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U n i v e r s i t y o f A m s t e r d a m – B u s i n e s s S t u d i e s
The categorization and assessment of business models that
stimulate large-scale deployment of energy improvements.
Wouter Buijze - 6172466
Supervisor: A.E. Kourula
Table of content
Abstract ... 3
1. Introduction ... 3
2. Literature review ... 7
2.1. The electricity market ... 7
2.1.1. The electricity value chain ... 7
2.1.2. The role of intermittent technologies in the electricity market ... 10
2.2. Investment drivers and barriers ... 12
2.2.1. Economic environment ... 15
Cash flow considerations... 15
Market adoption risks ... 19
2.2.2. Political environment ... 22
2.2.3. Technological environment ... 25
2.2.4. The comprehensive environment ... 26
2.3. Business models ... 27
2.3.1. Building blocks applied to the renewable energy industry ... 28
2.4. The energy transition and its new actors ... 34
3. Methodology ... 37
3.1. Research philosophies ... 37
3.2. Research methodology ... 38
3.3. Research design ... 39
3.4. Case selection ... 41
3.5. Data collection: documents and semi-structured interviews ... 43
3.6. Data analysis... 45
3.7. Comprehensive methodology ... 47
4. Results ... 49
4.1. Business model 1: Utility-scale renewable energy production... 49
4.1.1. Financial structure ... 50
4.1.2. Infrastructure ... 51
4.1.3. Value proposition ... 53
4.1.4. Customer interface ... 53
4.2. Business model 2: useful energy ... 54
4.2.1. Financial structure ... 55
4.2.3. Value proposition ... 60
4.2.4. Customer segments ... 61
4.3. Business model 3: lease arrangements ... 63
4.3.1. Financial structure ... 63
4.3.2. Infrastructure ... 65
4.3.3. Value proposition ... 65
4.3.4. Customer segments ... 66
4.4. Business model 4: loans ... 67
4.4.1. Financial structure ... 68
4.4.2. Infrastructure ... 69
4.4.3. Value proposition ... 71
4.4.4. Customer segments ... 71
4.5. Cross case analysis ... 73
4.5.1. Financial structure ... 74 4.5.2. Infrastructure ... 76 4.5.3. Value proposition ... 77 4.5.4. Customer interface ... 78 5. Discussion ... 80 6. Conclusion... 84
6.1. Scientific relevance and managerial implications ... 86
6.2. Limitations of the research ... 86
6.3. Suggestions for future research ... 87
References ... 89
Appendix 1: secondary material case studies ... 100
Appendix 2: Interview guides ... 103
Abstract
Climate change, uncertainty regarding fossil fuel prices and energy insecurity are drivers of the large-scale deployment of energy improvements. However, numerous barriers retain deployment. Recently, different innovative value propositions that facilitate the large-scale deployment of energy improvements for residential customers have emerged. First, this study describes the drivers and barriers to the large-scale deployment of energy improvements. Financing is recognized as one of the major barriers due to the risk associated with investments in energy improvements and is emphasized in this thesis. Furthermore, literature regarding business models (BMs) is considered in order to analyze the different BM components. The innovative value propositions are linked to innovation strategies and the specific BM components that are subject to innovation. According to this analysis, the BMs are categorized in utility-scale renewable energy generation, the delivery of useful energy, lease arrangements, and loan constructions. Each category is assessed on their potential to overcome barriers and facilitate large-scale deployment of energy improvements. In order to make a valid assessment, a Dutch as well as an American representative case illustrate each value proposition. Since financing is considered one of the most important barriers, BM’s contribution to overcome this barrier is emphasized in the evaluation. The assessment shows that the different value propositions address different barriers. While each value proposition is considered valuable for the large-scale deployment of energy improvements, BMs that create financial incentive are expected to become more important.
1. Introduction
Corporate responsibility has become an important research field in management research in the past decades. Reviews found that, within the field of corporate responsibility, environmental responsibility is among the most popular issues (Lockett et al., 2006; Egri & Ralston, 2008). The increased amount of research in environmental responsibility cannot be separated from the ecological concerns that are discussed in the media. Apart from prosperity, the industrial development over the past ages brought unintended ecological degradation. Specifically, global warming
could have disastrous consequences for the human environment (Gore, 2006), including extreme weather events, ocean acidification, and inundation leading to food insecurity (Hughes, 2000).
When understanding of the importance of ecological problems increased, a broad discussion among management scholars about the role of businesses in achieving ecological sustainability started (Christmann, 2004; Hoffman, 2013; Shrivastava, 2013). The energy sector is considered to be among the sectors with the most environmental impact (Finnveden et al., 2003). This is due to its emission of carbon dioxide and other greenhouse gases (GHG). The Intergovernmental Panel on Climate Change concludes that it is to a 95% certain that these emission cause global warming (IPCC, 2014). Besides, the energy sector is associated with other environmental problems such as, acid precipitation, ozone depletion, forest destruction, and emission of radioactive substances (Dincer, 2000). In addition exhaustion of fossil fuels due to fuel intensive energy generation results in resource depletion (Shafiee & Topal, 2009). Hence, sustainability is an important issue for the energy sector.
Sustainability itself is often defined as ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’, a definition which is derived from the Brundtland Commission of the United Nations (de Vries, 2013; Dincer, 2000). Bonser (2002) defines sustainable energy generation as the ability to generate enough power for everybody’s needs at an affordable price and to help supply clean, safe and reliable electricity. Technologically, the world’s energy demand could be met by sustainable generation (IEA, 2014a, 2014b). Specifically, methods to reduce carbon emission include; carbon capture and storage, nuclear power plants and the use of renewable energy technologies combined with energy efficiency measures (Sims et al., 2003). Yet, carbon capture and nuclear power plants have to deal with corresponding negative side effects. To illustrate, storage of residuals is considered costly and inefficient and nuclear power is related to serious security risks and problems of hazardous waste (IPCC, 2007). Therefore, investments in renewable energy technologies and energy efficiency measures, referred to as energy improvements, are considered the most important strategy to realize sustainable energy supply (Omer, 2008; Richter, 2012).
Renewable energy technologies, such as solar photovoltaic (PV) and wind turbines, enable the harvesting of energy from natural resources, such as sunlight, wind, and movement of water (Dincer, 2000; Sims et al., 2003). Although these sources are an effective way to limit environmental degradation, the International Energy Agency notes that only 13% op the primary energy supply is considered renewable (IEA, 2014b). In addition, the reduction of the energy demand is considered an effective way to reduce greenhouse gas emission (IEA, 2014b). Stimulated by technological development and government policies, BMs that stimulated the deployment of energy improvement emerged, addressing different barriers (Boehnke & Wustenhagen, 2007; Kartseva et al., 2003). In the end of the previous century, the importance of BMs was emphasized by a rapid growth of different BMs in the electronic commerce market, resulting in increased interest from management research (Osterwalder et al., 2005; Osterwalder, 2004; Timmers, 1998; Zott et al, 2011; Osterwalder & Pigneur, 2010). A BM describes the specific characteristics of a planned or existing business regarding creation, delivery and the capture of value on the one hand and market-orientation on the other hand (Morris et al., 2005; Osterwalder et al., 2005; Osterwalder & Pigneur, 2010). BMs are an important unit of analysis since research may enable understanding of the key success factors of value creation (Zot et al., 2011).
