A case study that explores the motivations and intentions that lead to
self sufficiency
U
NIVERSITY OF
A
MSTERDAM
T
HE BEHAVIORAL ASPECTS OF SELF
SUFFICIENT CITIZENS
Autor: M.T.J. Plein
Date of submission: 25-01-2016
Student numnber: 10282750
Institute: Faculty of Economics and Business
Qualification: MSc Business Studies
First supervisor: prof. dr. J. Strikwerda
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1 Introduction ... 3
1.1 Law and regulations in the energy market ... 6
1.2 Analysis of the market players ... 8
1.2.1 Traditional energy suppliers: a current analysis ... 9
1.2.2 Challengers: a current analysis ... 10
1.2.3 Local energy initiatives: a current analysis ... 11
1.2.4 A current analysis: comparison ... 12
1.3 The struggle of traditional energy suppliers... 14
1.4 Local energy initiatives ... 17
1.5 The evolution of the local energy initiative ... 20
2 Conceptual model ... 22
3 Research question ... 22
4 Theoretical framework ... 23
4.1 The energy transition ... 28
5 Research design ... 30 6 Research results ... 32 6.1 Motivational aspects ... 32 6.1.1 (Sub)conclusion ... 36 6.2 Intentional aspects ... 37 6.2.1 (Sub)conclusion ... 39 6.3 Moderating aspects ... 39 6.3.1 (Sub)conclusion ... 41 6.4 Self-sufficient behavior ... 42 7 Conclusion ... 43 8 Bibliografie ... 48
9 Appendix 3 Texel Energy interviews ... 52
10 Appendix 1 Business Case Texel Energy ... 69
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1 Introduction
This thesis is about local initiatives aimed at self-sufficiency by citizens with respect to electricity supply and demand. The future endeavors, issues etc. with respect to such initiatives only can be understood within the context of the industry of electricity as a regulated industry; it is more complex than a simple market level supply-and-demand phenomenon. This section will explain the nature of the electricity energy industry.
Through the development of new technology, such as solar panels, consumers are more or less capable of fulfilling their own energy demand. It is even possible to supply energy back to the net allowing consumers to receive discounts on their energy bill. However, the investments that are needed for consumers to produce energy for their own use are still disproportionately high. Currently, we are on the level where the return on investment breaks even between five and ten years. This is dependent on the amount invested in production facilities, such as solar cells, as well as the volume of energy and the prices per Kwh that is consumed. Households that have a high consumption pattern in the moments that the electricity is produced by solar cells profit more than households that do not adjust their consumption pattern to these “production” hours. The consumers who despite the relatively large investments still proceed often act out of principal grounds. The concept of
decentralized production, also known as civil self-sufficiency in the field of energy management, is gaining ground but it is in the Netherlands not widely accepted as a living standard. The wide availability of fossil-fueled energy sources but also the supply of solar and wind overcapacity from Germany, for instance, does not give an incentive to look for alternatives.
When the idea of decentralized energy production gets more substance in the society then this could result in far stretching consequences for the revenue model of the existent (incumbent) energy suppliers and, in particular the traditional energy suppliers in the Netherlands such as Essent, Nuon, Eneco, and so on. The traditional economic-technological model under which the energy market is currently operating assumes that electricity is centrally produced and decentrally consumed. This view is still being held in current governmental policy papers. Despite the fact that approximately only one-third of carbon fuel energy is actually converted to electricity without recovering the waste heat and almost 8 percent of its output is lost along its transmission lines. it needs to be evaluated how efficient the current technological model is. Given the fact that 20 percent of the capacity is reserved for peak demand, which is only addressed in approximately 5 percent of the time, the average cost to produce and transport electricity is currently relatively high (Farhangi, 2010). Transportation of electricity has always been one of the most expensive ‘goods’ to transport.
In order to overcome these technical constraints and issues the concept of the “smart grid” has been introduced. A smart grid is an intelligent energy net to which measurement and control systems are added. By these systems supply and demand can be synchronized and an optimal distribution of electricity can be sought that addresses the needs of decentralized production and simultaneously
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reduces average cost of transporting electricity by reducing the need for electricity production through the optimization of local-for-local production.
Due to the fact that traditional energy suppliers have high fixed costs and receive low margins on their commodities they would benefit from the demand for high volumes. Overcapacity in the market, due to the availability of added decentralized production, will have consequences for the revenues of energy suppliers. The current producers of electricity in a centralized model will find themselves in a rather hopeless situation because demand for the capacity of the incumbent producers will decline in two ways. First, the demand for high volumes of centralized production facilities will decline because of the generation of added decentralized electricity. Secondly, the decline in demand for electricity generated by fossil or nuclear-fueled power plants, due to environmental awareness of consumers and especially public sector customers like the city of Amsterdam and the national railways. However, in a model in which decentralized production is the aim, a number of issues arise, such as peak demand and gaps in energy supply during the day due to the unfamiliarity with this type of production within the current infrastructure. Currently, the solar and wind generating technology, for instance, is not capable of supplying electricity on every minute of the day with certainty. Future technology
advances (technically and economically proven) will probably be able to overcome these issues but in the transformation to a grid that is fully operating on decentralized energy production the need for suppliers that can step into this gap is important. In this playing field the current power plants can play a role although it is currently economically not viable to frequently adapt the output of such facilities to changes in demand due to the technical characteristics of gas turbines and especially coal operated plants. A constant output in conjunction with an economical storage of surplus produced electricity until it is demanded in the market could be a solution to this problem.
The relationship between TSO (Transmission System Operator) and DSO (Distributed System Operator) becomes more intertwined in comparison to their current positions. In the current system the relationship is primarily one-way, at least on a physical level. The TSO delivers electricity to the grid of the DSO and the DSO distributes this electricity to the connections. Behind these connections are the customers that have a contractual relationship with the energy supplier. In a system in which electricity is primarily inserted via the grid of the DSO the relationship between the TSO and DSO will change drastically from its present one-way relationship. Currently the main responsibility of the TSO is the balancing of the transmission network with respect to supply and aggregate demand of DSO. This transmission network is under very high voltage (between 380.000 and 110.000 volt) because these high voltages ensure transportation losses are minimized. Through this system it is possible to generate electricity (solar for example) in Germany and transport this electricity to recipients in the Netherlands. However, in a decentralized system electricity is generated locally and ideally travels as little as possible in order to minimize transport losses and losses to voltage
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consumers have to pay for their electricity; without this variable the price for the generation of decentralized electricity will become more competitive.
