Understanding the transformation of the energy services arena and business models

Introduction

On October 28 and 29, 2024, the 16th will be held. Edition of the Smart Grid Forum 2024, Conference and Exhibition of the Latin American Smart Grid Forum, in S?o Paulo, SP.? The Forum's focus is the transformation of energy businesses and services through technology. Throughout its 17 years of existence, its target audience has expanded significantly, incorporating, in addition to the traditional professionals and suppliers in the area of energy distribution and transmission, professionals from energy trading and generating companies, information technology and telecommunications companies, startups, energy service companies, energy storage and consultancies,? Integrating a significantly larger number of agents, into an expanded scope of business, through "service bundling", which is transforming the energy business arena in recent years. The Smart Grid Forum (www.smartgrid.com.br ) is attended by professionals who are building the future of the energy sector.

The Smart Grid Forum works with the objective of putting into practice and enabling new technologies and innovations in energy, in a sustainable way, in Brazil and in Latin American countries, favoring the energy transition. It works with other international entities and promotes the periodic and systematic sharing of information among executives who are interested in smart energy systems. Its work is focused on business, articulation and synthesis, aiming to establish an agenda for modernization in our region.

The Smart Grid Forum brings together the community of companies, governments, professionals, associations, consumers, universities and other stakeholders interested in advanced and innovative technologies that can enable innovative business models, services and smart energy platforms, across the entire business chain, in order to provide broad and unrestricted access to efficient, reliable,? resilient, sustainable, secure and economically viable and accessible to society as a whole, including the most disadvantaged populations.

Throughout its 17 years of existence, it has accompanied the transformation of the energy sector, and its current focus is on the energy businesses enabled by new technologies throughout the supply chain: generation (centralized or distributed), transmission, distribution and commercialization. This evolution is characterized by the attraction of a significantly larger number of agents and new entrants offering qualified and competitive services directly to end consumers, through new forms of packaging and value offering. Many of the new technologies, which were expected to be traditionally implemented by energy distributors, are advancing rapidly in other sectors and through other agents, as in the case of the implementation of smart metering by energy traders and connectivity for smart cities, where public lighting is being the pulverized platform that is scaling very quickly.? through PPPs - public-private partnerships.

The transformation of the energy sector

In the past, the sector was basically verticalized, with concessions for power plants, transmission and distribution, a fact justified by the very intensive use of capital, with a focus on the continuous growth of energy consumption and demand. The market was captive to the local distributor, which was the exclusive supplier of energy, from the plant to the end use. The return on investments occurred over decades with renewable 30-year concessions. Pricing policies were defined by the investments required and the scale (sales volumes), incorporating cross-subsidies. Technology evolved slowly, and the best generation and transmission projects were always deployed ahead of the least economically efficient. Energy costs, therefore, were always increasing, and the service was delivered in kWh and kW.

In the last decade of the last century, the business chain of the energy sector was de- verticalized, and the new regulation defined 4 areas of activity, with competition in the areas of energy production or generation and commercialization, the latter still limited to large energy consumers, who could make their purchases in the wholesale or free contracting market.? directly from the generators. The transmission and distribution networks remained non-competitive services and therefore logically regulated under a concession regime, as illustrated in the following figure:

Recent technological evolution and scalability have enabled the continuous cost reduction of new investments in renewable generation compared to previously traditional technologies. The rule previously in force, that generation costs were increasing, was broken, reducing the attractiveness of traditional hydro generation, mainly due to the advent of climate change, which increased the hydrological risks perceived by traditional investors. The sharp drop in energy production costs allowed generation to be viable even within consumer units, with excess supply in certain places, even bringing negative prices at some times and markets.? Commercialization, which was restricted to large energy consumers, has become a great "gold rush", attracting many investments and attention from traders, offering innovation, loyalty, technology and environmental compliance in a freely negotiated way with customers even at low voltage. Thus, today it is possibly feasible for the end consumer to have access to the technology without initial investments and, if desired, even to have their own energy infrastructure. There are now multiple sources of energy, from multiple users and owners working together, with competitive costs and a focus on energy efficiency and demand management. Modern projects are less capital intensive and have a return on investment often in less than 10 years. Prices are set by the required utilization, reliability, technology, and efficiency in competitive markets, and the core product is end-use management.