Major themes in renewable energy research include technological development, regulatory policies and management. Although some scholars studied specific BMs in the renewable energy industry (Boehnke & Wustenhagen, 2007; Gordijn & Akkermans, 2007; Huijben & Verbong, 2013; Paiho, Abdurafikov, Hoang, & Kuusisto, 2015; Richter, 2012; Wurtenberger, Bleyl, Menkveld, Vethman, & Van Tilburg, 2012), much remains to be done concerning the categorization and assessment of these BMs. First, existing categorizations and typologies do not include all innovative BMs that are recently developed. Second, there is a need to compare BMs and assess them on the basis of their potential to achieve economic sustainability and contribute to the large-scale deployment of energy improvements. In order to assess the potential contribution of companies, the most important barriers to large-scale deployment should be distinguished. Noteworthy, previous research did not put enough emphasis on the ability of companies to attract financing in order to grow their business. Access to low-cost finance is currently considered an important
barriers since investments in energy improvements are associated with high risk (Dincer, 2000; IEA, 2014a; McCrone, Usher, Sonntag-O’Brien, Moslener, & Gruning, 2013). In order to bridge the research gap, this study answers the following research question: in what way do companies innovate their BM in order to stimulate the deployment of energy improvements and how can these innovation strategies be assessed?
The aim of this study is to provide a typology and assessment of innovative BMs in the renewable energy industry. First, typical features of the electricity market, which is subject to change due to the deployment of energy improvements, are described. While the need for a comprehensive energy transition is emphasized, aspects of the economic, political and technical environment that either accelerate or delay this transition are highlighted. Furthermore, the transition in the energy sector and the relevant actors are considered. Next, the BM components are analyzed in the context of the renewable energy sector. Applying the BM theory as a structural framework for analysis provides insight in the opportunities for innovation per component of the BM. In the following section, companies with innovative BM components that act on the opportunities and threats in the sector are analyzed. Categorization is based on the structural framework derived from BM literature. This means that companies with comparable BMs are categorized. Lastly, the BM’s potential to overcome the identified barriers and accelerate large-scale deployment of energy improvements is assessed.
2. Literature review
In this section, the structure of the electricity market is described. Secondly, the investments that are required to finance the energy transition are analyzed from the perspective of risk and return, including the different drivers and barriers in the economic, political, and technological environment. Next, the business model canvas is described in the context of the energy sector. Lastly, the shape of the energy transition and the relevant actors, including new entrants that provide new services, are considered.
2.1.
The electricity market
The electricity market, including the renewable energy industry, has develop to a dynamic multi-billion dollar industry (O’Brien & Usher, 2004). This industry is subject to rapid change and provides opportunities for new players to develop innovative BMs (Kartseva et al., 2003; Abood, 2008). The most significant changes include the privatization of governmental owned utilities and distribution networks, and the increased importance of renewable energy.
2.1.1.
The electricity value chain
The energy value chain is an essential part of the infrastructure in our society (Alanne & Saari, 2006). The value chain consists of generation, transmission, distribution, retail and consumption (Richter, 2012). Traditionally, a few large energy utilities per country exploit and own large power plants based on fossil fuel or nuclear energy in order to fulfill the country’s electricity demand. They convert primary energy into distributable final energy, such as electricity. The electricity is transferred from the central production point to a large number of customers via a high-voltage long-distance electricity transmission system. A transmission system operator maintains the transmission grid in its area. Hence, a natural local monopoly is created. Finally, distribution networks deliver electricity to the end user at a low voltage level. A distribution network operator is responsible for the maintenance and the exploitation of the distribution grid. The retailer purchases electricity on the wholesale market or through long-term contracts with large producers. The retailer performs administrative tasks such as metering, billing, and communication with the end
customers (Kartseva et al., 2003; Richter, 2012). The full value chain is illustrated in
figure 1. Herein, the amount of deregulation in the Netherlands as opposed to the U.S.
is illustrated.
Figure 1: value chain electricity
Retailers purchase electricity from producers and sell it to end-users on the retail electricity market. Information technology enabled the development of an international competing market that replaced regional monopolies (Tishler, Milstein, & Woo, 2008). The largest share of electricity trading occurs in bilateral markets. In such markets, utilities own and operate generation units and engage in long-term power purchase arrangements (PPAs) with other utilities, independent end-users and retailers. The management of portfolios of generating facilities by PPAs allows utilities to control for longer run fuel price risks and perform long-term planning (Hausman, Hornby, & Smith, 2008). Hence, long-term contracts are of major importance in attracting capital. The contracts vary in structure, but typically include flexible arrangements to account for demand fluctuations. In this way, costs associated with imbalance can be minimalized (Gross, Blyth, & Heptonstall, 2010).
Besides long-term contracts, risk management is complemented by the purchases of securities and short-term trades (Hausman et al., 2008). Regionally, transmission system operators manage wholesale electricity markets that are dominated by spot markets. In these markets, electricity can be purchased on day-ahead and real-time basis aiming to stimulate competition and hedge against short-term price fluctuations. While these markets should ideally function as a balancing
market for retailers to meet obligations, spot market prices drive pricing terms for bilateral arrangements (Hogan, 2012; Tishler et al., 2008). Sellers with market power in spot markets have the same power in bilateral markets. The spot market is associated with a risk asymmetry, related to greater risks faced by buyers who wait to transact on the spot market (Hausman et al., 2008). As a result, spot markets discourage sellers to engage in long-term bilateral contracting that would provide the most benefit for consumers.
The wholesale market is rather complex due to continuously varying demand and supply. While the equilibrium price at the wholesale market is a function of supply and demand, end-users typically pay a standard price per unit of consumption instead of real time prices. Due to the inelastic nature of short-term electricity pricing for end-users, consumers do not face the actual costs of production. As a consequence, frequent surpluses and occasional full utilization inevitably result in high price volatility at the wholesale market (Tishler et al., 2008). Therefore, it is of great importance to match the demand with the marginal costs of different technologies (Wenders, 1976). During off-peak hours, only base load capacity, which includes high fixed costs and low marginal costs of production, should be used to meet demands. Conventional base load technologies typically include nuclear and coal-fired power plants. During peak demand, peak load generation is activated to meet demand. This refers to generation by more responsive and dispatchable technologies, such as gas turbines, which could be activated at request. The distribution of generation technologies in relation to the varying demand during the day is illustrated in figure 2. As a result, the marginal cost of the highest cost generator equals the price on the spot market.