Another party that operates in energy market is the balance responsible party (BRP or PV). This party is responsible for the purchase of electricity and is active on trading platforms. In order to let the TSO balance the grid properly a program containing the volumes that will be offered on the entry and exit points must handed in by the balance responsible party one day before the actual physical
transportation will occur. This allows the TSO to make preparations for the next day.
In addition to the issues regarding the decline of demand resulting from the further growth of
decentralized energy production, there is the current issue of the commodity trap. The commodity trap describes the situation in which there is little differentiation between products and services and there is mainly competition based on price. This development is already progressing for a while and will result in the enlargement of market share for low-cost competitors and a reduction of market share for the incumbents. Due to the fact that this shift will gradually take place and most likely an acceleration will take place when the “sleeping” consumers become active on the market, the urgency of this event has not been determined as it should be. In the current situation measures are being taken by the incumbent energy suppliers to decrease the average costs to serve/acquire in order to operate as efficiently as possible. In the long run, this strategy will not be sufficient for the incumbents to get an edge on the competitors that operate under a low-cost strategy. In order to obtain profits in the future, the current business model needs to be innovated. Capital and resources must be used to develop new concepts in order to achieve the required changes.
The situation in which the traditional energy suppliers had a dominant position in the market and switching between energy suppliers was not possible, because of the incurred high or prohibitive switching costs, is soon past tense (Economic Affairs, 2006). The benefits from and necessity to innovate in products and services is being demanded in order to stay viable in the long term. Differentiation in the product mix is, however, quite impossible because of the technical
characteristics of electricity. The only viable differentiation is the comparison between grey and green energy, which is exploited already by almost all energy suppliers. On top of that there is the shift to sustainable energy sources like solar and wind that have less variable costs than fossil-fueled production facilities. When these sustainable energy sources produce enough volume to fill the base load demand and the fossil-fueled production facilities will be reduced to filling the peak demand the variable costs of the latter will rise significantly. Historically, the traditional energy suppliers have long-term contracts with the centrally producing facilities, that are mostly governed by the same holding that the energy supplier is in, and have as such a long-term commitment with them. Not only does this cover the contractual relationships but also the sourcing strategies which are completely focused on fossil-fueled centralized production facilities. “Green” energy can be acquired through
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certain certificates but the transition to decentralized sustainable energy sources will require different sourcing strategies. Sourcing strategies that are heavily committed to fossil-fueled energy will encounter enormous pricing difficulties.
In the era before the unbundling producers of electricity, suppliers and grid companies were vertically integrated. The vertical integration of the electricity market has its origin in the compensation of not-functioning factor markets (Chandler, A.D., 1977) and the exercise of market power (Pfeffer & Salancik, 1978). Due to better functioning factor markets the need for vertical integration reduced. Firms that do integrate vertically are motivated by strategic intentions such as making a transaction on the market for a product or service or through managerial coordination within an organization. This can eventually lead to the decision to integrate vertically (up- or downstream). The unbundling has lead to the situation in which different sectors of economies are created such as the economic sector of production, the economic sector of supply and the economic sector of transmission and distribution. The original motivation to carry out the unbundling was because of the intended cost-savings for the consumer. Recently, the Dutch senate has rejected the proposal to proceed with further unbundling the electricity market (Senate, 2015). It seems that the members of the senate have their doubts if the proposed unbundling is actually contributing to public interest and if it will actually lead to cost-savings.
1.1 Law and regulations in the energy market
Laws and regulations control the energy market. The market for electrical energy is a (heavily) regulated market) in which each market player has its own role in this market. A production facility produces electrical energy that is bought by energy suppliers. These energy suppliers make
contractual agreements with businesses and consumers in order to deliver the produced electricity. The distributed system operator is responsible for the metering usage and the physical delivery of the electricity to the consumers and businesses whereas the transmission system operator is responsible for the transportation of electricity over high-voltage cables. Due to the strict regulations in this market it is not easy for newcomers (or challengers) to access the distribution part which is a natural monopoly that is government owned and at the same time is as essential part of the Dutch
infrastructure. The production and supplier market are easier to contest. A well-organized firm is needed that is capable of fulfilling the regulations set by these governmental bodies.
These same regulations also currently hinder the initiatives that are interested in energy that is not produced in central facilities. These initiatives consist of citizens that have their own ideas about the energy market in general and in particular the local, sustainable production of electricity and are looking for ways to autonomously address these needs. The current legislative framework, however, is not supporting this but instead perpetuate the market model as it currently is. A number of proposed incentives such as the “postcoderoos”, SDE (stichting duurzame energieproduct), “netting” (salderen)
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did not have the necessary effect because the alleged financial advantages are not met or at least not perceived as very rewarding. In the public domain discussions have already erupted about the effectiveness of these incentives. An example is the “postcoderoos” regulation that was introduced within the energy agreement. Its basic principle was to stimulate communities to place solar panels on their premises. The generated electricity could be delivered back on the net, which would result in discounts on the energy bill. However, the investments to be made in solar panels were too high in comparison with the size of the market (small community) and the price per kWh.
Energy Strategy 2050 (European Commission)
The EU has set itself a long-term goal of reducing greenhouse gas emissions by 80-95% when compared to 1990 levels by 2050. The energy roadmap 2050 explores the transition of the energy system in ways that would be compatible with this greenhouse gas reductions target while also increasing competitiveness and security of supply (Commission, 2011).
One of the conclusions in this report published by the European Commission is that decarbonising the energy system is technically and economically feasible and increasing the share of renewable energy sources and using energy more efficiently are crucial irrespective of the particular energy mix chosen. Different scenarios have pointed out that a decarbonized economy in the long run is probably cheaper than the current policy. They emphasize that in comparison to the current system in which high fuel costs and operational costs dominate the expenses, the new system will lean on high (initial)
investments cost and low fuel costs. The average investments costs in the energy system will rise and as such political vision and courage will be needed to repel the criticism of the high investments in order to be able to transform to an new energy system.