The possibility of producing part of its own energy reduces dependence on the monopoly service and favors entry into the free trading market (account portability). This opens up the possibility of trading surpluses and the emergence of a new aggregator market. At the same time, it promotes the increasing acceleration of transformation, where the vital and central element is the customer (the people) and integration with other services. Cloud computing is a key part of this transformation and enables agility and scalability. On the other hand, legacy transmission and distribution networks, however, have not kept up with this dizzying evolution:

-? They are not prepared to integrate increasing numbers of injection points and increasing scales of small decentralized plants.

-? They are not adapted to measure energy intelligently – one volumetric measurement per month does not allow for the correct allocation of sectoral costs.

-? They are not prepared to face extreme weather events.

In transmission, the new developments of more recent auctions are still satisfactorily profitable and of more modern design, but the legacy networks need investments, systematically postponed due to lack of space in the tariff.

In distribution, the situation is more critical because the necessary investments have been systematically made impossible by the already high tariffs that incorporate subsidies and high taxes, leaving no room for companies to have comfort in making investments in the renovation and requalification of legacy systems. The low availability and stimulus for investments, in a phase of progressive erosion of the captive market, accelerates the loss of competitiveness of distributors, increasing credit risks for the entire sector, and putting even more pressure on margins as tariffs and subsidies continue to rise. Many concessions will expire in the coming years and the sector faces major profitability challenges and high uncertainty, despite the government signaling that the concessions will have to be renewed. But unfortunately there is no clarity on how the concessions will be renewed and it will be disastrous if the current remuneration model of the companies is maintained, as will be discussed later.

The following figure illustrates the current attractiveness and profitability situation of the various segments presented above. The lowest profitability and attractiveness are in the legacy transmission and generation systems, while the new transmission systems, implemented in the most recent auctions, have higher profitability, despite the lower attractiveness due to regulation.

?Generation is on the axis of greater attractiveness and competition, but with lower profitability as there are signs of structural surplus of energy and many investments and projects in progress.

Still on the axis of high attractiveness and greater profitability, the aforementioned "gold rush" of commercialization has strongly attracted many new entrants in the sector, such as oil and gas companies, banks, telecommunication service providers, and deregulated and competitive companies of the distributors themselves, which try to compete in this new environment. The target customers of the strong rush of commercialization offers are the distributors' higher-margin customers, which puts greater pressure on their results, reducing the availability of resources for new investments.

But the scenario of the arena illustrated above is being transformed by leaps and bounds, with the increasing penetration of non-dispatchable renewable generation in the electricity matrix and a new "gold rush" is already underway and neither the distributors themselves nor the government have noticed, despite being widely announced: the provision of flexibility services, both at the systemic level and at the local level.

At the end of last year, the Brazilian National System Operator - O.N.S itself published the EXPANSION AND REINFORCEMENT PLAN (PAR/PEL) 2024-2028, which presents the expansions and resources needed by the sector in the medium term, over a 5-year horizon, and which highlights the challenges necessary to meet the common loading ramps in the transition between the day and night periods. The need for available capacity to serve the ramps will increase from 25 gigawatts in 2024 to 50 GW in 2028, and the electricity sector will need sufficient flexibility to supply this increase in the ramp for the control of load balance and generation to allow the optimized operation of the system. In addition to fast-firing power plants, the role of transmission and distribution networks will be fundamental to maintaining the necessary stability, and increasing energy storage resources will certainly also be needed to be supplied by these systems.

The need to reskill legacy L&D systems.

The requalification of legacy systems for smart energy technologies is a critical path for the energy transition and, therefore, needs to be supported by a specific PUBLIC POLICY and considered in the process of renewing the concessions of distribution concessionaires and in the reassessment of the regulatory impact of the re-bidding of transmission facilities. The current scope of work of L&D companies is no longer and will not be in the future the same as that described in the contracts of the current concessions. The reality of a more competitive market and the energy and technological transition needs to be considered.

Legacy systems need to be prepared to:

- Host and optimize the use of distributed generation and other distributed energy resources, such as back-end generation and energy storage.? Among the Brazilian distributors, only CEMIG has started the implementation of a distributed energy resource management system within its advanced distribution management systems. These systems are essential to properly orchestrate the use of resources as they are available, avoiding spillage of surplus generation and lack of stored energy when necessary.

-Adopt tariffs and smart meters, offering options to customers in order to provide access to energy services for the various consumption and income profiles, in order to avoid the undue transfer of costs between consumers, which with the monomial energy tariff ends up occurring, to the extent that the costs of service are not properly specified. Smart tariffs also make it possible to align the supply of cheaper energy at times of greater generation availability, reducing the average value of customers' bills that concentrate their consumption at these times.

