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What role do you still have as an energy company in 2040 (III)?

October, 2023

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It is a given that towards 2040, i.e. in about 15 years' time, we will face a solid surplus of cheap renewable electricity. However, there will also be shortages that cannot be covered by storage methods. This 'E-mismatch' is going to have a big impact on pricing. In this new reality, what can be the role of the energy company?

What trends are we seeing?

The main trends we are already seeing, and which will continue, is the move towards shorter-term contracts and settlement on shorter timeframes.

The electrification of our society continues; the share and importance of renewable electricity continues to grow. Whereas gas procurement has a long-term perspective, electricity procurement is much more of a short-term market. In that market, issuing fixed long-term prices has become something of the past. The market is increasingly moving towards shorter forms of contracts for customers. We also see this on the purchasing side of electricity. Up to three years ahead, the market is not liquid. Many large customers therefore choose to buy their energy now on the EPEX spot market (day ahead) by the hour.
Settling on shorter timeframes is a trend that is now also visible in the consumer market1. Hardly any retail contracts longer than 6 months have been offered in the past year. With the termination fee becoming more expensive as of 1 June, fixed-price contracts with durations of 1, 2, or 3 years are also available again. In addition, for small consumer connections, there is now the possibility to directly conclude a contract with dynamic prices yourself, with billing on an hourly basis (ISMA connection). These contracts have been increasing in popularity recently. One of the issues here is that the match between procurement (say wholesale) and customer profile is increasingly difficult to make.This is because customers' off-take profiles are fluctuating more and more (e.g. does a customer have solar PV or not). As hedging increasingly does not match actual off-take behaviour and prices fluctuate widely, flexibility surcharges increase. This creates an incentive for energy companies to offer the option of putting part of the cost of that flexibility on customers.Add to this the fact that an EPEX contract clearly shows what the tariff is, and it becomes logical that more and more customers choose such a 'bare' contract. A LEAN contract is more transparent and can be cancelled more easily if opportune. For consumers, there are opportunities here to reduce their energy bills.

How are customer positions evolving?

In 15 to 20 years, renewable electricity, especially produced from wind and solar, will account for the vast majority in the energy mix. We will then be much less dependent on international, geopolitical developments abroad (Russia, Qatar, UAE, Saudi Arabia...).

With that dependence on external imports of gas and coal virtually eliminated, long-term electricity market prices will be able to stabilise over time and are expected to remain fairly constant on average.

However, short-term (hourly and quarterly) prices will become much more volatile, due to the unpredictable supply of wind and solar. Customers are therefore going to need more ways to smartly deal with those short-term price fluctuations.

Where is the role of energy companies moving?

What added value can energy companies offer customers in the new energy world? Different roles will emerge with which they can respond to various customer needs, depending on how much control a customer wants to have over their own energy situation. This also creates opportunities for energy companies to differentiate themselves.

Customers who want to control their entire energy management as much as possible themselves will be helped by an 'energy administration firm', a party that provides them with the leanest possible energy contract. 2
Customers who want to be guided through the energy landscape as carefree, cost-effective and sustainable as possible will benefit from all kinds of services to optimise their existing energy management on the basis of data, with information, control and forecasts. Within the frameworks provided by customers (importance of price and comfort level), the energy company can then indicate, for instance, when it is wise to temporarily shut down industrial processes when a period of high prices is approaching. But it may also be possible to temporarily switch back to natural gas, green gas or hydrogen solutions.
For customers who want to be completely unburdened, energy companies may start providing value-added products and services. It is possible that many consumers will prefer this. Energy companies could then install some of the installations at consumers' premises themselves, so that this can work optimally with the control from the energy company. Examples include heat pumps, battery deployment, washing machines, dishwashers and heat buffers.Energy companies already have sophisticated software to predict generation, customer behaviour and price levels. Sharing these services with their customers could potentially re-establish long-term sustainable relationships with customers, without the energy company having to take major risks. Anything to provide a customer with guaranteed optimal and sustainable energy management within self-selected parameters. This is where interesting collaborations between tech companies and energy companies can emerge.
There will possibly still be room for small customers who want a fixed kilowatt-hour tariff. However, they will then start paying a surcharge in the price to buy off the cost of flexibility. After all, the power company runs all the risks for its customer's behaviour.

The challenge for energy companies will lie in how well they can handle the flexibility their assets and their customers have to offer. The value of trading bulk/commodity is likely to diminish in the process. The added value of the energy company is that they can do the optimisation of flexibility across their asset and customer portfolio better and more efficiently than the individual. They will need to market that value.

The triptych 'E mismatch' was prepared by the ICE Department of Data & Analytics. Their analysis shows that energy companies face a major challenge, including when it comes to IT supporting systems and the adoption of the change by incumbents. ICE is also active in these areas!