EU 2020-strategy
The targets set in the Energy Strategy 2050 have found their way to the goals set by the European Commission for 2020. One of the goals is the so-called “green economic growth” or also known as the 20/20/20 goal. The emission of greenhouse gases must be reduced by 20 percent in comparison with the emission that was measured in 1990. The energy efficiency must be increased by 20 percent and 20 percent of the energy must be generated in a sustainable way.
On the 16th of June 2015 a progress report has been published on the progress of the renewable energy
goals. The general feeling is that the European Union lies on schedule concerning the target of 20 percent sustainable energy. The share of renewable energy of 5,9 percent in the Netherlands however contrasts sharply with some other European countries. Germany, for instance, has a share of 9,5 percent renewable energy in 2014.
Energy Agreement
The Dutch government has already pointed out that they will not be able to comply with the 20/20/20 goals in 2020. At the moment a share of 16 percent renewable energy is planned for 2023 which in the
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end could also be determined ambitious. In order to comply with the goals set by the European
Commission an energy agreement has been setup by a number of representatives in the energy market including the Dutch government. In this energy agreement the basis for sustainable growth has been set and it presumably serves as the fundament for the 20/20/20 goals. However, in order to support these goals three important topics have already emerged. The first topic is the availability of large quantities of electricity at a particular point in time. In Germany the first issues with an overload of solar energy has already tested the stability of the physical energy systems. In order to be able to absorb such quantities of solar generated energy it is necessary to adapt the way the grid currently is used. The shortage of electricity in this context is not the issue but the abundance of it. It is necessary to come up with new concepts such as demand side management, (cheap) technology to store large quantities of electricity and advanced smart grids. The second topic concerns the discussion about law and regulations. This has also been discussed earlier in this paragraph but there are two points that need to be emphasized in this context. The first is that the government needs to let go the paradigm of central production to decentralized prosumers. Law and regulations must support the new paradigm in which consumers supply consumers, from decentralized generation to decentralized consumption. Issues concerning peak supply will then of course emerge because decentralized production does not have the same base load capabilities as centralized production but one must think about mixed generation concepts first before a full adaption of a decentralized economy can be thought of. A second point concerning law and regulations is the spatial planning. Within the Netherlands there are strict regulations concerning the placing of, for instance, windmills. Also environmental
regulations affect the initiatives concerning the placing of windmills. If the government of the Netherlands want to make work of the sustainability goals then they need to make choices regarding the current legislation and possible rewrite or adapt where needed.
The third topic concerns the reconsidering of the fiscal regime. Taxes such as the energy tax do not serve their purpose anymore. The reduction of energy usage is already widely adapted by consumers and does not need any fiscal stimulants. Probably the need to fill the national budget deficit is the reason why this tax still exists and not the presumed stimulant to reduce the energy usage. Instead the Dutch government should listen to energy initiatives that have been started throughout the country and adjust law and regulations accordingly.
1.2 Analysis of the market players
This chapter will discuss the market players that are currently active in the economic sector of electricity supply. It will give an insight in the most important characteristics of their business model and will show where their strong and weak points are positioned. This analysis has been done with the business model framework of Ostenwalder and Pigneur which helps to address the important aspects of business operations (Ostenwalder & Pigneur, 2010).
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1.2.1 Traditional energy suppliers: a current analysis
The traditional energy supplier is a remain from the market model in which distribution and supply facilities were still one. Due to a large amount of sleeper consumers these traditional energy suppliers still have the largest customer bases.
Key partners
One of the key partners of the traditional supplier are still the production facilities they were separated from. These production facilities generate the energy they sell to customers.
Also the trading platforms like ICE-ENDEX offer energy for a certain price that is bought by energy retailers. Some retailers have setup strategic alliances in order to launch new offerings (Essent, Google Nest; Quby, Toon). Also spinoffs and new startups under the umbrella of the traditional energy retailers can be identified as a key partner
Key activities
The main activity is selling gas and electricity to customers (business and consumers).
Value proposition
Sustainability, service, price and product variation are currently the most important dimensions the traditional suppliers are building their proposition around. It has the potential the attract every possible customer but misses focus.
Customer relationships
For most traditional suppliers the relationship is switching from personal assistance to self-service due to cost reduction activities but also due to the fact that most customer interactions can be supported by self-service environments and automated services.
Customer segments
Traditional energy suppliers traditionally segment their customer base in two categories: business and consumers. This finds its origin primarily in the separation of high and low volume customers.
Key resources
Currently their customer services and marketing capabilities are the key resource of traditional energy suppliers. Attracting and retaining customers is key for their continuity.
Secondary to that are their back-office capabilities in which high service levels must be met against low costs.
Channels
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online channels is top of mind because of the relative low investments that have to be made and the opportunity to reach customers via digital media.
Cost structure
Traditional energy retailers are stuck in the middle concerning their value driven or cost leadership strategy. On the one hand they want to be an organization that has excellent customer-rated service levels and on the other hand an organization in which the cost-to-serve must be brought to a minimum.
Revenue streams
Revenues are based on the usage of energy. On a monthly basis advance payments are done by the customers which are settled after 12-months against the invoice that is based on the calculated consumption. Some of them create revenue out of the sales of smart thermostats.
1.2.2 Challengers: a current analysis
The challengers penetrated the market shortly after the unbundling. These companies were built up from scratch and are less bothered with expensive housing, too much and too expensive personnel resulting in higher cost to serve.
Key partners
The challengers mostly focus on one type of product (wind, nuclear) and then look for a specific partner.
Key activities
The main activity is selling gas and electricity to customers (business and consumers)
Value proposition
The value proposition for most challengers follow the rule, keep it simple and digitize. There is not a lot of product variation and communication is done via digital channels. This results in a focused strategy that does not target all customer segments.
Customer relationships
Most challenger have switched already from personal assistance to digital assistance in order to keep the cost-to-serve on a low level.
Customer segments
Challengers have a very focused strategy and thus search for specific customer segments.
Key resources
Primarily their ability to almost sell against cost price. Besides that is their ability to market their products very effectively.
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Channels
Most challengers use online channels to attract customers.
Cost structure
A low-cost strategy is key to challengers. Not only their minimum overhead is supporting this but also their choice for focusing on specific products and customer segments.
Revenue streams
Revenues are based on the usage of energy. On a monthly basis advance payments are done by the customers which are settled after 12-months against the invoice that is based on the calculated consumption. Some of them create revenue out of the sales of smart thermostats or other products.