Figure 2: deployment of energy technologies in relation to demand (Windlogic, 2011)
2.1.2.
The role of intermittent technologies in the
electricity market
In contrast with base and peak load technologies, renewable energy technologies are referred to as intermittent energy sources. This means that the availability of the sources cannot be controlled (Franco & Salza, 2011). In contrast to base load technologies, renewable energy technologies are not continuously available since their functionality depends on factors outside direct control, such as weather condition or tidal schemes. However, comparable to base load technologies, renewable energy technologies are capital intensive and require mainly fixed costs. Although some scholars argue that concentrated solar with thermal storage is an exception and may be identified as a base load technology, others question its base-load behavior in winter (Elliston, MacGill, & Diesendorf, 2013). In contrast to peak load technologies, renewable energy technologies cannot be dispatched to meet peak demand. Although the degree of intermittency differs among technologies, output security of renewable energy technologies is typically far lower than that of conventional technologies. A solution for this problem would be energy storage. However, energy storage technologies are currently considered not cost-effective (Barton & Infield, 2004; EIA, 2011).
The intermittent nature of renewable energy technologies affect the retail price since intermittent sources are not operator controlled and cannot be dispatched when production would be of greatest value. Hence, they cannot be rewarded for flexible
operation. Since the wholesale price of electricity is highest during peak demand, the limited contribution to peak demand reduces its wholesale value (Gross et al., 2010). Furthermore, although predictions could be made on the basis of previous periods and weather forecasts, exact production capacity may be hard to predict. To meet customer demands, retailers that produce renewable energy need to complement insufficient production capacity with purchases on the electricity market. Inaccurate predictions are costly since they need to be corrected by last-minute balancing activities, which requires flexible and expensive plant operation (Neuhoff, 2005). Thus, since electricity generation by renewable energy technologies cannot be controlled, the revenue from the produced electricity could be significantly lower than in case of controlled production.
As illustrated in figure 3, when the demand curve is affected by the deployment of renewable energy technologies, electricity generators should respond to new challenges, such as more spikes and fast speed-up in the morning (Barton & Infield, 2004; Franco & Salza, 2011). Due to their intermittent nature, the role of renewable energy technologies in the mix of heterogeneous generation technologies is questionable. Neuhoff (2005) describes system characteristics that foster the market penetration and increase the wholesale value of renewable energy. First, closely coordinated and integrated networks, instead of micro-grids, realize spatial diversity, reducing the correlation of output. Second, contribution from different renewable energy technologies may diversify the output. To illustrate, Elliston et al. (2013) found that an optimal mix of renewable energy technologies combined with investments in energy efficiency could replace the fossil-fuelled system in Australia and could meet the country’s peak demand without base load power stations. Third, in many regions PV output is correlated with peak demand due to energy demand from air conditioning and computers during the day.
Figure 3: effect of intermittent Energy improvements on the demand curve (Windlogic, 2011)
2.2.
Investment drivers and barriers
The contribution of renewable energy technologies to the total electricity production increased rapidly and is expected to increase even harder the coming decades. The International Energy Agency (IEA) use two scenarios for their predictions in their annual World Energy Outlook, the New Policy Scenario and the 450 Scenario (IEA, 2014a, 2014b). While the New Policy Scenario takes all formally adopted measures and policies and relevant proposals into account, the 450 Scenario accounts for all policies necessary to prevent an increase of two degrees Celsius over the pre-industrial level. For both scenarios the IEA approaches the increase in energy demand, the fuel mix, and the investments that are required to meet the predictions. Electricity demand is expected to grow by almost 80% over the period 2012-2040 (IEA, 2014b). As illustrated in figure 4, renewables are responsible for nearly half of the growth in electricity generation, resulting in tripling of renewable electricity generation. By 2035, renewable energy technologies will surpass coal as the top source of generation (IEA, 2014b).
Figure 4: power capacity by energy source (IEA, 2014b)
In order to facilitate the significant growth in electricity demand, cumulative investments of $ 16.4 trillion are needed across the power sector in the period 2014-2035 (IEA, 2014a). This results in an annual average investment of $ 740 billion. Investments concern mainly the replacement of infrastructure, the reduction of energy demand through efficiency improvements, and the decarburization of electricity generation. However, in order to meet global climate targets and prevent an increase in global surface temperature of two degrees Celsius, $ 2.9 trillion more is required. In figure 5, the distribution among the different types of investments and regions is illustrated. Moreover, figure 6 shows the distribution of the 58% of the total investment in power generation, representing $ 9.6 trillion. Noteworthy, 46% of total investment in capacity goes to non-hydro renewables, including both centralized and distributed generation capacity (IEA, 2014a). Non-hydro renewables, such as solar panels and wind turbines, account for investments of approximately $ 5.2 trillion up to 2035.
Figure 5: Cumulative global power sector investments by type and selected region (IEA, 2014a)
Figure 6: Average annual investments in power generation capacity by type (IEA, 2014a)
As illustrated in figure 5 and 6, the power sector requires substantial investments in the coming decades. According to IEA's (2014a) World Energy Investment Outlook, private sector participation is required to meet the investment needs in full. New types of investors are emerging. New entrants and small market players largely facilitate implementation of energy efficiency measures and deployment of distributed generation. These players rely heavily on external sources of financing. Therefore, there is a need to unlock new sources of finance, for example via the issuance of bonds, securitization and equity markets. However, this requires improvement of risk management and effort to reduce uncertainties. In the following paragraphs, the political, economic and technological environments are covered. For each area, the drivers and barriers that either stimulate or retain investments in energy improvements are covered.
2.2.1.
Economic environment
In order to attract the investments that are required to fulfill the growth in electricity demand and decarbonize electricity generation, developments regarding the economic environment are of great importance. The annual investments in non-hydro renewables are expected to grow from $ 200 billion in 2012 to $ 290 billion in 2035. Access to finance, both for large centralized developers as for entities that enable distrusted generation by households, is considered a major barrier (O'Brien & Usher, 2004). As in every other industry, the attractiveness of investments in the renewable energy industry depends on the fundamentals of risk and return (Wustenhagen & Teppo, 2006). Generally, a company’s risks can be categorized as either internal or external to the venture. While internal risks can be controlled for, external risks are outside the control of the organization and may be difficult to predict since they concern the broader environment. Indeed, the renewable energy industry is associated with high external risks (Wustenhagen & Teppo, 2006). External risk for renewable energy projects might be categorized as economic, political or technological. While political and technological risks are covered in the next sections, this section describes the relevant economic considerations. These include risk related to cash flows as well as market adoption risks.
