A market in high speed transformation

A picture is emerging of the European electricity market post liberalisation. It will be radically different. Policies, laws and commercial strategies which have served wind well in the past will not do so in the future. The result will be a transformation achieved at high speed, with all the positive and negative effects that such velocity entails. In short, liberalisation of the electricity business will be fast, deep and bloody.

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In the electricity market of tomorrow, the successful wind energy company will be an aggressive marketer of an infinitely flexible product. Possessed with a flair for integrating wind power into user oriented, total solution packages, the company will boast a commercial trading division far larger than its engineering department. The wind turbine salesmen and women of yesterday will have been replaced by entrepreneurs who, skilled in the art of adding value to their merchandise, will win over customers from gas and "clean coal" suppliers. Other commercial division staff will be infinitely adept at weaving deals for niche applications, with a detailed understanding of how to encourage expansion of these specialist markets.

If all this sounds like so much far fetched gobbledygook, then just take a look at the mega trends which are currently shaping industry, society and politics. They are all about to impact the energy industry -- and not least to impact the renewable energies.

The European electricity industry has, for the most part, been wrapped in a series of monopoly cocoons. The turmoil which has shaped most other industries over the past 20 years has passed it by. While car manufacturers, the computer industry and many others went through a painful global restructuring, national utilities -- with the possible exception of Britain -- are only now feeling the powerful global trends which have been shaping all industries: the emergence of direct access to the customer as a key strategy; the increasing pressure of competition in every conceivable niche; the drive for highly diversified and individualised products and services; the requirement for stewardship of these products; the need for flexibility within networked and virtual companies; and last but not least, the rise of the concept of sustainable development as an integrated business goal.

The electricity industry is now facing the monumental task of catching up with the real world. Its liberalisation from the archaic bonds of a structure now only relevant in history will not only introduce competition between existing players, but also open the entire sector to whoever is willing to pay the entry fee. In the same way that energy service utilities are entering new business areas -- telecommunication, security services, waste disposal -- new competitors from these sectors will be entering the energy market, loaded with professionalism, cash and new ideas.

The result will be a transformation achieved at high speed, with all the positive and negative effects that such velocity entails. Positive, because rapidly increasing competitive pressure supports the kind of radical change and innovative solution that wind energy embodies. Negative, because vital aspects such as security of supply will tend to be sidelined, while there will be little time to learn from experimental solutions or to take precautions against undesirable side-effects. In short, liberalisation of the electricity business will be fast, deep and bloody.

Packaged services

The key forces driving all market players will be reducing production cost, strengthening customer relations, building brand loyalty and increasing customer satisfaction. The once uniform product "electricity" will be split into volume and time dependent components, into generation, production, transport, frequency control, stability control, and so on. These will be repackaged into a plethora of separate offers targeting individual user groups.

Industry, in particular, will be offered a mesmerising choice of electricity supply options. To meet the aluminium smelter's craving for large quantities of cheap power with guaranteed availability, packages will be hawked which leave out specific frequency or voltage stability. The micro chip producer, with its hair fine manufacturing process, will be offered 100% available electricity and absolute frequency and voltage quality. Other businesses will be able to buy electricity for the lowest price as long as they accept supply-side limitations, including unannounced switch-offs.

Meeting the needs of domestic customers will require a totally different approach. Most do not know, or even care, where their electricity comes from. All they want is trouble free delivery of the necessities of modern day life: telecommunications, water, electricity, and so on -- and in some cases will demand a clear conscience as part of the packet. The clever service provider will recognise this and market electricity accordingly. Customers will be categorised into "price," "comfort" and "standard" oriented groups, with total solution packages devised for each of them.

For the price oriented customers, the package will be without trimmings. But even this bare-bones group will find "total energy solutions," which include electricity and heat, to be the most attractive. Packages for "standard" customers will comprise more functionality and will be a stepping stone to the fully integrated solution demanded by the "comfort" target group. Here we will see the integrated supply of buildings and their inhabitants with full services in the areas of water, energy, security and health. Even personal transport could be included as part of the overall service package.

In all likelihood it will be non-utility suppliers, with their ample experience in commodity marketing, that will dominate the service market. The successful wind company will already be forging the first tentative links to these firms. Even more importantly, it will be recognising the urgent need for making its voice heard in the political arena. Without a series of cast iron ground rules the enormous potential of liberalisation could still slip through the fingers of the wind industry.

Understanding the market

In order to come up with the right set of ground rules, it is first necessary to take a look at where the market potential lies and which forces of good and evil are likely to influence it. Within the overall picture of tomorrow's energy market, there are three areas in which the successful wind company of tomorrow can operate: the open energy market, the added value market and the protected market.

On the open market, where cheap ubiquitous energy is the key item and all energy resources are ranked according to profit alone, wind does not stand a chance. Hydro energy is the only renewable resource to have made an impact here. But although this is where the real market volume is, the added value market and the government protected markets are already nibbling away to gain a greater share of the cake.

The protected energy market is where most wind turbines are sold today. Statutory instruments such as tax incentives, or schemes such as Germany's Electricity Feed Law, based on the concept of a renewable energy feed in tariff (REFIT), Britain's Non Fossil Fuel Obligation (NFFO), or Denmark's Wind Turbine Law all create a protected area for wind within existing electricity markets, dominated as they are by big generators and suppliers. Eventually these dinosaurs will lose their grip on the shifting sands of liberalisation and the flexible service providers of tomorrow will move in. When that happens the demarcation line between protected markets and the added value market will become well and truly blurred.