1.2.3 Local energy initiatives: a current analysis
The local energy initiatives are relatively new in the market. They represent smaller groups of customer but are more aware of their needs. They do not only support these customers with contracting energy but also other services surrounding the energy issue.
Key partners
The local energy initiatives stand in-between the consumer and energy supplier.
Key activities
What local energy initiatives basically do is supporting customers in their energy demands by selling the knowledge they have
Value proposition
Their value proposition is answering the customer energy needs not only in supply of electricity and gas but also in any other demand that arises in local initiatives due to the close contact they have with their customers
Customer relationships
Customer relationships are typically personal in nature. This is relatively expensive but customers are willing to pay because of the offerings that exactly meet their demand.
Customer segments
Local energy initiatives typically serve a very homogeneous group. It is possible that they serve multiple homogeneous groups with offerings that fit them best.
Key resources
The key resource local service providers have is their ability to effectively translate local demand to propositions that answer the energy transition customer go through in a better fashion. This is fueled by the knowledge they have of the market and needs of their customers.
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Channels
Local energy initiatives contact their customer directly on a personal level.
Cost structure
Local energy initiatives follow a value-driven approach. Their aim is not to lower the cost to serve to a minimum but to offer products and services which customers are willing to pay for.
Revenue streams
The revenue streams are much more diversified in comparison with the energy supplier. Local energy initiatives get revenue from the margin on top of the delivery of gas and electricity, consultancy regarding energy savings, administration of billing processes and so on.
1.2.4 A current analysis: comparison
In the former paragraphs the analysis of the current market roles have been described. What similarities and differences are found when the three different market roles are compared?
Key partners
Traditional energy supplier mostly rely on the production facilities of the parent company. Prices are given and there is not much room for bargaining. The challengers opt for partners that give them the best price. Local energy initiatives opt for multiple partners. They seek partners for the administration of energy delivery but also to address the demands that stretch further than energy supply and
demand.
Key activities
Traditional energy suppliers and challenger have as main activity the selling of gas and electricity to consumers and businesses. Local energy initiatives are not primarily bothered with the selling of gas and electricity but are interested in the total energy demand of consumers.
Value proposition
Traditional energy suppliers still rely on offering a better service to customers instead of a lower price. The willingness to pay more for better service is an important part of their proposition. The challengers on the other hand focus primarily on offering the best price. Their proposition is built around cost leadership. Local energy initiatives act on the basis of giving the best value. Because of their ability to address local demand they can give the best value which in return must result in a greater willingness to pay.
Customer relationships
For both the traditional energy supplier and challenger the customer relationship is shifting to self-service. Some challengers go even further by only allowing customers that are willing to
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initiatives typically have personal contact with their customers. Self service portals are not interesting for these players because of the variation of demand.
Customer segments
Traditional energy suppliers target as much as possible customers in order to extend their customer base. Their business model is dependent on a broad base of customers so that the average cost of producing is lowered. Challengers target a customer group with specific properties that suits their business model best. Due to this focus they can keep their cost leadership in place.
Local energy initiatives are very demand-focused. Because of the fact that local service providers mostly originate from local initiatives a very homogeneous customer base has already been established.
Key resources
A key resource of traditional energy suppliers are their customer services and marketing capabilities but is tt the same time also their main cost driver. The key resource of a challenger is their ability to almost sell their energy against cost price but at the same time continue their operations. A key resource of local energy initiatives is their ability to effectively translate customer demand is valuable propositions.
Channels
Traditional energy suppliers reach customers via online and offline channels. Because of the relative high costs that offline channels possess the transition to online channels are made. Challengers
adopted online channels from the beginning and also add aggressive direct sales channels to it in order to attract customers via the telephone. Local energy initiatives contact their customers directly on a personal level. They are not driven by gaining or reaching as much as possible customers but by formulating demand on a personal level.
Cost structure
Traditional energy suppliers follow an approach that restructures their cost structure in order to level the playing field with their competitors. Their “engage all customers” strategy makes them invest in too many customer segments resulting in internal resources that are getting squeezed in this stuck in the middle approach. Challengers opt for a cost leadership approach because of the position they claim in the market. With this approach they are able to slowly decrease the market share of the traditional energy suppliers and with the growing awareness of consumers that there are almost no switching costs when changing supplier, the position of challengers will become more significant. Local energy initiatives follow a value-driven approach. Their aim is not to lower the cost to serve to a minimum but to offer products and services that customers are willing to pay for.
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Revenue streams
For traditional energy suppliers and challengers revenue are based on the usage of energy. Their business model is solely built around the selling of gas and electricity. They are both dependant on high volumes because of the low margins. Without these high volumes the average cost per unit would increase making it harder for them to invest in other products and services.
The revenue streams of local energy initiatives go further than the margin on selling of energy. In their business model energy is just a residual product whose usage must be limited to a minimum. Instead they are looking for ways to make consumers aware of their energy demand and in their preferences
1.3 The struggle of traditional energy suppliers
Traditional energy suppliers are struggling with the market as it currently is. The sales of only
electricity and gas is subject to diminishing returns because of the challengers that are putting pressure on the prices. Also the lack of innovating capability is putting further pressure on the business
continuity of traditional energy suppliers. Innovation was never an important topic within these organizations and therefore capabilities in this area were not needed and developed. Another gap in the composition of these organizations is the emphasis on relatively low-educated employees because the majority of work consisted of back-office activities instead of more creative and self-steering employees. In order to transform to an energy service provider innovative and creative capabilities. Also a fast time-to-market is needed to become a serious player on the market. The following
examples shows the activities of Eneco and how they are trying to transform to an organization that is not only an energy supplier but also a provider of products and services in the domain of energy. Eneco has the ambition to become an organization that offers energy-as-a-service. This is a conceptual change in the industry. This ambition started with the introduction of Toon. Toon is a smart thermostat that can be controlled through the Internet and offers insights in the usage and costs of energy. This device was the first on the Dutch market that offered these insights and is currently being sold as a stand-alone product. However, the fact that it is a smart thermostat if for Eneco not the main reason to sell it. They want to offer other products and services, via this device, in order to reach customers in their homes. In addition to that has Eneco also adopted the concept that delivery of electricity is nothing more than a byproduct of their range of product and services. They are in the process of changing their key activity from the selling of commodities to offering services and products around the device Toon. For example, think of the monitoring of smoke detectors or starting the washing machine on a particular point in time. Toon has the ability to create an ecosystem that manages all electrical devices in a home (Schootstra, 2015).
