Municipal energy supply companies are facing new challenges due to the transformation of the energy system: Are their previous concepts suitable for the energy transition? Which technologies and innovations do they need to face up to the competition successfully and ensure a future-proof and reliable supply for Germany together with the other stakeholders in the energy transition? On 24 October 2017, a workshop in Berlin gave participants an opportunity for intensive discussions between municipal utilities and stakeholders from energy research. It was organised by Project Management Jülich and the Energy in Buildings and Districts research network.
An event report by Uwe Friedrich
Implementation of the energy transition requires fundamental new approaches and ideas – including those for energy provision to cities and municipalities. To achieve this goal, the various stakeholders must build stronger networks and cooperate more. Innovative ideas and concepts as well as new technologies from research must be considered systematically, optimised and applied. This requires new business models in particular, in addition to marketable solutions. They must create new perspectives for municipal utilities in the energy market of the future. The market will be more and more decentralized – based on a supply of renewable energies. This calls for a flexible, demand-driven network operation, intelligent combinations of electricity, heat and mobility as well as new infrastructure services. Municipal utilities must find their new role there. Cooperating with research can help in this.
The energy transition creates new framework conditions
Decentralisation, decarbonisation and digital transformation are the key trends in the energy transition for Dr Frank Heidrich, Subsection Head at the German Federal Ministry for Economic Affairs and Energy. The “old” German Federal Government had already passed or introduced corresponding new frameworks. These already have significant effects on local authorities, their urban districts and the existing buildings. For example, in recent years, the electricity market was based to a greater extent on efficiency and decentralisation. The amendment of the Combined Heat and Power Generation Act (KWKG) is intended to ensure that high-efficiency combined heat and power will continue to make a key contribution to implementing the energy transition in future: to achieve the climate targets, with more planning certainty and greater flexibility. The percentage of volatile renewable energy sources renders flexible plant operation essential. This process is supported through funding of the “Heating Network Systems 4.0 Model Project”. They boast an impressively high percentage of renewable energy sources, efficient use of exhaust heat and a significantly lower temperature level compared to classic heating networks. The German Federal Government aims to better utilise the potential efficiencies in Germany through the National Action Plan for Energy Efficiency (NAPE). Sector coupling plays a key role in this. Municipal utilities are among the key stakeholders.
Energy research was also restructured: Besides new topics and new platforms, such as founding research networks, energy research is to increasingly operate across system boundaries. Among others, the “Solar building/Energy-efficient cities” research initiative, which focuses on multi-technology projects and interdisciplinary cooperation and was launched with the German Federal Ministry of Education and Research (BMBF), epitomises this approach. The first joint projects have already started, some in cooperation with municipal utilities. Local authorities and the private sector face the task of coping with these changing conditions. Municipal utilities are to play a greater role in this – and in energy research. They are the local motors for the energy transition and have an eye on the market.
Municipal utilities in dialogue
In a “Dialogue Arena”, representatives from municipal utilities, citizens’ energy cooperatives, startups and researchers discussed the new role of municipal utilities, their potential and prospects on the changing energy market. The debate revolved around the following questions: How is the energy transition impacting municipal utilities? Which problems are occurring, which opportunities are being created? Have the municipal utilities already had experiences with new approaches? Which new roles resulted? Is research & development a success factor? What are the barriers for in-house research activities? And where do municipal utilities see further need for research – as impetus for the German Federal Government’s 7th Energy Research Programme?
Municipal utilities are an important constant – locally for customers and on the energy markets. At the same time, they must change, face up to the energy transition and its targets and enter new markets. For example, the 5th Monitoring Report on the Energy Transition from 2015 found that there would be a far lower demand for heating and gas in future. The future of electricity generation is in decentralisation, i.e. redistribution to local plants. Classic business models for municipal utilities will come under pressure due to these developments. For instance, a survey by DNK-Research found that sales of gas, electricity and heat still accounts for the majority of company profits. So which municipal utility and which business model will benefit in future? The Municipal Utility Study by BDEW/Ernst & Young “Digitisation in the energy sector” distinguishes four different types of company: First Movers try virtually all new business model trends that emerge. Early Followers join when the business model trend proves reliable and starts to establish itself on the market. Late Followers offer a new business model once it has clearly established itself on a broad level. And Observers focus on the core business of supplying their city or community.