On the added value market people are prepared to spend more on a quality product because it adds value to their lives or to their businesses. As more people demand the option to add value to their electricity supplies, governments will be obliged to ensure that markets allow them to do so. Here lies considerable potential for sales of wind power. The drivers for the added value market are several. They range from a desire to actively contribute to pollution abatement by using wind power, to improving a company's image by visible ownership and operation of a clean power plant, to a desire for self-actualisation or self determination: "me and my megawatt-system."

The modern wind turbine market in Europe has its roots in the added value sector. Roughly 20% of people in industrialised countries can be classified as "ecologically oriented" and such greenness will be heavily exploited. Today's introduction of "green pricing" is a first step in this direction and more and more versions of green power programmes will be created, with several green markets resulting. For most utilities, green power will be just one supply option out of many. But some will exploit its potential to grow from an incidental marketing tool into a decisive company uniqueness -- and will concentrate exclusively on the production of green energy.

Other added value vendors will concentrate on image aspects. For this market, wind turbines could be developed with an extravagant and eye-catching design -- small and silent enough to be placed in business and industrial areas, large enough to impress the most blasé customer. Others will offer turn-key solutions for the safety-conscious user: guaranteed power supply through a combination of wind energy and gasified biomass energy, maybe including a rental contract for several acres of forest. In that way electricity supply becomes immune from the political forces which could disrupt oil, gas or coal supplies.

Price remains important. The lower the price of wind, the larger the volume of the added value market. But even without any renewable support schemes this market will expand into various niche applications -- as long as the ground rules are fair and set in cast iron legislation.

Defining the ground rules

For wind to gain fair access to the huge sales volume of the open energy market, the external costs of electricity generation and supply would have to be internalised into the product's end price. This would be the optimum solution for wind energy, a solution that would fit well with today's trend towards the separate pricing and sale of the individual aspects of energy production. Given such a level playing field no additional renewable support policies would be needed, no separate "protected energy market" would be required. A mechanism for achieving this utopian electricity market -- and the political agreement to implement it -- is still a surprisingly long way off. Meantime, wind can turn to the growing added value market. Or can it?

There is a major hitch. Access to electricity customers can only be gained through the electricity supply network. Without free access to the grid for all market players, those heading for the added value market are pinned to the starting line of liberalisation. Guaranteed and regulated third party access is essential if today's owners of the electricity networks are not to be the controllers of tomorrow's markets. Such access has yet to be achieved in most of Europe. A poor second cousin, negotiated third party access, has been much discussed and is a much supported alternative to free access to a regulated grid. But it does not go far enough; it would still leave the old utility structures in control of the market.

Without a fair market and without fair access to the grid, wind energy -- a product which should be flying along on the crest of liberalisation -- has no option but to plea for a continuation of the protected markets which have sheltered its growth hitherto. The form such markets take is a matter of national character, from the highly competitive regulated renewables scrum of the NFFO playing field, to the authoritarian nature of the German REFIT law, to the grass roots democracy of Denmark's wind law. But while accepting the inevitability of national niceties, Europe -- and for that matter the world -- needs to agree on the same shaped playing field and a common goal.

setting the agenda

Any playing field on which to base rules for fostering the growth of renewable energy must be oriented to the mega trends shaping business and society. Today it is market forces which decide winning technologies and sector survivors, not government mandarins. With this in mind, a protected market for renewables needs four fixed corner flags.

Competition is the first one. In today's ultra-competitive business environment no support system will be accepted unless it complies with the rules of supply and demand. The American Wind Energy Association's proposals for a "Renewables Portfolio Standard," which would place an obligation on electricity generators to include a fixed amount of renewable energy in their supply portfolios, incorporates competition by including a system of tradeable emission credits. In contrast, Germany's REFIT concept, which fixes a standard price for all wind energy, is the antipathy of competition.

The second flag must point to market-oriented solutions. The more flexible a model is, the more chances for renewables to win dedicated market niches against unregulated competitors, such as CHP-systems or gas turbines. A rigid, uniform approach to supporting all renewables under one set of rules is doomed to fail. Wind energy, photovoltaic generation and biomass, to mention just three technologies, have completely different application characteristics and therefore need different support policies.

The third flag must fly for the market's new players, welcoming the entry of new attitudes and approaches. The concept of "voluntary industrial commitments" to mitigating pollution through development of renewables by utilities has frequently been mooted as an approach worth following. But any long term commitment from the players of today is meaningless since they will not be here tomorrow. In a rapidly changing industry, it is an approach doomed to failure from the start.

Finally, the fourth guiding flag must be so flexible that it can be periodically adjusted as the details of market liberalisation and utility regulation emerge. At the same time, however, it must be impervious to external attack. Experience in both Germany and Denmark has shown how markets can be dramatically slowed once utilities are allowed to sow the seeds of insecurity.

Fixed ground rules accompanied by flexible instruments of implementation would seem to be the order of the day. A perfect playing field at the first attempt is perhaps asking for the unrealistic, but a good deal of hearty flag waving could at least ensure a second division pitch. Aggressive marketing, it seems, needs to be combined with an equal measure of aggressive lobbying.

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