Engaging consumers in a decarbonized world with the right pricing
BEHAVE 2016
Coimbra, 9th of September of 2016
Ana Quelhas
Director of Energy Planning Department
• Achieving decarbonization
• Pricing distortions
• Engaging consumers in Portugal
Agenda
2
Europe has assumed a long term economy-wide decarbonization goal of at least 80% emission reductions by 2050 compared to 1990 level
• Strong push for energy efficiency
• Strong electrification of energy demand
• Full decarbonization of power sector
EU GHG emissions by sector100%=1990
Source: EC, “A Roadmap for moving to a competitive low carbon economy in 2050”, 2011
3
Renewables and energy efficiency are the main instruments to achieve decarbonization
Source: IEA – International Energy Agency
Average annual investment in low carbon techsTrillion $13, 2014-2040
Greenhouse gas emissions reduction by driverGt, 2010-2040
4
LCOE wind onshore$/MWh
Cost of Solar PV module$/W
Source: BNEF
Innovation and mass production of renewable energy led to a strong reduction in the costs of these technologies, namely for wind and solar PV
5
The boost in the competitiveness of RES technologies led to frequent upwards revisions of the forecasts for installed RES capacity
0
50
100
150
200
250
300
350
400
450
500
550
600
20302020
2015
2006F
2010F
0
100
200
300
400
500
600
700
800
900
1 000
1 100
2020 2030
2006F
2015F
2010F
Solar energy installed capacity forecastGW, 2013-2030
Wind energy installed capacity forecastGW, 2013-2030
20132013
x6.9
x8.0
x2.0
x2.5
x3.6 x6.2
Source: IEA
6
The increase in intermittent power generation sources needs to be accompanied by investments in techs that provide flexibility to the system
TRENDS OBSTACLES SOLUTIONS
Centralized Decentralized
Conventional Renewable
Dispatchable Intermittent
Source: European Commission
Grid instability
Grid congestion
Volatile markets
MWEnergy storage
Smart analytics
KEY
Flexibility
7
While historically generation techs have adapted to demand changes, in a decarbonized world it will be demand adjusting to supply changes
While in a conventional world, generation techs are able to adapt to demand changes...
Portugal’s electricity balance at 07/05/2016Portugal’s electricity balance at 09/08/2008
Source: REN
... in a decarbonized world, demand needs to adapt to generation changes
8
In this context, the “energy efficiency” concept is also evolving from consuming less to consuming smart
GenerationFully dispatchable
Mostly pollutant and limited resources
Cost structure
Scarce resource
Energy efficiency
CONVENTIONAL POWER SECTOR
DECARBONIZED POWER SECTOR
Mostly intermittent
Mostly clean andabundant resources
Energy Capacity
High fuel cost with low capex Low fuel cost with high capex
Reduced energy consumption Smart energy consumption
0,0
0,5
1,0
1,5
2,0
2,5
0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5
Oil
CAGR 13-40
CAGR 73-13
Coal
Gas
Electricity
Total
Renewables
Highest historical and forecasted growth
Inputs to electricity as a share of total primary energy%, 1965-2035
Final energy CAGR by fuel type%
Source: BP Statistical review 2014, IEA WEO 2015
Electricity as a final energy source has grown significantly in the past, and it should remain as the highest growth source in the future
Source: EDP analysis
% CO2 emissions reduction
% electricity in final energy demand
Emissions factor
Zero
Today´s
Increase electrification> Transport (EV)> H&C> Energy efficiency
Decarbonize electricity> Renewables> Nuclear> CCS
Target
A
B
C
Indeed, strongly reducing emissions implies increasing electrification of energy demand, besides decarbonizing the power sector
Emissions reduction as a function of the share of electricity in final energy demand%
11
Through the electrification of transports and H&C, overall energy consumption decreases due to higher efficiency of electric techs…
Source: Deloitte, EDP
Transport Electrification1 (Average for 100 km) Heating & Cooling Electrification
ELECTRICVEHICLE
DIESELVEHICLE
VS
58,7 kWh(6 liters)
24,3 kWh
13,5 kWh(1,4 liters)
13,5 kWh
Primary Energy
Final Energy “after the engine”
HEAT PUMP
H&C NON-ELECTRIC
Heat pump 3x more efficient than non-electric technologies
VS
90% 300%Efficiency
1. It is assumed a primary energy/final energy ratio of 68% for generation and 91% for transport and distribution
Electric vehicles 2,5xmore efficient
12
…contributing to decarbonization not only due to reduced overall energy consumption, but also due to the ability of use renewable sources
1%
10%
14%
20%
Electricity
21%
8%
15%
Transport
10%
6%
17%
34%
26%
Total Heating and Cooling
2014
2020
2004
Share of Renewables by sector in the EU1
%, 2004 - 2020
1. EU-27 - excludes MaltaSource: Eurostat
Higher %RES in electricity is explained by the higher easiness of RES implementation for power generation – there are several RES technologies available at a competitive cost
• Achieving decarbonization
• Pricing distortions
• Engaging consumers in Portugal
Agenda
14
Source: Eurelectric
In the last years, electricity retail tariffs have been pressured upwards mainly due to the strong increase in the costs related to taxes and policy
Evolution of electricity retail tariff components in the EU€cent/kWh, 2008 - 2014Retail tariff components
> Energy– Costs are related to production in
power plants, trading & selling, customer service
> Network– Costs related to transport and
distribution activities
> Tax & Policy Costs– Costs are related to taxes and
energy policy such as: renewable and CHP support, nuclear decommissioning, vulnerable customers, etc.