Currently a number of energy suppliers are trying to close the gap with regard to the offering of smart thermostats, such as Essent and the Nederlandse Energie Maatschappij, but neither are capable of
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fulfilling the same ambitions on the short term as Eneco. But if the current suppliers are not capable of closing the gap on which level can competition be expected? Traditionally energy suppliers only competed amongst themselves in a market that was segmented in a group with traditional energy suppliers and a group with challengers. The most important axis these organizations are competing on is price which degrades this market to a saturated market. Eneco is moving their revenue model away from the commodity market and is investing in concepts that make use of technology. The market of smart technologies, however, is a market in which companies such as Google, Tesla, Apple, Samsung are also acting. The recent partnership between Essent and Google regarding the sale of Nest shows that there is a wider interest in the energy market, attracting non-traditional (powerful) players.
The idea of an energy service provider can in this context give different insights in how can be dealt with a changing demand in the energy market. The energy service provider does not have the maximization of energy usage as basic principle but, instead, the opposite. It will advice and guide customers in their effort to be as sustainable as possible and help them with offering solutions, for instance, in the area of decentralized production, provision of energy saving products or energy advice in its broadest sense. The energy service provider will function as a business partner on all aspects in the area of energy supply. Via these activities the energy service providers are able to penetrate the specific energy demands of consumers and are thus able to translate this demand to viable
propositions.
In the transition to a new market balance the need for an energy service provider seems inevitable. An energy service provider is the combination of an energy supplier that is capable of managing the energy supply and an innovative energy initiative that is capable of serving consumers with new energy concepts. An energy service provider must be capable to bring new and ideas and concepts in a short time-to-market. According to the theory of Mia de Kuijper an organization or firm should create profit power by holding on to the value from its own activities as well as to extract from the activities of others with whom it interacts (De Kuijper, 2009). When acquiring the position of an energy service provider, which is a relatively new position, the exact power that can be wielded is not exactly known. What is known, is that there is an enormous gap that needs to be filled. Currently, all kinds of local initiatives are started that are exploring the energy market but do not have the same stable organizations, traditional energy suppliers have. It is very well possible that in this gap firms will be started that will wield profit power in the coming years. In this information technology will play an important role, as energy management will become part of home information systems which is a target market of large tech firms.
A transformation to an energy service facilitator is also an alternative that needs to be considered. Given the limited capability to innovate and a slow time-to-market it could be an almost impossible
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mission for traditional energy suppliers to transform to a energy service provider because of the facing challenges. A well thought out other move could be the transformation to an energy service facilitator. An energy service facilitator offers products and services to organizations in the consumer market. However, for organizations that are new in the regulated energy market it is important to attract knowledge about the delivery of energy, the use of renewable energy, legislative aspects regarding regulation and so forth. The traditional energy suppliers have historically built up a profound knowledge of market and customer interaction processes and are as such capable of transferring this knowledge to other organizations such as local initiatives. This knowledge is, for instance, thinkable on the level of business process or even IT-systems. The operational processes that traditional energy suppliers support have a long history. These processes cover activities such as move in/out, meter changes, tariff changes, billing, collecting and so forth. Most of these processes are supported by IT-systems that were developed over a period of years. It is for traditional energy suppliers a possibility to combine this knowledge in shared service centers in order to serve multiple organizations. The role of such a traditional energy supplier would change to a more consulting or advising one. Another aspect is the role of regulation in these processes. Traditional energy suppliers have also built up knowledge around the regulations that affect the market. These policies are very specific and demand legal departments that are capable of interpreting them. Organizations that are on the verge of
launching a new product or service will benefit from the legal knowledge to the extent that they are capable of stretching the rules in their favor.
With this position between the demand and supply side of the market the traditional energy supplier is able to exploit the capabilities it has and gain a position in which it can wield power. The energy service facilitator is thus an entity that is capable of commercializing its knowledge and skills in order to facilitate other players in the market. In this context the traditional energy supplier would transform to an energy service facilitator and, for instance, make consulting services available. This
transformation would change the way the market is currently arranged. The following activities can be thought of when energy service facilitators go to the market to earn their position.
Consulting services
As part of its new activities can be thought of consulting services. Traditional energy suppliers have years of experience in the energy market and are familiar with the activities that need to be performed to adequately service consumers. With the entrance of local initiatives, enterprises and communities in the market that address the needs of specific customer groups, the importance of traditional energy suppliers gets diminished. Instead these traditional energy suppliers should exploit their capabilities in a different way. They could for instance teach these local initiatives how to drive an effective business including customer services, billing, collecting and so forth. The most traditional energy suppliers have in conjunction with the trading functions that in some situations have control over production
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facilities built up a profound knowledge of renewable energy sources and the production capabilities that are needed to exploit these renewable energy sources. Advising these parties to make the right investments because investing in renewable energy sources is a capital intensive endeavor.
IT services
Traditional energy suppliers have also built up tremendous IT-capabilities. The processes of moving a customer from address “a” to address “b” or the billing of customers, for instance, resulted in a very complex communication system between energy suppliers, system operators and program responsible parties for which advanced information systems are needed. These systems have been developed over the years and profound knowledge regarding these systems and processes have also been built up. Local initiatives can be supported with this knowledge so that they can focus themselves on the needs of their customers. The term “platforms” can also be introduced in this context. The use of a platform in a multi-sided market by different market players will decrease the total cost in a sector (Evans D. S., 2003). This effect can be commercially exploited by traditional energy suppliers by making for instance, billing platforms available that serve other players in the market. Another idea is the development of a “co-opetitive” enterprise for the processing and exchange of data (Volkers,
Huitema, Strikwerda, & Ijsbrandy, 2005). In this model the system operators are only responsible for the transport and distribution of electricity. The processing and exchange of data is organized in an entity outside of the organizations of suppliers and system operators. Through this model the costs of information, goods and money are externalized making them exposed to external pressure and will result in better efficiency (Volkers, Huitema, Strikwerda, & Ijsbrandy, 2005).