Cash flow considerations
In order to assess if an investment is economically feasible, the Net Present Value (NPV) is an important metric (Oxera, 2011). In the NPV calculation, the annual incoming and outgoing cash flows over a period of time are corrected for the time value of money through the consideration of a discount rate. The present values of these cash flows are compared with the initial investment. When the present value of the future cash flows is larger than the initial investment, the NPV is positive, which indicates an economically visible investment. While the incoming cash flows are dependent on the sales price of final energy, the outgoing annual cash flows concern, among others, capital costs and operation and maintenance (O&M) costs. For O&M costs, fixed and variable O&M costs are usually distinguished. While fixed costs occur regardless the deployment of the installation, variable costs are relative to the deployed capacity. Therefore, for conventional energy technologies, fuel costs are often considered variable O&M costs. An important measure to compare the
competitiveness of energy technologies is the levelized costs of energy (LCOE). This measure concerns the cost price of energy, only concerning the cost component of the NPV, including correction for the time value of money. The LCOE of new generation technologies, based on estimates of the Energy Information Administration (EIA) in their Annual Energy Outlook 2011, are provided in figure 7 (EIA, 2010).
Figure 7: cost structure for different energy technologies (EIA, 2010)
The most important difference in the cost structure between renewable energy technologies and conventional technologies are the high initial investment (Alanne & Saari, 2006; IEA, 2014a; Wurtenberger et al., 2012). While the costs for coal-fired power plants are relatively evenly distributed over time, consisting for one third of initial investment, fixed O&M, and fuel costs, upfront investment for renewables usually covers approximately 80% of the total life costs. As a consequence, the cost of capital, represented by the discount rate, is the most important component in the assessment of the relative competiveness or the economic feasibility. The discount rate is a fictive rate that reflects the return on investment that is required by the investor. It is derived from investment considerations, such as risk and maturity of the investment, but also the expected return on the company’s alternative investment options (Branker, Pathak, & Pearce, 2011). While policy makers frequently use a discount rate of 8%, Fuller (2008) argues that a discount rate above 25% is reasonable, considering the high risk of the investments. The cost of capital is subject
to the loan terms. For traditional financial entities, it might be hard to quantify investment risks. Therefore, private projects are often not qualified as suitable for traditional lending criteria, but require a premium price for capital (IEA, 2007). Since utilities most often have access to debt with low interest rates or equity investments, the upfront costs are considered less important. For households in contrast, access to financing and high cost of capital is considered an important barrier. However, this provides an opportunity for companies that offer financial solutions to households.
Although renewable energy technologies require high initial investments, once they are constructed, their operating costs are generally much lower than fossil fuel power plants (EIA, 2011). Since renewable energy technologies use natural resources, which are continually replenished, they are not considered consumptive technologies and do not suffer from price fluctuations regarding fuel costs. Indeed, operating costs of conventional technologies, which are consumptive technologies, involve high fuel costs that are susceptible to price fluctuation (Branker et al., 2011). Although the future availability of fossil fuels is uncertain, scholars agree that supplies diminish and a shortage is expected in the future (Mackay, 2009; Shafiee & Topal, 2009). Thus, fossil fuels are subject to exhaustion, eventually resulting in scarcity. Based on standard economic logic, a decrease of supply will result in an increase of the price. The Annual Energy Outlook 2014 (IEA, 2014b) shows that prices of fossil fuels are expected to increase significant until 2040. Increased taxes on emission or other governmental policies might be another cause of fluctuation in production costs. Since renewable energy technologies do not consume fossil fuels or emit any GHGs, they will not be affected by changes in the energy sector, such as strict emission limits and increased fossil fuel prices. Therefore, as opposed to conventional energy technologies, the risk regarding cost fluctuations is limited (Alanne & Saari, 2006). The cost structure as a percentage of their total costs is illustrated in figure 8.
Figure 8: cost structure as percentage of total costs
Apart from the cost component, the incoming cash flows are exposed to retail price volatility. As mentioned before, due to continuously shifts in supply and demand and inelastic consumer prices the electricity wholesale market is subject to high price volatility (Tishler et al., 2008). Hence, future retail prices are both variable and uncertain (Short, Packey, & Holt, 1995). Previously, independent power producers sold power to grid operators based on negotiated long-term PPAs (O'Brien & Usher, 2004). The shift to spot markets impeded utilities’ willingness to engage in long-term bilateral contracts. In some markets electricity, providers have been even barred from engaging in long-term contracting to stimulate competition. While Hogan (2012) emphasizes the importance of interaction between long-term PPAs, day-ahead and real-time prices, Hausman et al. (2008) stress the lack of sufficient long-term PPAs and the corresponding lack of investment security. A recent trend in the electricity market is the entry of large end-users and consumer franchises aiming to cut out unnecessary overhead costs. Neuhoff and De Vries (2004) recognize long-term contracts between retailers and consumer franchises as means to reduce price risks, but this is often not allowed since it may prevent retail competition.
Although not affecting the LCOE by renewable energy technologies, uncertainty about future fuel prices do expose investors to revenue risks due to retail price volatility (Gross et al., 2010). Specifically, electricity prices strongly depend on
fossil fuel prices and could be influenced by geopolitics, such as war or political activism. In addition, established players in the energy sector with significant market power act as gatekeepers (Wustenhagen & Teppo, 2006). Large electricity providers typically have high market shares in regional markets, resulting in the ability to influence short-term prices. In the traditional generation mix, long-term PPAs with retailers and other utilities refrain them from using this market power. However, when new renewable energy producers penetrate the market and increase their market share, large utilities may anticipate on the intermittent nature of renewable energy technologies to exploit their market power. While utilities can buy electricity at favorable conditions when the output of renewable energy technologies is high, they can offer additional electricity at a premium price when renewable output is low. In this manner, profit from the sales of renewable energy will be reduced below their fair value (Neuhoff, 2005).
Thus, as a result of the shift from long-term PPAs to deregulated spot markets, investors are exposed to more risk than in the previous regulated markets. As a consequence, financers require more equity from investors (O’Brien & Usher, 2004). Still, the most common strategy used by renewable energy producers to overcome price risks is to enter long-term purchase agreements with retailers, other utilities or local authorities. While contracts with authorities are usually based of feed-in tariffs, bilateral contracts with retailers typically correct for the intermittent character of the renewable energy technology through a lower unit price. Long-term contracts can mitigate the risks associated with price fluctuations, but they cannot eliminate them. Marginal costs based price signals and the ability to respond to flexible demands are still reflected in those contracts. In addition, the limited time span of contracts results in only modest support to manage price risks, corresponding to long-run fuel price uncertainty. Noteworthy, fixed feed-in tariffs are the most effective way to control for price risks since they provide the most security.