Indicators for new business models
Decentralisation, changing customer requirements and digitisation are seen as drivers of change in business models. New regulatory framework conditions are also viewed as part of this. These frameworks are critical for the future focus of smaller municipal utilities. Specifically, decentralised electricity supply with the increasing percentage of renewable energy sources means that fluctuating loads or rapidly disconnecting generators can increasingly cause instabilities in power grids. This makes planning and operation of plants more complex, as generator and storage capacities must be optimally utilised via sector coupling and plants must be operated flexibly. Information and communications technology (ICT) is proving to be the key technology for this.
Municipal utilities can contribute to research activities successfully, and benefit strategically from this. This was found by the “City as Storage System” research project as an example. In this project, the Herten municipal utility cooperated with scientific partners to combine electricity and heating supply, in order to utilise the high levels of available local storage potential. In a field test underway since June 2016, a virtual energy storage system is being tested and the thermal storage capacity of the consumers connected – a leisure pool, an indoor pool and a local heating network – are being used for this.
Of course, the arena panel also discussed the political and legal framework conditions and asked: What is driving the change – climate protection or natural resources conservation? An argument was brought forward for CO2 as the lead variable and a price target for CO2. “That would render subsidy systems unnecessary”. Instead of losing ourselves in rules and closing loopholes all the time, CO2 prices could regulate the energy market.
Energy cooperatives as partners, project developers and energy suppliers
From the point of view of an energy cooperative, a successful change in roles also means including people and incorporating their individual demand structures. Experiences from the sharing economy can help energy cooperatives open doors. They bring people who want the same thing together. A glance overseas reveals cultural differences. It was reported that many of the grids in the USA are operated by energy cooperatives. However, irrespective of this, research into electricity and heating networks is essential – that was something all participants could agree on. However, for municipal utilities, the participants indicated that research is an interesting, but “cost-intensive additional business”.
Research as a risk investment?
Another progress report focused on the difficulties of networking research and the market, for example via digital platforms. For many on the market, research is not as interesting as new business models or services by startups. However, startups often grow out of research and development work. As a result, they build bridges to the market. That makes cooperation between municipal utilities, with their technical and sales expertise, and innovative startups in new markets all the more desirable. That could turn more municipal utilities into Early Followers.
A central problem for all stakeholders: Many good ideas are not profitable in the current legal framework. Investing in projects with uncertain outcomes involves a significant risk. In some cases, it takes a lot of perseverance to test the new technologies developed in practice. The German Federal Ministry for Economic Affairs and Energy pointed out that the real laboratories format is to be prioritised even more in the 7th Energy Research Programme. The objective is to test new technologies under conditions that could prevail in future.
Future business models and market roles
Dr Helmut Edelmann, Utilities Director at consulting firm Ernst & Young, presented six theories on business models and future market roles of municipal utilities in his keynote speech. The main statements:
- Customer orientation is becoming the guiding principle for business models. Municipal utilities must have a clear definition of real customer orientation and who their customers are.
- Markets are becoming increasingly fragmented. Due to unbundling in the energy sector, municipal utilities must find answers to fragmentation and enter new markets, e.g. in the intelligent measurement sector.
- Partnerships and cooperation are growing in importance. Increasingly complex requirements call for networking, experience sharing and learning from partners and other industries.
- Digitisation is revolutionising energy provision.
- Municipal utilities will be able to expand their role as infrastructure service providers for local authorities. They will still be needed as (digital) infrastructure service providers.
- A change in culture and values increases the chances of success. This includes less hierarchies, openness, team work and adaptability.
