, which has made the country vulnerable to supply disruptions and political tensions. This dependency became particularly problematic during geopolitical crises, which exposed the fragility of relying on a single source or route for critical energy supplies. Decentralized energy systems enhance energy security by diversifying energy sources and reducing reliance on geopolitical hotspots.

Independent Power Producers (IPPs): They face numerous challenges due to a complex regulatory landscape that varies by country, making market entry and operations difficult. These challenges include high initial costs, limited and congested grid access, and lengthy permitting processes that can impede project timelines. IPPs also struggle to secure Power Purchase Agreements, which are crucial for stabilizing revenue and attracting investment.

SMEs: they have been particularly affected by rising energy costs in the past years in Europe, which can represent a significant portion of their operating expenses. High energy prices can reduce competitiveness and profitability, especially for energy-intensive businesses. Decentralized energy offers SMEs the opportunity to generate their own power, potentially at lower costs, and with greater control over energy spending.

STATUS QUO

In Germany alone, the number of households generating their own power has surged from 1.8 million in 2019 to 3.4 million in 2023. This trend highlights a growing consumer interest in self-sufficiency but also underscores the challenge of high initial investments that could widen the energy divide among socioeconomic groups. Meanwhile, technological advances have enabled buildings to not only generate their own power but also join Virtual Power Plants (VPPs), allowing energy suppliers to offer new products aimed at leveraging small, flexible energy assets, potentially creating a €60 billion annual market by 2030.

The engagement in energy communities is also expanding, with over 2 million Europeans participating across more than 7700 groups, contributing to approximately 7% of the EU’s renewable capacity, or 6.3 GW. Europe’s readiness for these changes is also supported by its leading position in smart meter technology, a critical component of smart, decentralized grids.

POTENTIAL SOLUTIONS

VPPs / VPPAs: A VPP is a virtual network of decentralized energy assets (solar, storage, EV chargers and batteries, and demand-responsible devices) that are managed collectively through software to act as a single power plant. This allows production optimization, dynamic control of the electric load based on real-time pricing signals, and the ability to sell back energy and / or grid services back to the market. Additionally, curtailing energy consumption during peak demand periods where prices are higher allows consumers to benefit from lower energy prices.

Energy Communities: Collaborative local energy systems where a group of individuals, businesses, or organizations produce, manage, and consume energy together. They typically involve local generation, distribution, and sharing of renewable energy resources. This can look like a neighborhood that installs rooftop solar and shares the electricity across households.

Demand Response Technologies: Demand response programs play a crucial role in decentralized energy systems by adjusting the energy consumption of appliances and systems in response to supply conditions. This helps balance the grid in real-time without the need for centralized control. Smart appliances and home energy management systems are key technologies enabling effective demand response. For this purpose, the grid must be flexible enough to accommodate various demand types and possess the necessary storage capabilities.

Microgrids: energy systems that can operate both with the grid and completely independently of it. As utilities struggle to keep up with grid connection requests, more players are moving to these off-grid solutions. (Forbes).

Advanced Inverters: conventional inverters convert electricity current coming from power sources into usable form for consumers. Advanced inverters can be more two-way, helping integrate DERs as well as providing many other grid-stabilizing features.

Other Smart grid, smart meter, and energy management systems: integrate automation to improve real-time monitoring, control, and optimization of grid operations or algorithms that can help improve load forecasting.

Energy storage: energy storage solutions that can help balance energy supply and demand, support the integration of renewable energy sources, and improve overall grid efficiency.

MARKET

With electricity consumption expected to increase by around 60% between now and 2030, the electricity networks will need to integrate a large share of variable renewable power. Wind and solar generation capacity must increase from 400 GW in 2022 to at least 1,000 GW by 2030, including a large build-up of offshore renewables.

Thanks for reading and engaging with us on this vista on energy decentralization!

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