Market adoption risks
Market adoption concerns the demand side of the renewable energy market (Wurtenberger et al., 2012). This can both concern the demand for renewable energy offered by retailers as well as the attractiveness of participation in distributed
generation by residential customers. First, due to the relatively low energy price, financial incentives are usually insignificant. Therefore, the societal and environmental benefits might be an important driver for the deployment of energy improvements. However, when incentives are limited, practical barriers, such as transaction costs and ‘split incentives’ could be important barriers.
As described under cash flow considerations, the competiveness of renewables is to a large extent dependent on the cost of capital and the energy price. In addition, compared to other recurring charges, households usually consider energy costs a limited expense (Guertler, Kaplan, & Pett, 2005). This is partly caused by artificial low prices due to market distortions, such as subsidies to fossil fuel based technologies (IEA, 2012; Longo, Markandya, & Petrucci, 2008; Owen, 2004). The limited cost competitiveness of renewable energy and limited share of total expenses results in a lack of incentives to invest in energy improvements and a lack of energy providers that provide renewable energy at competitive prices. However, energy prices slightly increased over the years, partly due to carbon taxes and the increase of fossil fuel prices. As a result, the payback time of investments in energy improvements decreased, resulting in improved cost competitiveness (Marino et al., 2011). While energy prices are expected to increase in the coming decades, the LCOE of renewables are expected to decrease due to ongoing technological improvements (EIA, 2013; IEA, 2014a). Yet, Alanne and Saari (2006) stress the importance of competitive prices, as opposed to policy support, to create confidence among investors.
Since renewable energy cannot compete with conventional technologies on price yet, incentives should be found in societal benefits, such as environmental and human health benefits (Gossling et al., 2005; Owen, 2004). Although it is challenging to develop a niche market for renewable energy, some consumers are willing to pay a premium price for renewable energy. According to Longo et al. (2008), private and public benefits in terms of climate change appear to be the most catching benefit among consumers. Since understanding about the causes and effects of climate change is increasing (IPCC, 2014), this niche market might grow. Renewable energy meets Bonser's (2002) requirements regarding clean, safe and reliable electricity, because renewable energy technologies are considered an appropriate way to
overcome environmental and human health issues (Dincer, 2000). In line with the Brundtland report, since natural resources constantly replenish, the fulfillment of present needs does not affect the ability of future generations to meet their own needs. Although multiple surveys (e.g. Bergmann, Hanley, & Wright, 2006; Dimitropoulos & Kontoleon, 2009; Ladenburg & Dubgaard, 2007; Ladenburg, 2010), showed a positive general attitude towards the term ‘green energy’, individual projects may suffers from a public antipathy (West, Bailey, & Winter, 2010). Especially the wind energy sector is facing opposition due to visibility and landscape effects, leading to debates on local and national levels (Wüstenhagen et al., 2007; Ek, 2005). In addition, solar PV has to deal with customer unease about energy-intense production (Alsema, 2000). The problem of social acceptance was first recognized by Carlman (1982), who stated that siting of wind turbines is a matter of public, political and regulatory acceptance.
Apart from the financial incentives and the attitude towards renewable energy, practical considerations might affect household’s decision regarding investments in energy improvements. Transaction costs are particularly relevant in case of distributed generation. Transaction costs refer to the effort to arrange the process regarding the financing, installation and operation of energy improvements. Wurtenberger et al. (2012) refer to the ‘hassle factor’ as the time and effort required to gather enough information to make a decision. These transaction costs may simply outweigh the financial incentives and public benefits of the investment (Fuller, 2008). Split incentives occur if the party that invests in a certain technology is different from the party that benefits from the technology (also known as principal-agent problems) (Brown & Conover, 2009). To illustrate, there is little incentive for a landlord to invest in energy improvements, when the tenants pays for the consumed energy. Comparably, there is little incentive for the tenant to make such an investment, when he is possibly moved out before the end of the payback period (Wurtenberger et al., 2012). This could change in a slow rental market, where renters emphasize the importance of low energy bills in their rental decision (Fuller, 2008). In addition, split incentives occur in the property ownership market. Owners may not stay long enough to realize payback from their investment. When they sell their property, it is questionable if the value increased parallel to the investment (IEA, 2007).
2.2.2.
Political environment
A dominant theory in policy research is that efficient allocation in markets is achieved when regulations correct for externalities (Stone, 1988). Externalities occur when actions with private benefits entail social costs. Energy generation by conventional technologies includes social costs, such as ecological degradation, human health impacts, and resource depletion. If these externalities are not corrected by policies that force people to consider social costs when they engage in transactions, market inefficiencies occur. Moreover, diversification of energy supply could contribute to energy security and refrain countries from geopolitical risks. The need for fossil fuels results in dependence on the Organization of Petroleum Exporting Countries (OPEC). As evidence from the 70s and 80s suggests, political instability in these countries could result in disruptions in fossil fuel supply and could, in turn, be followed by recessions of national economies (Hamilton, 1985). Hence, energy production by renewable energy technologies, which are not dependent on fossil fuels, creates energy security. Besides, dependence on other countries leads to exposure of national economies to international fuel-price fluctuations (Neuhoff, 2005; Scheer, 2006).
The internalization of social costs related to the energy sector could be an effective policy instrument to realize an efficient market (Longo et al., 2008). Appropriate pricing mechanisms would encourage the economic visibility of energy improvements (Owen, 2004). However, social costs are hard to quantify and if they could be quantified, internalization will be a highly politicized judgment (Neuhoff, 2005; Tol, 2005). Hence, policymakers mostly fail to implement appropriate policies that address externalities in energy pricing (Wurtenberger et al., 2012). As a result, investors, operators and consumers do not face the full costs of their decision (Neuhoff, 2005). Instead of correcting for externalities, subsidies in the energy sector traditionally aim to provide access to affordable energy. Energy subsidies often intend to benefit low-income households, which could be hard to advocate against. In some cases, the need to maintain social stability may discourage policy reforms (IEA, 2014a; Neuhoff, 2005). Due to long lasting policies, conventional technologies are to a large extent dependent on subsidies. In 2011, subsidies for conventional technologies reached over $ 500 billion globally, six times more than subsidies for renewable energy (IEA, 2012; Whitley, 2013). However, subsidies for renewables reached $ 121 billion in 2013 and expand to nearly $ 230 billion in 2030 (IEA,
2014a). Noteworthy, in 2013, almost 70% of the subsidies were provided to the top five countries, with Germany accounting for $ 22 billion. As a result, 22% of Germany’s power is generated with renewables (Scheer, 2011). Since the costs for this support are recovered through network operator’s energy bills to the consumer, the German consumer pays a premium for energy overall (Wurtenberger et al., 2012).