Commodity for cost price
Traditional energy suppliers can sell commodities against cost price in order to attract customers. Local initiatives can profit from this situation by seeking partnerships with these energy suppliers so that their own value proposition gets strengthened. This standpoint is based on the premise of interpreting the generation of energy as a residual product and not as the main product to be sold.
Regulatory affairs
Although part of consulting and IT services regulatory affairs is an important activity within traditional energy suppliers because of the impact on processes and systems. Exploiting this
knowledge commercially can help local initiatives, for instance, to offer products and services that are better suited for the market.
1.4 Local energy initiatives
In order to understand the position of energy initiatives some attention is needed for energy initiatives that have been started on a local level. As more and more local bottom-up energy initiatives are
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emerging the role of local energy initiatives become more apparent (Attema, Paradies, 2014). These local energy initiatives answer a latent demand that is not properly addressed by the current market players. However, it is not only because of the inability of current market players that these initiatives make way to the market, an important development is the interest for these initiatives of consumers themselves. As consumers become more familiar with energy topics and the potential benefits from them they start to organize themselves in small consumer groups. The current status of local energy initiatives, however, is somewhat unclear. It does exist as a legal form, but does not have the same organization degree as for instance as a traditional energy supplier. Which makes them too big for the few citizens they represent but also too small to actually be of interest for the bigger parties such as traditional energy suppliers.
A local energy initiative typically goes through the following three stages. It begins as a community initiative which orientation is very small and is primarily aimed at energy awareness and energy savings. This organizational form is very much informal and leans on the strength of volunteers which makes these initiatives, evidently, vulnerable. In the second stage the development to a legal form comes into play. The energy cooperation is born and the search for a revenue model has begun. The focus is on energy but also on sustainability and in a broader context the local quality of life. The aim is to let local investments flow back in the local community instead of letting them disperse on a national level. There are more or less two options in which these energy cooperations can grow into. The energy cooperations will remain in its current for m and will constantly act as a driver of new ideas. A party that is capable of bringing multiple stakeholders together. Another possibility is that it will transform to a full-fledged energy supplier with a profitable revenue model (Oostra & Jablonska, 2013)
The third form is the cooperation as enterprise. These professional organizations can count on healthy returns. These parties are capable of partnering with established parties, such as traditional energy suppliers, and with their sustainable propositions they can influence the offerings of these parties and the perception of sustainable propositions in general (Attema & Paradies, 2014)
The bottom-up transition is facing some obstacles that hinders them from evolving to socially accepted phenomenon.
Currently there is no basis on which traditional parties (for instance traditional energy suppliers) and local energy initiatives are cooperating on because there is no urgency to cooperate at this point (Attema & Paradies, 2014). There is a lot of unfamiliarity between both market players and as such partnerships are not very common. Also the lack of vision of local energy initiatives of the total energy system is holding traditional parties back. The organizational degree in combination with the lack of projects that have healthy returns is scaring off other parties to jointly enter the market. Another difficulty, besides the asynchronous view of local energy initiatives and traditional parties, is the dynamics of the government parties. In all collaborations it is important to keep in mind that there
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are three government layers to be reckoned with, the national level, regional level and local level. In order to effectively offer propositions to the market interaction must be sought with the different levels. Due to their position in the market local energy initiatives are normally only acting on a local level whereas traditional energy suppliers are acting on regional and national level. If both market players want to effectively penetrate the market both must see the complementarities of their capabilities.
Duurzaam Hoonhorst
Another example is “Duurzaam Hoonhorst” in which sustainability and self-sufficiency plays an important role. This projects shows exactly the same intentions Texel Energy has, be in the long term autonomous regarding the energy challenges and the motivation to act accordingly. Within this project the motivation of a small community resulted in a number of initiatives. For example, the use of solar panels on schools, churches and other businesses. But also the use of leaves as fertilizer in farms and the application of the cradle-to-cradle principle regarding waste. Waste is in this principle not an end product but the starting product for another process, for example, the heating of houses (Ahrens, van Heumen, van Loon, Schileffski, & Schoenaker, 2013).
Texel energy
An important topic that hasn’t been addresses effectively by the other market players (such as the traditional energy suppliers) is the demand for decentralized energy production and the administrative processes supporting this. Currently a small portion of the total population of the Netherlands are able to have a share in the production of renewable energy, are able to adjust demand according to the available supply and are able to trade energy surplus on the market. A well known example of this is Texel Energy that was started as a project for the island Texel. The inhabitants of the island wanted to be completely autonomous regarding their energy demand by 2020 supported by the use of renewable energy. It strived for the following objectives: it needs to (1) fulfill the energy need of the whole community, (2) sell, produces and buys renewable energy, (3) assist in the reduction of their energy consumption and implementation of domestic power generation, (4) offer an internal market for exchange of energy and (5) contribute to the local economy of the island of Texel (Hobbel, 2013). In order to accomplish these objectives a number of challenges needed to be overcome. For example, the resources to attract production facilities or permits that needed to be issues by local municipalities. However, despite of the ambitious objectives and challenging obstacles the motivation to fulfill the goals were astonishing. This entrepreneurship is not found within any of the current market players (certainly not within traditional energy suppliers) but is very much needed to further develop the current energy market.
“Cloud Power” refers to the business and architectural model that was invented for community driven energy management on the island of Texel. The concept is based on the idea of communities that want
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to be (completely) self-sufficient in the supply of electricity and is built on the “Trias Energetica” concept (Lysen, 1996). Although this three-steps strategy was initially developed for the sustainable design of buildings its basic principles are also applicable to other parts, for instance, the development of a energy initiative that has the same requirements.. The following three steps are the underlying principles of this concept.
Firstly, the amount of energy used must be reduced to a minimum. The waste of energy must be addressed in the design. Secondly, the use of fossil fuels must be reduced to a minimum and instead the energy mix must contain a large portion of renewable energy sources, such as wind, water or solar energy. Thirdly, If fossil fuels must be used then make use of them as efficient as possible.