Municipal utilities as designers of the local energy transition
As an example for municipal utilities operating in new areas, Carsten Liedtke, CEO of the Krefeld Energie municipal utility, presented his company’s business areas. Here too, electricity generation has become far less centralised in recent decades: Within a 20 year period, the percentage of renewably generated energy has increased almost sixfold, partially replacing conventional central generation. Liedtke sees municipal utilities and their distribution network operators playing a main role in the energy transition and decentralised electricity generation. Municipal utilities now epitomise high feed-in power and are increasingly electrifying the heating sector – thus ensuring grid stability. In spite of this, many instruments such as tenders for the control reserve still largely focus on transmission system operators. What does the Krefeld municipal utility do in this environment? The company was recognised in the 2014 “CHP Model Local Authority of North Rhine-Westphalia” state competition for its use of mini-cogeneration plants for decentralised electricity and heat generation. Coupling to form a virtual power plant supplies various buildings flexibly and is adapted to their needs. Since 2016, more pilot plants have been operated with dedicated optimisation algorithms to supply a swimming pool and a multi-family home with roughly 50 residential units. The optimisation approach means incorporating both the heat and electricity requirements and the electricity exchange price.
To increase the chances of realising projects like this, precise knowledge of laws and correct formulations is critical as early as the application phase. Support through incentives and grants consulting, e.g. from the German Federal Office for Economic Affairs and Export Control, and simplified, more transparent application procedures can help here.
Innovative solutions for integration of renewable energy sources
Since 2014, the municipal utilities in the eNERGIE project have been working on real-time tracking of the status of the power supply grid. It is supported by the German Federal Ministry for Economic Affairs and Energy as part of the “Future-proof Power Grids” funding initiative. The goal was to establish a measurement system to analyse and individually optimise the grid areas of Krefeld municipal utility. To achieve this, new components were used in the Wachtendonk community, in order to deliver findings on the grid status. Solving the problem depended on recording operating and power quality measurement values at the low-voltage level, among other things. Real-time capable data transmission and connected real-time and master data were used for grid analysis with a few measurement points. This allowed critical grid statuses such as local overloads to be detected rapidly. The project was recognised with the GreenTec Award 2016 in the “Energy” category. These activities show that efficient solutions for integrating decentralised renewable energy sources and synchronising generation and consumption are becoming increasingly important. For this purpose, the high innovation potential of the roughly 800 municipal utilities and distribution network operators must be used in the competition for the best solutions. However, Liedtke added that the political framework for distribution network operators should be adapted to the future role in an increasingly decentralised energy system. The potential business area “congestion management” is one example of this.
Startups as partners for research and companies
A third keynote presentation focused on the function of startups in redesigning the energy markets with a focus on digitisation. Thorsten Seipp, Managing Director of startup volterion, reflected on the relationship to municipal utilities and reported on his consulting experience. His argument is that startups should have a consciously “disruptive” effect when cooperating with municipal utilities, rendering old business models obsolete.
Volterion GmbH was founded in 2015 as a spin-off of the Fraunhofer Institute UMSICHT. The company produces and sells small-scale redox flow batteries with continuous powers of 2 to 30 kW for single-family homes. The innovative energy storage systems make self-generated electricity from fluctuating renewable energy sources accessible even at night and at times with little sunshine.
From the point of view of a startup, the USPs of municipal utilities are their closeness to customers and municipal supply responsibility, which they have held for roughly 150 years. However, in the era of digitisation and decentralisation, changing business models and therefore new USPs are inevitable. Cooperating with startups delivers new ideas from external sources. In some cases, “finished” business models from new markets or other industries can be adapted. In spite of this, different worlds and cultures are united when two partners come together. Unlike municipal utilities, startups epitomise in particular new ideas, innovations and have relatively shallow organisational hierarchies. Municipal utilities can also benefit from research activities, for example in developing new products. It is also important that new business models come from the company itself. For example, municipal utilities can use idea workshops and promote entrepreneurial behaviour among employees (intrapreneurship).
As an example of successful cooperation, Seipp reported on a project by the Herne municipal utility, which is planning to build a climate-friendly and carless housing estate in Herne-Sodingen. Seven single-family homes are to be equipped with photovoltaic systems and redox flow battery storage systems by volterion GmbH. The ground-breaking ceremony is scheduled for early 2018.
In the following discussion, the unpredictable regulatory framework was mentioned as a barrier to growth for startups. The complex funding conditions and labour-intensive application processes were also described as problematic.
Workshops with keynote presentations
The previous debate was covered in greater detail in two simultaneous workshops. Representatives from municipal utilities were asked to formulate research desiderata and ideas from their point of view for topics and funding lines of the 7th Energy Research Programme.