Ringel (2006) recognizes feed-in tariffs as the most dominant policy instruments. Feed-in tariffs guarantee the cost price for electricity produced by renewables in the form of long-term contracts. Prices are based on the generation costs, differ among different technologies and might be independent from the market price. Feed-in tariffs are considered favorable for investors since they provide price guarantees, which allows amortization of the high initial investment (Couture & Gagnon, 2010). Within feed-in tariffs, Couture and Gagnon (2010) distinguish fixed price policies and premium price policies. While fixed prices are independent from the actual market price of electricity, the premium-price option offers a premium on top of the market price. The fixed price option is favorable for smaller investors, who are generally more risk averse. Since it guarantees a certain return it makes participation on equity basis or by contributing debt finance more attractive. However, although fixed feed-in tariffs provide important revenue security, it does not reward production during peak demand (Alderfer et al., 2000). The premium-price option in contrast, creates incentives to generate electricity at peak supply and could result in alleviation of peak supply pressure (Couture & Cagnon, 2010; Fleten et al., 2007). In Germany, progressive policies, including high incentives for a guaranteed period, reduced the investment risks
Besides policies that regulate the demand and price of renewable energy, numerous policy instruments focus at investment stimulation. Incentives for investors include tax reductions or options to write off investments in renewable energy against favorable conditions. Maybe the most known tax instrument is the 30% tax credit available for residential and commercial investors in solar in the U.S. (Lowder & Mendelsohn, 2013). While carbon taxes address the social costs of energy actions, and thus internalize the external costs, cap and trade and green certificates policies aim to create a market economy. According to Lu, Zhu, and Cui (2012), market based mechanisms are more likely to succeed in achieving emission reduction without
affecting industrial production. However, oversupply of emission allowances resulted in low carbon prices and ineffective markets. Green certificates, or renewable energy certificates, are documents that prove that a certain amount of energy is generated by renewable energy technologies (Nielsen & Jeppesen, 2003; Ringel, 2006). The certificates can be traded separately aiming to create a market for renewable energy support. The purchase of a certificate equals a claim that the owner consumed a renewable portion of the grid’s capacity. However, in contrast to emission reduction certificates, the green certificates cannot be traded worldwide. An overview of the most important policy instruments is provided in table 1.
Policy instrument Description
Feed-in tariffs (fixed price)
A PPA with a fixed price per unit of produced energy.
• Benefit: provides security regarding price volatility and thus investment security.
• Disadvantage: no incentive for peak production.
Feed-in tariffs (premium price)
A PPA with a flexible price, based on the current market prices at a premium.
• Benefit: provides incentives for peak production.
• Disadvantage: no income security, exposure to price volatility.
Investment incentives
Favorable conditions for the initial investment in renewables. • Benefit: clear and predictable measure.
• Disadvantage: inconsistent among regions and periods.
Carbon taxes Internalization of external costs trough emission taxes. • Benefit: no price volatility or market fluctuations.
• Disadvantage: bureaucratic measure that does not optimize efficiency.
Green certificates Tradable claims that a used amount of the grid is considered renewable. • Benefit: a market based approach aiming to realize emission reduction
at the lowest costs.
• Disadvantage: not possible to trade worldwide.
Cap and trade Tradable emission allowances.
• Benefit: a market based approach aiming to realize emission reduction at the lowest costs.
• Disadvantage: Over-allocation of allowances results in a lack of effectiveness.
Table 1: Policy instruments that stimulate the deployment of renewables (author)
element of the risk assessment for any energy investment. Generally, governments could affect a project’s financial viability since they have the ability to change the regulatory framework at any time (IEA, 2014a). Regulations are time dependent, which creates uncertainty about the stability of existing regulations. Feed-in tariffs typically include adjustment mechanisms to reduce support over time and tax incentives could be repealed quickly. To illustrate, the unstable regulatory frameworks in Spain resulted in declined growth for Energy improvements (Shirazi & Shirazi, 2012). Wustenhagen and Teppo (2006) found that regulatory risk was among the most important reasons for lower investments in the renewable energy industry. In addition, Marino et al. (2011) refer to ambiguity in the legislative framework as important driver of transaction costs of renewable energy projects. Moreover, policies are inconsistent since they are subject to regional policymakers who introduce varying delivery mechanisms (Mitchell, Bauknecht, & Connor, 2006). This inconsistency could be problematic for international operating renewable energy companies since advanced local knowledge is required.
2.2.3.
Technological environment
Technically, a combination of renewable energy technologies and energy efficiency improvements is sufficient to replace the total generation by fossil decarbonized energy (Fthenakis et al., 2009; Neuhoff, 2005; Sovacool & Watts, 2009). Due to constant technological developments, the price of generating electricity through renewable energy technologies has decreased rapidly. As a result, competitiveness with conventional technologies is getting closer for solar PV and wind power (IEA, 2014b). Whereas the price of PV modules and wind modules decreased by respectively 50% and 10% in 2011 (McCrone et al., 2012), these technologies experienced continued price reductions in 2012. In 2012, the LCOE of solar PV was reduced around one third as opposed to the year before. Besides economies of scale and technology advances, price reduction occurred because equipment manufacturers had to deal with production surplus of modules and turbines (Lins, 2013).
Although some renewable energy technologies are technologically mature, technological risks are considered relevant for investments in renewable energy projects. Technological risks include both the performance risk related to energy
improvements with a limited track record and the uncertainty regarding technological development in the sector. Performance risk relates to the efficiency and reliability of the technology (IEA, 2014a). Technological problems can occur in different phases of the life cycle of renewable energy projects, but are most relevant during construction and interim operation. In the first phase, construction delays and errors may come along. Intensive cooperation with suppliers and supplier guarantees could be effective instruments to control these risks. Financial strength of the manufacturer may be taken into account since it affects his capability to fulfill guarantees. When the project matures, material deterioration could occur and O&M costs may increase. Besides long-term O&M agreements with supplier, insurance may play an important role in risk management in this phase. Performance risk varies strongly between different technologies and will be an important element in investment decision-making (Gross et al., 2010).
Uncertainty regarding technological development might cause unexpected competition from alternative energy technologies or providers (IEA, 2014a). Although installed costs of renewable energy technologies has decreased significantly due to technological innovations (Branker et al., 2011), it might be hard to predict future developments that affect the initial costs of the technologies. When technologies have untapped potential to increase efficiency, which would affect revenue or reduce production costs, investment in a later stadium could be more attractive. Besides, the energy sector is subject to continuous changes. New entrants that deploy new technologies might be future competitors.