In this context energy needs to be interpreted that is widely available via renewable sources and at the same time has a reduced demand because of the efficient processes these energy sources are used in. The added value for market players will not lie in the supply of electricity from fossil fueled power plants but to facilitate consumers in their search for optimal performance with the use of renewable resources. The optimization of efficiency is possible by making consumers aware of the advantages decentrally produced electricity poses. For instance, the dependence of energy supplied by political unstable countries will be reduced. There are also economical reasons, for instance, the development of storage facilities for electricity reducing the loss of energy or demand-side management in which supply and demand can find themselves (nearly) balanced. Reducing the loss of energy and
production of energy also reduces the cost consumers need to make for the use of electricity. In the case of Texel energy there are a number of aspect that also need to be highlighted because of the value they possess for the success of this initiative. Texel energy is community-driven. What means that a motivated community is necessary that strives to mutual goals and formulates a strategy together. The members of this community do not necessarily have to be physically co-located but they need to have a clear understanding about why they are in this community. The motivation to build a self-sufficient community is what binds them.
The products and services are based on the goals of the community. When the goals of the community change then the products and services will change accordingly. This has to be part of a community-driven initiative because without these adaptations the initiative will lose its reason to exist. The Texel initiative was established in 2007 existing almost for ten years now. They have attracted the interest of lot of consumers (mostly the islanders from Texel) and have grown into a position from which they can transform to the next level. The question that arises then is to what extent can the Texel initiative be sustainable over the long-run given the fact that investments in renewable energy sources and smart grids are very high. In addition to that are also the policies not of such a nature that they effectively shape the environment for such initiatives to transform into.
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The local energy initiatives demonstrate that the consumer market for energy is changing. Consumers are becoming demanding organizations that can address their needs and are thus forming local initiatives to fulfill this need. These initiatives are filling a gap , however, but are not addressing all the needs in an integral way. Let’s look at some of these needs (Oostra & Jablonska, 2013).
(1) There is an emerging tendency among consumers to invest in private energy generation (2) People are not satisfied about how large energy suppliers work. These companies have
become anonymous entities driven to maximize profit, some people feel the need for an alternative which allows people to get involved
(3) Control over own energy supply
(4) To improve the quality of life for the community and to improve the social cohesion These are number of drivers that people are motivated by and it is already making clear that
consumers want to get more involved, energy suppliers are too far separated from the consumers and the importance of the community including the quality of life in it.
These needs indicate that there is gap in the consumer market that can be commercially exploited. The question then is how can local energy initiatives transform to an organization that represents the needs of consumers and is capable of translating them to demand in the market?
In order to make such a transformation a number of things must be taken into account. First needs to be determined what the added value of a local service provider is. As described earlier, a local service provider must be able to promote local initiatives to concepts that can be applied on regional or nationwide level. This requirement can be met by searching partners that can help professionalize their value proposition. Traditional energy suppliers, for instance, can help driving an effective business by offering their expertise.
It must also be able to apply market technologies to consumer applications. Small partnerships must be sought to launch technologies that haven’t been widely tested yet on the market. Innovative concepts are key to success. On the other hand collaboration must be sought with, for example, traditional energy suppliers in the domain of administrative handling. These energy suppliers have years of experience in the domain of market and customers processes and are thus able to share this expertise.
Reasoning from the technical and administrative challenges these local energy initiatives face a transformation to a local energy service provider seems rather ambitious. However, the
entrepreneurship of these local initiatives shows more potential than the ability of traditional energy suppliers to exploit their expertise and move down the ladder.
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2 Conceptual model
In September 2008 a research was conducted by SEO, an institute of the Faculty of Economics and Business of the UvA that conducts economic research for mainly for governments, that contains a proposal for a model of how the motivations of people lead to intentions and finally to behavior. This model was applied to the concept of self-sufficiency in the area of electricity. In this research I will contribute to this model by my own observations, study of documents and conversations. The Texel Energy case, in particular, will be used to determine in what way the model is realistic enough and if it can act as a model of analysis for self-sufficiency.
Motivations
A. Environmental considerations B. Financial considerations C. Knowledge and interest D. Reputation energy companies E. Problems with energy supply
Personal and household characteristics - Property versus rental
- Income - Household size - Education - Region Intentions - Energy savings - Green energy
- Willingness to pay for electrical induced devices
Self-sufficiency - Partly/complete
- Use methods for power generation
Stimulating/restraining factors - Social network effects - Costs and revenues
- Suppliers and project developers - Government
- Technical capabilities
Figure 1 SEO model (Leenheer & de Nooij, 2008)
Although SEO is well known for its use of concepts of industrial organization, the question is whether more recent developments and new insights properly have been taken into account. In the study done by SEO in 2008 a number of motivations were presented that theoretically could lead to the intention to become self-sufficient. The motivations that were presented are: environmental considerations, financial considerations, knowledge and interest, and issues with the supply of energy. The
moderating variables as presented in figure 1 (stimulating/restraining factors) can have a positive or negative effect on the intention to become self-sufficient. The intention to become self-sufficient must be interpreted as the will that is observable in human behavior. In their study they acknowledge that there is a substantial difference in what the exact intentions of people are that are already self-sufficient and the people that have the will to be self-self-sufficient.
3 Research question
The main research question of this research will be:
Which behavioral aspects make citizens more susceptible to the adoption of self-sufficiency given the SEO model of self-sufficiency?
23 The following sub questions will also be taken into account:
Are there any motivations, intentions or factors missing in the conceptual model?
Are there any motivations, intentions or factors part of the model that can be challenged?
To what extent does existing academic literature provides useful theories and where are
possible gaps between the phenomenon at hand and academic literature?
4 Theoretical framework
A first question is which field(s) of academic theory are applicable to the object of the research. A first approach would be at the level of the individual consumer, in terms of price elasticity related to e.g. Holbrook’s typology of consumer values, especially the combination of self-oriented economic use value and other oriented altruistic value of electricity (Holbrook, 2006). That however assumes a perfect market based on a free price mechanism. However, the introduction of decentralized energy production through solar and wind implies a change (if not a disruption a la Christensen) at industry level, in an industry that is heavily regulated and is governed by the interests of incumbents and has a natural monopoly with respect to its infrastructure. That lifts the object of the research question to the level of the field of industrial organization (Carlton & Perloff, 2000) (Lipczynski & Wilson, 2001) (McGee, 1988) (Waldman & Jensen, 2001) (Belleflamme & Peitz, 2010). With respect to behavior it is also relevant to note that behavior of individuals and groups not only results from individual preferences, but as well is being influenced or restricted by institutions (North, 1990) as well from conditions created by e.g. the internet in terms of general opinions, etc (Barabasi, 2010). North argues that the major role of institutions in a society is to reduce uncertainty by establishing a stable structure to human interaction. These institutional frameworks influence the decision-making processes of human beings through the use of formal and informal rules. Formal rules being the rules and restrictions imposed by governmental organizations and informal rules the mentality, for instance, imposed by cultural backgrounds.