Workshop 1: Opposition for municipal utilities
The most important question for this workshop was: What potential future business models are there for municipal utilities? This question was to be answered based on five key questions, which were briefly introduced by Prof. Dr Hans Schäfers from the Center for Demand Side Integration at HAW Hamburg as the moderator:
- Which future scenarios are apparent?
- How must municipal utilities be positioned to survive in future scenarios?
- What must municipal utilities be prepared for?
- Which new competitors are to be expected on the market in future?
- Is it still possible without cooperating with new partners?
The current developments in the municipal utility sector are revealed particularly through the new competitors and decreasing margins from the conventional business of selling electricity and gas. The transition from supplier to service provider is also paved with new challenges, such as digitisation, virtualisation, broadband expansion and implementation of smart city concepts. That is also why local municipal utilities must be integrated in the urban development processes to an even greater extent. They should already be involved as partners in district development and renewal, and deal with strategies for reduced heat requirements there. In the electricity sector, they are perceived as responsible for supply security – in terms of congestion management, black starts or operating isolated networks.
Municipal utilities as infrastructure and service providers
As providers of multiple converged services, municipal utilities are ideal for the role of superordinate platform managers for electricity, heat and data – not just in the energy sector, but also as part of new mobility concepts and smart city strategies. While municipal utilities know a lot about local customers, they do not use this knowledge often enough. The vision is for municipal utilities to become comprehensive infrastructure and service providers, fully automatic and customer-friendly. To do so, they should look into the following questions or scenarios: Should municipal utilities rely on fully electrical infrastructure (all electric) or build on a broader base? If gas is to remain significant, what level of expansion makes sense? And what effects does the increased competitive intensity with many new players on the market have? It is not only Deutsche Bahn, Telekom and the Sparkasse financial institutes that are now also selling electricity, and competing significantly with the municipal utilities. The giants Google and Amazon are also forcing their way on to the market. Housing associations not only develop districts, they also supply energy. Added to this are the many startups.
To survive in the face of this competition, companies need to bring in expertise: New employees with new ideas, who can today primarily be attracted with flexible working hours, flat hierarchies, work-life balance offers like company sports or childcare. Municipal utilities cannot be fit for the future as isolated units. They should be open for cooperation and networking, not just within the energy sector. Innovations often come from outside, from startups, IT companies, insurance companies or housing associations. Speaking of the future market for metering: Business models must be developed for new metering points. Smart meters will soon be rolled out to hundreds of thousands of users, but there is no business model for them.
Workshop 2: Technological development and digitisation as success factors
Katja Tschetschorke from Project Management Jülich (PtJ) asked the initial question at the second workshop: “What does technological development mean for municipal utilities today, and what role will it play in future?” The background for this question is that municipal utilities must create a sustainable perspective for themselves in a liberalised energy market – while also promoting the goal of the energy transition. Do they overlap? Being aware of your own strengths helps in this. And these strengths are primarily local solutions, for example infeed of renewable energy sources and flexible operation of heating networks. One demand is for an overall increase in the speed of building heating networks. Industrial waste heat use also offers immense technical potential. Commercial and planning risks and barriers should be investigated in even greater detail. Research and municipal utilities should share their expertise in this area. However, in some cases, the lack of expertise and personnel shortage are particular problems in municipal utilities.
For example, further need for research is seen in sector coupling, storage technologies and concepts and in information and communications technology. Concepts are needed for integrating electromobility to avoid congestion for the ongoing electrification process and the expansion of decentralised generation. It is important that the same competitive conditions apply for all renewable energy sources. Digitisation of the existing expertise will promote its propagation and application. This requires the right software and tools. The SimCity tool for simulating different local supply solutions was mentioned as an example. In the mobility sector, research into new battery concepts and fuel cells is essential. The final objective is optimal use of all infrastructures.
Quo vadis energy research?
