Market fairness, DERMS and decentralization: the new drivers of the energy transition?

Peter Warren:
Thanks very much Tom. So let me kick it off with sort of an opening question here, and this is sort of a broad question, and I'll go to you first Kristian on it here is, the energy transition is in full motion. I think we fully agree with that. Electrification is everywhere. I've got a Tesla, I've got a zero motorcycle, I'm part of that transition. I'm eyeballing a home battery to see where that goes. Renewable energy is everywhere and really we're looking to see really where things are going to foray. Where do you see people playing as active members of the new energy market, including even things like hydrogen. Just sort of what's your viewpoint on the new energy market?

Kristian Ruby:
Yeah, that's a big one. Well, maybe to start with the helicopter perspective here, we've seen the transition in the utility world unfold I would say over at least a decade at full speed. And before that we already had a few companies that were taken an early start. What we see now I think is perhaps the most prevalent trend is that companies are taking a very different approach, individual companies are taking different approaches to the energy transition. Some are focusing on offshore wind and hydrogen production transmission, others are going downstream, focusing on e-mobility, charging infrastructure, onshore renewables, distribution grids. So there's really a diversity of strategies. Some are getting out of generation altogether, focusing on distribution and customers. So where you'd have in a distant path now a utility defined by power plants and transmission lines, the distribution lines out and then to the customers, you really have a wide variety of ways that companies position themselves within the sector.

Peter Warren:
Anything to add there, Tom?
Tom van der Leest:
Well, yeah. I think on many of these commodities, some of where we're at the start, otherwise we're progressing a bit more. I think in the complexity kind of increases by all the new stuff that we're doing. Maybe to add a bit to your first question, Peter, and I'm very interested Kristian, what's your view on that? Because especially on electricity, we have a very complex system. It always needs to be in balance, we always have to look at that capacity, where do we use it, when do we use it. And that's a balancing act. Well, all of a sudden, we're introducing mediums for storage such as batteries, decentralized productions, whether it be through wind or solar that are very unpredictable in nature, that provide some challenges not only for grid operators but also for us and consumers. Well, what's the best kind of way to treat all these new options? What's your view on some of those trends on that?

Kristian Ruby:
Yeah, so my view on all those trends, well first off, I would want to sort of establish that the mega trend that we're seeing in the energy system, despite all the noise is a massive decentralization. Yes, there's hydrogen, yes there's offshore wind, yes, there will be power plants in the future. But when we see where we come from and where we're going, it's all about a massive decentralization.
One example, E.ON is celebrating these days their feed in their grid number one million. One million feed in points in one grid. It is absolutely amazing. If you look back 20 years, you'd maybe have had a few hundred in such a grid. So we are really talking about a gigantic change here. So that poses a whole range of challenges, as you said, but it also provides us with a lot of opportunity. I think that's really important. Opportunity for the customer to do things their way, opportunity also for society ultimately to have a more secure energy supply. And energy security is really rising to the top of our agenda because of all the changes around us, all the geopolitical shifts we're living through these days. And one significant part of this decentralization and the upside of it is that whereas it does pose challenges, ultimately it will provide us with a system where the individual customer has a chance to weigh in on his own security supply. And that's a really interesting perspective.

Peter Warren:
I totally agree with you on that and it's interesting and it's been sort of a viewpoint of ours, is that energy will no longer in the future if you go a little bit further ahead, produce somewhere and shipped somewhere. It'll be made and consumed locally. And a lot of the existing infrastructure will be used to balance between zones. And this is a tough concept when you talk to other industries because people aren't staying in their same swim lanes as you mentioned before too. People are moving around and they're used to a predictable way of things. I buy oil from these guys, they send it to me and therefore, it moves forward. Even in the transportation industry, we're talking to people in the rail industry is that they have this viewpoint, I have to buy hydrogen, therefore from somebody, but really they could make their own or they could maybe have hydrogen as a service from someone. The rules are different. It could be made on-prem, it could be trucked in still or piped in.

Peter Warren:
But the world's changing and that really comes around DERMS. You talked about the connection points at E.ON. How do you see the view of DERMS and people participating more in the energy, not just for my home or my business, but as a part of the community?