2.2.4.
The comprehensive environment
Large-scale deployment of Energy improvements is dependent on a variety of economic, political, and technological factors. Access to low-cost capital is considered a crucial factor (Dincer, 2000). The cost of capital is an important measure in the energy transition to a renewable society as describe by Alanne and Saari (2006). Low-cost capital fosters both the competitiveness with conventional technologies and economic sustainability, independent from unstable policies. However, a vicious circle could be recognized. While financing terms depend on risks related to cash flow assumptions and market adoption, those risks will be limited
when the competiveness increases trough the access to low cost capital. In table 2 the most important investment barriers are presented.
Category Description
Economic Barriers related to:
− Cost of capital • High cost of capital due to high-risk perception.
− Cost structure • Large effect of the high cost of capital since initial investment is a large cost component.
− Price volatility • Uncertainty about retail prices due to spot markets, fuel price volatility, and market power of large players
− Transaction costs • The ‘hassle’ associated with research and decision-making with many suppliers and imperfect information.
− Split incentives • The principle that the costs and the associated incentives will not be divided equally between the tenant and the landlord.
Political Barriers related to:
− Policy inconsistency • Uncertainty regarding future policies and the inconsistency between policies in geographical areas.
Technological Barriers related to:
− Performance risk • The possibility that the real efficiency and reliability is lower than expected.
− Development risk • Possible future technological development of the applied technology as well as alternative technologies creates uncertainties about the investment timing and technology.
Table 2: Overview of investment barriers
2.3.
Business models
Although BM research is a relatively new concept, scholars agree that BMs are possible sources of innovation and competitive advantage for a company. In relatively new-formed industries that undergo fundamental change, such as the renewable energy industry, numerous innovative BMs are emerging. BMs can be vehicles for the deployment of relatively new technologies, such as energy improvements (Wüstenhagen & Boehnke, 2008; Huijben & Verbong, 2013). By designing the appropriate BM, a firm can address the barriers to deployment and achieve commercial success (Wüstenhagena & Boehnke, 2008; Abood, 2008). BMs can be used to compare markets and companies in a structured way (Wüstenhagen & Boehnke, 2008; Morris et al., 2005; Osterwalder et al., 2005). Moreover, generic
categories and ideal types of BMs could function as “blueprints” for innovation (Baden-Fuller & Morgan, 2010). Therefore, as stated by Osterwalder & Pigneur (2010), BMs are considered to shape the environment in which they operate.
Timmers (1998) was one of the first scholars who provided a definition of BMs. In his definition a BM concerned the architecture for the product, service and information flows, a description of the potential benefits and a description of the sources of revenue. According to a more recent definition of BMs by Osterwalder and Pigneur (2010), “a BM describes the rationale of how an organization, creates, delivers and captures value”. Although there is no clear uniform definition of the concept of BMs, focus shifted to the interdependent components of BMs (Osterwalder & Pigneur, 2010; Klang et al., 2010). While there is no consensus which components are most important, four basic areas are most prominent in existing literature, namely value proposition, customer interface, infrastructure and financial aspects (Osterwalder, 2004; Richter, 2012; Hamel, 200). These four areas could be broken down into nine interdependent building blocks that form the basis of a BM (Osterwalder, 2004; Osterwalder & Pigneur, 2010). The business model canvas, which is developed by Osterwalder and Pigneur (2010), is shown in figure 9.
Figure 9: the business model canvas (Osterwalder & Pigneur, 2010)
2.3.1.
Building blocks applied to the renewable
energy industry
In this section, the BM components are analyzed in the context of the renewable energy industry. With respect to the literature review regarding the drivers and barriers, innovation potential is outlined per component of the BM. In this analysis,
the value proposition is considered the most important component in the BM, allowing companies to differentiate themselves. While the financial structure of the BM is essential to address the relevant economic barrier and determine the value proposition, the company’s infrastructure should enable the delivery of the value proposition. The customer interface communicates the value proposition to the market. While the company’s financial structure and resources belong to the internal structure of the company, their partners and other BM components are part of the market where they operate.
The financial aspects concern the revenue model and the cost structure of the BM (Osterwalder, 2004). Both the cost structure as well as the revenue stream provides opportunities for innovation. To illustrate, while the sector traditionally sells intangible assets to its customers, nowadays BMs occur that benefit from a decrease in electricity use. Thus, in contrast with the traditional BM, the profit of these companies increases when the sales decrease. Regarding the cost structure, the difference between consumptive conventional technologies with high variable costs and energy improvements with high upfront costs are covered in the literature review. The high initial cost is considered a barrier for distributed producers and could be addressed in a company’s value proposition. For companies that facilitate distributed generation, a study to the effect of either economies of scale to reduce the fixed costs per unit, or economies of scope to create synergies between different business activities, on cost reduction could be valuable. Regarding the revenue streams, the traditional revenue of asset sale might be replaced or complemented by a leasing, loan or usage fee. While all income structures provide a solution for the high initial cost of energy improvements, some also offer risk reduction (Wustenhagen & Boehnke, 2006). To illustrate, when the use of electrical appliances or electricity provision is considered a service, which is charged against a fixed fee per unit that is arranged beforehand, the performance risks are fully covered by the company. In addition, this income structure creates an incentive for the company to offer the service, e.g. hours of lighting, and minimize the associated energy consumption in order to reduce costs.
Infrastructure management refers to the infrastructural or logistical issues concerning the company’s key resources, activities and partnership (Osterwalder, 2004). Key resources in the renewable energy industry may be for instance access to
low-cost capital or specific knowledge and experience. Traditionally, utilities core competence is management of physical assets, production facilities (Boehnke & Wustenhagen, 2007). Although asset management might be an important competence for companies in the renewable energy sector, facilitation of distributed generation requires other competences. Dependent on the value proposition, resources could include a technologically skilled workforce to assess generation potential, access to low-cost capital, best practices regarding debt collection, an established information technology system to enable monitoring, or an efficient system for dispersed O&M of assets. With respect to the company’s own resources, key partners typically offer connecting services. Besides, partnerships may be used to access capital, outsource services that require specific knowledge, and to share risks. Potential partners include financial institutions, manufacturers, specialized technical companies, insurance companies and competitors. Since partnerships in the renewable energy industry open up new ways to create value, they offer potential for BM innovation (Richter, 2012). The business activities that are related to energy improvement projects, including project development, financing, system design, procurement and manufacturing, installation and construction, monitoring, billing, and O&M are illustrated in figure
10. It could be stated that the activities on the value chain are either performed by the
company’s own resources, by one of its partners, or is not offered as part of their value proposition.