To close the event, Dr Rodoula Tryfonidou, Head of the Energy Research department at the German Federal Ministry for Economic Affairs and Energy, informed participants about the preparations and consultation process for the upcoming 7th Energy Research Programme of the German Federal Government. It started at the end of 2016 and was continued in the “40 Years of the Energy Research Programme” ceremony this May. The 7th Energy Research Programme is to form part of the coalition agreements for the new legislation period, and be passed by the new German Federal Government in 2018.
As a strategic element of energy policy, energy research can help implement the energy transition successfully, especially through technological innovations. It is also important to secure future technological options – to a certain extent as macroeconomic risk prevention. In addition to this, there are aspects such as exporting energy innovations – in particular in the context of international efforts for effective climate protection.
The development of research budgets in the past ten years reveals the increasing significance for the implementation of the energy transition. The priority is to promote energy efficiency and renewable energy sources. Besides cross-technology energy system analysis, technical focal areas include in particular researching energy conversion technologies, as well as networks and storage systems, grid integration of renewables and sector coupling. Another focal area is efficient energy use in buildings, in the heat and industrial sector. Future energy research is to focus increasingly on systematic solutions: synergies, networking and system optimisation are the keywords. New topics are already becoming apparent and were also already discussed at this event: the major trends of digitisation, decarbonisation and decentralisation and intelligent sector coupling. New research formats like real laboratories and communication platforms like the research networks will play a greater role. New stakeholders like energy cooperatives, startups and municipal utilities can give energy research an additional innovation boost and a closer relationship with the market.
Expertise transfer essential for researchers and municipal utilities
The strategic model project launched by the German Federal Ministry for Economic Affairs and Energy “Trends and perspectives in energy research” performed a comprehensive technology evaluation and proposed new instruments. Stakeholders from business and research were incorporated in expert workshops, in an online survey of the Energy Research Network and a specialist conference. The process is to be completed by the end of 2017. See www.energieforschung.de for documentation and statements.
The subsequent discussion was primarily about transfer of research results: Why are long-standing results of energy research too rarely turned into marketable products and methods? Exceptional research results must be more visible. Recognition of research highlights in competitions can contribute to this. Besides the better dovetailing of research and practice through research networks, superordinate evaluation of the project results by support research teams is also important. In the area of the Energiewendebauen research initiative, i.e. research for buildings and districts, these results are to be made accessible from 2018 on via a map of the projects.
Promoting the transition: Demands for research and politics
- Support for the development of business models for future markets was an important demand by the municipal utilities. However, according to the German Federal Ministry for Economic Affairs and Energy, the funding provider is not responsible for direct subsidies; it is in the companies’ own interest to develop business models. However, selected questions can be investigated as part of research projects.
- In the discussion, the municipal utilities complained that they are losing many minor consulting projects for on-site consultation due to the previous subsidy criterion of independence. The German Federal Ministry for Economic Affairs and Energy reported that the approval requirements in “Energy consulting for residential buildings (on-site consulting, individual renovation roadmaps)” and “Energy consulting in medium-sized companies” on 1 December 2017 are to be changed so that in future all qualified experts can work in subsidised in-depth energy consulting, provided they meet the respective minimum requirements for specialist qualification. This new regulation makes higher consulting figures more likely, as consumers will be able to choose from a far larger selection of qualified energy consultants in future. However, the consultation must still be objective/neutral and of high quality. Both the tradespeople performing the work and the energy supply company and/or their commissioned energy consultant could then perform the required energy consultancy.
- Representatives of startups called for a simplification of the previous creditworthiness check as a requirement for subsidies. Young companies generally lack the two annual financial statements to be submitted for the creditworthiness check; and the revenue situation is still insufficient. From their point of view, a solution could be a creditworthiness assessment in cooperation with investors on the basis of the business plan and waiver of bank guarantees and investment contracts before approval. For a closer integration of startups in funding research, networking with the German Federal Ministry for Economic Affairs and Energy’s EXIST programme “Business startups from science” was suggested.
- All participants repeatedly complained about the high complexity of applying for research funding.
- According to one proposal, concepts could be tested experimentally in urban districts, i.e. without depending on conventional laws, for example in data protection or consumption recording, by funding real laboratories. One participant reported that deviations from valid law are permitted in the Netherlands with express permission of the parliament within a research project. However, the participant also stated that a report must be submitted afterwards.