Kristian Ruby:
Well, that's definitely part of this decentralization trend. When we look at the additions of solar to the grid last year we saw a lot. And I'm talking millions and millions of customers investing in their own home systems probably at least in part as a direct consequence of the uncertainty they saw around them and the notion of, well, I want to retain just a little bit of control on my own supply in case things go awry around me.
If we look at this development from a systems perspective, it spells a number of pretty fundamental changes for the utility as we know it today. First off, and this is something we've been dealing with for several years, we need to learn from the tech business, for instance, to become really obsessed with our customer.
Back in the day, we would see the customer as a load profile. We're used to this pattern, that's what it does at this time of day. Probably they're switching on something at home, we don't really know, but this is the load profile, full stop today. In order for us to make money and stay competitive, we need to be obsessed about what our customers want, how we can serve them, and also how we can help them optimize in an increasingly complex system.
This is, in essence, great news for utility. We have a whole range of new services. We can supply them onsite systems, we can supply them with support for optimizing their local system. We can supply them with energy services for the car, which was in the case in the past and so on and so forth. But the first thing that's really important is that we need that customer obsession as part of the new paradigm.
The second thing I would say is that we need to acknowledge that our operations will change quite fundamentally. And it even comes down to the very basics of security supply, like the 50 hertz and the N minus 1. Today even you tend to look at the issue of reliability at transmission level. Are we in sync? Are things happening at the right pace and at the right rhythm at transmission level? If so, then we're good.
The truth is, no, we're not because so much dynamics has already changed to the low voltage grids. So today, they need to have a whole different level of reliability and optimization. So we need to change our notion of security supply in a certain way, the concrete methodologies that guide our security supply calculations and the operations that go along with it. Then the third thing is we need to look for new ways of making money in this new system.
Just if we look at the massive rollout of DERMS and when we take that to the extreme, maybe adding some 600 gigawatts of renewables to the European grid, which has maybe a total of a thousand gigawatts a day, well that means we need to see for different types of business models like demand side response, introduction of local flexibility sources as new ways of doing things in order for us to stay competitive and provide reliability and good service.

Tom van der Leest:
I find very interesting some of the things you point out here. So back when I started working for a few DSOs, we refer to a connection point rather than a consumer, right? And the connection point now no longer holds valid because all of a sudden, it's mobile and it's called an electric car. So this consumer obsession rather than an endpoint obsession, I really much relate to that.
I do think there are some fundamental changes that we have to make it appealing for the key and the solution to the problem, the end customer, to participate. So I think in some of these countries we work with fixed profiles instead of dynamic tariffs. We work with high tax energy where 60 70% of your kilowatt-hour price is consumed by taxes or other kind of cost associated to it, and not really the commercial part where you can actually get a discount on. And I think that's something for these government and also for DSOs to think about on where does the customer obsession lies and how do I seduce my customer to participate in new business models that I would like to develop.
I'm always being very interested about this concept of aggregators on leveraging flexibility. So assuming that you would say that the energy transition falls around three things, reliability, affordability, and predictability, and those three things are a balancing act, then all of a sudden, it's not the energy that has to value, it's flexibility that has to value. And that's very much where this new business model lie.

Tom van der Leest:
At the same time leading a bit up to the next question, it's kind of important to keep it equal and fair. And we don't all have this equality. I have solar panels because I have a roof suitable for those solar panels. I have an electric car because I'm able to afford an electric car. But also on a bit more macro level, one party shouldn't create its own amount or selling at favorable times by switching from one commodity to the next. So with this whole idea of upcoming and energy storage facilities and large scale batteries or even hydrogen storage, we could leverage one commodity versus the next.
How do you see that and do you think on a European level we're doing enough to keep this a fair playing equal game?

Kristian Ruby:
It's very interesting that you bring up the word fairness. It was actually one of the three top priorities set by our new presidency team when they came in, in June this year. They said security supply, grids and fairness. So indeed I think with everything that's been happening in the recent years and especially perhaps in the last year, the issue of fairness has really risen to the top of the agenda again. And why is that? Well, as you say, there's something about the ability of the individual to participate one way or the other in the energy transition and a whole range of fairness questions rise exactly from that. There's also a national dimension to this. The policies that we do at EU level need to suit 27 very different contexts with different types of resources, different types of starting points, different types of energy systems, and the fairness equation amongst that is really important.
And a last dimension to mention here is, if you will, a sectorial fairness. We experienced in the past year a quite paradoxical situation where the war in Ukraine triggered a massive rollercoaster of price increases and so on and so forth. And what policymakers did was quite interesting. On the one hand they said, "Okay, we need to get out of those fossil fuels and get into clean electricity." What they did from an intervention point of view, however, was to double down massively of all kinds of interventions in the power sector while leaving the oil and gas in companies that were really raking it in from these disruptions. So there was a fairness aspect to that. And we also saw a very important fairness discussion in the context of electricity prices.
I think it's very natural for a politician if you see skyrocketing prices all of a sudden to say, okay, wait a second, we need to do something. However, what they ended up doing in many cases was really counterproductive because, as it were, one of the good things of a very high price is that it provides you signal, better save this stuff, better not buy too much of this because it's expensive.
What we got on the other hand with those policy interventions was essentially, at least in some cases, policy makers bailing out individual customers, incentivizing them to use more and also making very, let's say, counterproductive arrangements, which we're still grappling with. For instance, there's this idea that we should ban the disconnection of vulnerable customers if a difficult situation comes up. That sounds seducing at first. But once you start looking into it, what that means is, well, you're banning the disconnection, thereby incentivizing vulnerable customers to use more. And at the same time, you're piling in a mountain of debt on top of them. So they come out of this crisis with very bad habits and a huge debt. And this is the kind of situation where we need to get the right notion of fairness to guide our decisions.

Peter Warren:
Yes, thank you for that. It leads into my next question, which I'll pick up in our next part. We'll pause today. Thank you very much for today's session. We'll break now and we will see you again in the next part.