The field of industrial organization has evolved over the years. In order to understand the different theories within industrial organization an overview is needed that extensively explains them. The question “why do firms exist?” (Conner, 1991) (Coase R. , 1937) helps to better understand the reasons behind these theories and through the use of this question the different theories will be discussed. This reasoning is derived from the statements of Holmstrom and Tirole in which they contribute to theory of the firm by asking two questions: (a) why do firms exist and what is their purpose, and (b) what determines their scale and scope (Holmstrom & Tirole, 1989). Industrial organization firstly emerged from the neoclassical perfect competition theory. The neoclassical theory promoted the existence of a perfect market because that would in general benefit society the most. The firm in this sense exists to combine resources to produce an end product (Conner, 1991). It is the
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most pure form a firm can be in because its reason of existence is instrumental to the maximization of societies welfare. In order to come to this perfect market certain conditions must be met. One of them is the condition of perfect market information. All participants within the market must have the same access to information so that information asymmetries do not occur. Information asymmetry can lead to situations in which participants can have advantages over others. Another important conditions are (1) that there are no barriers to entry (or exit) to the market, (2) resources are mobile, and (3) the existence of multiple buyer and sellers .
In later years economists have come up with a different theory as an answer to the emergence of the big firms, namely Bain-type IO. Economists observed that due to the rapid development of rail transportation and telegraph communication networks the production and transportation capabilities advanced to a point in which small enterprises were replaced by larger ones (Chandler, A.D., 1977). A certain consolidation of firms or “collusion of practices” occurred (Weiss, 1975). Firms exist in this theory as output-restrainers meaning that they will manipulate the production output to levels that it affects the price. Market prices will be driven up and the firm’s profit is the difference between an “artificially” high market price and it costs. From a social welfare perspective above-normal returns thus reflect nefarious firm behavior that occurs at the expense of customers (Conner, 1991). The motivation for firm expansion is in Bain-type IO is to increase monopolization or prevent another firm from gaining monopoly control (Conner, 1991). Vertical integration, for instance, is seen as a method for extending monopoly power to downstream industries (Vernon & Graham, 1971). The main belief underlying Bain-type IO was that firms with market power were the central economic forces instead of firms competing over making at lower costs a products that customers prefer (Conner, 1991). Schumpeter had a different explanation of market mechanics. His idea of the purpose of the firm is to seize competitive opportunity by creating or adopting innovations that make rivals’ positions obsolete (Schumpeter, 1950). In reaction to the Bain type IO presumption that monopoly power always has negative welfare implications Schumpeter argues that radical innovations occur more frequent within firms that exercise monopoly power. This has to do with the fact that investing in radical innovations is risky and firms feel more comfortable when competition is not that fierce (Schumpeter, 1950). A fourth theory that emerged, partly as a response to Bain-type IO, was the theory proposed by the Chicago school. The Chicago school reasoned that firms exist to seek production and distribution efficiencies. They go further by stating that effective collusion will not occur because it requires costly monitoring and enforcement (Stigler G. , 1968). An important assumption within the tradition of the Chicago school is that of costly information. The acknowledgement of the cost of information has led to a difference stance regarding the economic function of providing information. If customers are well informed then this reduces customer searching costs (Stigler G. , 1957) and of ascertaining the quality of goods (Nelson, 1974).
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economics. Within this theory firms are seen as avoiders of the costs of market exchange (Conner, 1991). Ronald Coase reasoned that firms and market exchange are alternative methods for
coordinating production (Coase R. , 1952). Firms exist to avoid the market price mechanism by forming firms that do not need extensive monitoring and contract negotiations. “A firm will tend to expand until the costs of organizing an extra transaction within the firm becomes equal to the costs of carrying out the same transaction by means of an exchange on the open market or the costs of
organizing in another firm (Coase R. , 1952). Williamson supports this reasoning and expands it with three specific situation in which transaction cost avoidance can be particular acute (Williamson, 1989). The first is asset specificity in which there is a certain dependency between two parties. Due to this risk managers will tend to incorporate this relationship within a firm. The second is related to the first and has to do with a small number of replacements. If someone holds a specific ability which is rare on the market but is essential for a firm’s well-being then a manager will try to incorporate this ability within a firm. The third situation is related to imperfect information. Williamson reasons that complete contracts cannot be written between parties and that opportunistic behavior can occur in a later stage. He continues and concludes that firms will exist when opportunistic potential is
significant, in order to decrease thus potential; when asset specificity, small numbers, and imperfect information are not significant, transactions between autonomous contractors will dominate
(Williamson, 1989). There is another element, that of contestable markets. In IO it is described that, dependent on the nature of technologies, especial their economies of scale, in principle markets are contestable, e.g. the way gas turbines in electricity production eroded the monopolies of carbon based electricity with its much higher economies of scale (Baumol, Panzer, & Willig, 1986) (Motta, 2004). However, natural monopolies, respectively essential infrastructures like electricity grids are not contestable (different from e.g. telecommunications where earth connections could be replaced by microwave air connections).
The energy market in the Netherlands is being unbundled into producers, suppliers and the grid companies. Legislation regarding the unbundling of the production, transmission/distribution and supply activities has been rejected by the Dutch Senate which creates an unbalanced situation in which some traditional energy companies have already unbundled their activities and some have not energy companies are in the process of unbundling their activities. This decision contradicts with the decision of the supreme court in which they ruled against Essent, Delta and Eneco (Splitsing Eneco en Delta, 2015). Their argument was that the ‘Unbundling Act’ is in breach with European Law. The resistance to this unbundling is not illogic if this is reasoned from the perspective of the traditional energy suppliers. The unbundling has led to market takeovers by foreign firms because with the unbundling of its activities the economic value of the suppliers was drastically reduced. Foreign energy companies mostly do not face the challenges of unbundling because the Dutch government was one of the first to enact legislation to unbundle activities. Due to this enactment domestic energy