Figure 10: value chain activities (author)
The value proposition, or the offering, refers to the products and services that seek to create value for specific customer segments by solving customer problems (Osterwalder, 2004). It is the value proposition that differentiate a company from its competitors. The value proposition forms the center of the BM. While the company’s infrastructure enables the delivery of the value proposition, the customer interface concerns the communication of the proposition. Generally, a trade-off between the
quantitative and qualitative value is visible. This trade-off is structured by the quality that is delivered by the company’s infrastructure, customer interface, and revenue model and the cost minimization that is accomplished trough efficiency. Since electricity is considered a commodity, traditionally, competition is based on quantitative aspects, such as price. Renewable energy, however, is considered to differentiate itself from energy generated by conventional technologies in a qualitative perspective. Due to the public benefits of renewable energy, it includes environmental and human benefits. However, in order to target customers beyond the qualitative eco-niche, the value proposition should emphasizes the quantitative financial incentives on top of the public benefits (Wustenhagen & Boehnke, 2006). While centralized producers should create a solid business case in order to offer competitive prices to its customers, facilitating companies could target households with value propositions that help them to overcome investment barriers. In order to overcome risks regarding price volatility and technological performance, value propositions might include guarantees for savings in future energy costs, cash flow security or technological performance. Ownership structures and financial vehicles might be developed to target the high costs of capital, the high initial investment and split incentives.
Customer interface concerns the establishments and maintenance of customer relations, the customer segments that are served by the company and the channels that enable the delivery of the value propositions (Osterwalder & Pigneur, 2010). There are opportunities for BMs in the renewable energy to gain competitive advantage by innovating on customer interface management. Previously, diversification between customer segments was of little importance to utilities and retailers. Since customers are considered to become more heterogenic, customer segmentation becomes more important. While active customers could be interested in ownership structures and financing vehicles that facilitate distributed generation, passive customers could prefer flat energy rates (Richter, 2012). In case of distributed generation, customer relationships become increasingly important due to their complex character. Customer relationships are diverse and might include personal assistance, self service, community building and co-creation (Osterwalder & Pigneur, 2010). First, marketing channels are important to communicate the value proposition in an effective and understandable way and reduce transaction costs for potential customers. Later, both a
company’s own and their partner’s channels are used to create efficient communication. Therefore, partnering with specialized companies and competitors in the different service stages of the customer relation becomes more important.
Based on the characteristics of the energy sector in relation to the BM canvas, this study proposes a BM framework that is specifically designed for the energy sector, which is illustrated in figure 11. In this framework, the electricity value chain is the central point of focus. The key resources and key partners enable the execution of activities. Activities are considered a service for the customer. The more activities the company executes, the higher the service level. The resources and partners that are deployed to execute the relevant activities determine the cost structure of the company. This results in a trade-off between the quantitative and qualitative aspects of the value proposition, represented by the cost structure and the service level, respectively. Strategies might include the establishment of key resources in order to create economies of scale and scope or close collaboration with partners in order to minimize costs through specialization on specific activities. Another option is to offer only a limited selection of activities, which allows for specialization and cost reduction as well. Together with the services that are offered and the cost structure, the revenue model completes the value proposition. The revenue model defines the incentive structure of the company. In this research, asset sale, usage fee, lease fee, and loan amount are distinguished. The revenue model determines to a large extent the risk distribution between the company and the customer and is therefore an important component of the value proposition. Regarding the customer interface, the executed activities define the customer relationships. In turn, the company’s resources and partners determine the communication channels. Finally, the customer segment is defined by the value proposition.
2.4.
The energy transition and its new actors
The growth of renewables has significant consequences for the value chain, the positioning of existing actors, and new market entrants. Within generation by renewable energy technologies, two methods with different requirements are distinguished. While the large-scale production by renewable energy technologies, such as offshore wind farms and solar power stations, demands extension of the transmission grid, distributed generation by customers creates the need for flexibility in the distribution grid. Furthermore, the activities for both production methods differ to a large extent, providing opportunities for different actors.
While stationary power generation used to be an open multi-player market with small competing utilities, it became a monopolistic market when technological development fostered large-scale generation (Dufour, 1998; Alanne & Saari, 2006). This concerns large power plants located in remote areas connected with high-voltage transmission grids to the consumers. Comparable, renewable energy technologies could be used for centralized generation connected to the grid. This requires grid extensions, which could be problematic in case of energy generation at inaccessible areas, such as offshore wind farms. Technologies that are used for centralized generation, mainly wind turbines and solar PV, and corresponding maintenance strategies differ from conventional technologies. However, the BM and accounting policies are to a large extent comparable since both models require large initial investments and energy sales on the wholesale or retail market. Due to the existing capabilities of traditional utilities, such as excess to low-cost capital, they have an advantage as opposed to new market entrants.
Small-scale renewable technologies enable generation close to the demand center, allowing end-users to become energy producers themselves. This conflicts with the BM of centralized producers and retailers. Decentralized generation is referred to as distributed generation (Kaundinya, Balachandra, & Ravindranath, 2009). According to Alanne and Saari (2006), distributed energy systems are efficient and reliable alternatives to traditional energy systems. Distributed energy production takes place in dispersed energy systems, which operate independently. Since the distributed energy systems do not require access to the long-distance high-voltage
transmission grids, which is accompanied by distribution losses, production is considered efficient (Kartseva et al., 2003). Distributed generation is reliable since, in contrast to centralized generation, a natural disaster or a war that destroys the transmission grid would not affect distributed systems. Some scholars believe that distributed generation will totally replace centralized power plants. Dunn (2002) implies that all energy systems will be integrated in buildings that are disconnected from the grid and are equipped with renewable energy technologies combined with heat and electricity storage.
As described in this literature review, the electricity sector is subject to rapid change. Specifically, the deployment of distributed generation has had a major impact on the value chain. These changes are accompanied by new activities, which are executed by the utilities that are traditionally active in the energy sector and new actors. Distributed generation in specific provides opportunities for new entrants. Largely simplified, this study recognizes three new services that are offered to distributed electricity producers. While distributed generation covers all relevant aspects, technological and financial services focus on a specific aspect of the value chain. Technological services include system design, installation, measuring, and O&M. Financial services cover solutions for the high initial costs and cost of capital (Huijben & Verbong, 2013; Wurtenberger et al., 2012). In addition, companies that apply a new BM, such as the delivery of useful energy, lease arrangements and loan arrangements, provide these services. Table 3 provides an overview of the BMs and the associated services.
Activities
Business model Centralized
generation Distributed generation Technical services Financial services Renewable energy X X X X Useful energy X X X Lease arrangements / X Loan arrangements X
Table 3: Overview of activities and corresponding products in the renewable energy sector.
The new entrants that act upon the new opportunities in the market are often referred to as energy service companies (ESCOs) (Wurtenberger et al., 2012). This might be