-Demand response, today it is already feasible only for large customers, but whose response is effective sporadic situations, bringing great impact on productivity and economy, when activated with great frequency in these larger customers.? Demand management programs are most effective when used in a synchronized manner with smart tariffs in programs aimed at smaller consumers, who have more flexibility to change their usage profiles in higher-price situations.

Flexibility services, therefore, allow you to dynamically redistribute and redirect leftovers and shortages throughout the system with multiple agents and flows. To achieve this, the reskilling of legacy L&D networks needs to include:

- Investments in digitalization, automation, and introduction of advanced control systems for its automatic and intelligent management.

- Capacity and resilience reinforcements to accommodate growing decentralized generation, new electrification loads and withstand increasingly frequent extreme weather events.

- Implement tariffs and smart meters that allow the provision of flexibility and demand response services.

Smart grid technologies are already available worldwide, but their structured implementation has been systematically postponed in Brazil due to the lack of space in tariffs, contaminated by subsidies and periodic apportionment of deferred costs, and the lack of a public policy that considers total operating costs in the long term, and not just initial investments. The argument of tariff moderation, always employed in the immediacy of the short term, but never made feasible in a consistent and sustainable way in practice, has made it impossible to compete and reasonably tariffs in the long term. For this reason, some technologies have only been deployed in a segmented manner in Brazil, especially for revenue protection in the largest consumers and in the automation of substations and main feeders.?

The Necessary Evolution of Public Policies and Regulation

The lack of modernization of tariffs, where the monomial tariff loaded with subsidies and higher energy purchase values, carried out in regulated auctions, increasingly undermines the competitiveness of distributors compared to the offers of the free market or even of the remote distributed generation options, which are based on these higher regulated tariffs.

Smart metering would make it possible to bring utilities back in the game by offering options to customers in a competitive market, enabling new smart rate options with connected smart metering availability supported by cloud systems. ANEEL opened the possibility of the adoption of tariff sandboxes by the concessionaires, which will only be explored later.

Competition for the energy market is like the offerings of mobility service platforms – bilateral transactions where regulated tariffs are only referential, and the growing connectivity and growth of monetizable energy surpluses create business models and markets. New agents, who in some way already have end customers, are entering and will increasingly offer energy supply services: telecommunications companies, banks, oil, and gas companies, among others.

Regulation also needs to move forward, starting to consider the investments made in intra-tariff cycles. Today, investments are only recognized and incorporated into tariffs at each periodic tariff review, every 4 or 5 years. The current model encourages companies to concentrate significant investments only in the year immediately preceding recognition, which prevents incremental implementations that are more meaningful, more continuous, progressive, fluid, and at significantly lower costs.

In addition, regulation needs to ensure returns for companies and reduce the risk of upfront investments in new technologies. There needs to be a greater deferral of capturing cost reductions through economies of scale and new revenues from new services in the implementation of new technologies that deliver these cost reductions.

It is also urgent to review subsidies and charges that make electricity bills more expensive and erode the investment power of distributors. It is also necessary to review the allocation of costs and risks to consumers through smart tariffs, promoting the opening of the market for greater competitiveness and options of use plans. And finally, rethink innovations as expenses and not necessarily include them in the remuneration base, so that the implementation costs are diluted and do not impact the tariff all at once.

Conclusion

The transformation of the energy sector is already in place, it will be inevitable, fast and silent. Change comes from consumers to businesses and will be impossible to keep up with orderly top-down orchestration. The government and its agents have been discussing for years a Public Policy Agenda for the modernization of current systems, seeking to increase competitiveness, eliminate subsidies and provide regulatory certainty to agents, but there is an objective need to evolve. Energy resources will increasingly be within customers, who will have more autonomy and services will be integrated with a wide range of other services, through new agents. Public networks, which evolve in renovations, can and should be lighter and less expensive than the current ones, and should also be increasingly integrated with other urban services, such as lighting and underground networks, within the vision of smart cities. Similarly, energy services will be integrated with other services within the buildings of the future.?

These and other technology-leveraged business topics will be addressed in greater depth at the 16th. Edition of the Smart Grid Forum 2024, Latin American Smart Grid Forum, on October 28 and 29, 2024, in S?o Paulo, SP. Come and talk to the professionals who are building the future of the electricity sector: www.smartgrid.com.br/eng

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Sponsor the Smart Grid Forum: https://smartgrid.com.br/eventos/smartgrid2023/2023-12-11-120433-202309220402082024guiasmartgridingles.pdf

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