Taxes and Policy costs
Network
15
There is an imbalance between the way costs are charged to final consumers and the underlying structure of costs...
Energy
Charge structure
Mostly kWh
Mostly kWh
Mostly kWh
Underlying costs
Mostly kWh
Mostly kW
Fiscal nature (Taxes)
Mostly kW (Policy)
Match?
YES
NO
NO
16
... which generates a significant mismatch between the costs and the revenues’ structure in the power sector in several countries
Structure of costs and revenues of the power sector by country1
0%
20%
40%
60%
80%
100%
RevenuesRevenuesCost Cost
Variable
Revenues
Fixed
Cost
1. Data for Spain refers to 2015 and comes from BCG analysis; Revenues data for Portugal calculated for all voltage levels; Cost and revenue data for Portugal refer to 2016; in Italy, revenues’ structure refer to households only
Source: Eurelectric, BCG, European Commission, EDP analysis
17
Charging fixed costs through a variable retail tariff leads to distortive incentives to reduce demand from the grid
Representation of tariff deficit creation due to demand reduction
Costs
Revenues
Breakeven
VolumeV0V1
Deficit
M€
Comments
> A demand contraction causes a reduction of revenues by α, which is higher than the cost reduction of the system (β), thus leading to a tariff deficit
> Increase power demand costs α to the consumer, but only costs β to the system (α> β)
— This penalizes demand electrification and overvalues investments that reduce demand at grid (energy efficiency and distributed generation)
— Clients with higher load factors are paying more than the costs that the system incurs to satisfy that demand, so as to subsidize clients with lower consumption
α
β
18
This cost to price mismatch leads to a “vicious cycle”, where system costs will be charged over few(er) customers, increasing the “consumer divide”
Source: EEI, “Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business”, 2013
Loss of revenues >
cost reduction
Tariff increase required
Customer assessment
Behavior change
DER1
Recovering the revenue gap through tariff increases will:
• Push costs to consumers who didn’t invest in distributed resources (“consumer divide”)
• Increase profitability to invest in distributed resources (“death spiral”)
Reduction of grid demand
1. DER: Distributed Energy Resources
19
There are historical reasons for these distortions, but the context has changed and the associated inefficiencies are now greater and need to be addressed
Historical motivation
Context
• Robust demand growth rates
• Power generation mix had a higher share of technologies with high variable cost
Emissions/ Energy
Efficiency
Innovation
Why need to change?
• A highly variable tariff protects consumers with low load factors (progressive effect)
• Higher variable tariff provides stronger incentive to reduce demand, contributing thus to energy efficiency and the reduction of greenhouse gas emissions
• Power demand stagnation / reduction
• Increased penetration of technologies with low or null variable cost
• Equity is more effectively achieved with special mechanisms to vulnerable consumers
• A highly variable tariff over-incentivizes new technologies, penalizing consumers who are not able to invest (regressive effect)
• Decarbonization of the power sector
• With RES abundance, energy efficiency is not about reducing demand, but instead consuming when energy is more abundant
Equity
• Customers had no viable technological option to reduce grid demand without loss of service
• Set of new technologies (energy efficiency, storage, distributed PV) allows change in grid demand without changing the clients’ service level
20
The tariff structure also over incentivizes investment in distributed resources over centralized plants, which are more economical
• Return for investor is higher with investment in distributed resources
• However, the optimal for the society would be if these investments were in centralized generation (not only in utility-scale solar, but also in thermal and in other mature renewables)
Solar LCOE vs Revenues/Savings by segment in Portugal1
(€/MWh, 2015)
0
20
40
60
80
100
120
140
160
Residential IndustrialCommercial Utility-Scale
LCOE Variable retail tariff
Distributed Generation
1. Prices exclude VAT; WACC 8% nominal; CAPEX considered: 1800€/kW (Residential), 1150€/kW (Commercial), 1050€/kW (Industrial); 1450h levelized eq. hours; O&M=10€/kW for commercial and industrial; Regulated tariffs assumed: Residential simple tariff <10.35kVA, Commercial tariff refers to BTE for long uses at “horas de cheio”, Industrial tariff refers to MT at “horas de cheio”; For utility-scale, CAPEX considered is 977€/kW and 1800h.
Source: EDP
21
Thus, the tariff structure should evolve to a higher fixed share, as occurred in the telecom’s business
€/minute €/month
€/kWh €/month
TELECOM
ELECTRICITY
• Achieving decarbonization
• Pricing distortions
• Engaging consumers in Portugal
Agenda
23
EDP launched its solar energy offer in Portugal in 2015...
Innovative offer Customer benefits
Autonomy Savings
Sustainability Simplicity
Reduce your energy bill
Produce your own energy for more
than 25 years
• Solar energy solutions for customers to produce and consume their own energy
• edp re:dy system is offered to manage consumption, control appliances and monitor solar generation in real time
• Ability to pay the solar solutions in 36 monthly instalments in the energy bill, starting from 20€per month with no upfront payment
24
... with solutions designed to fit each customer consumption profile, reducing grid injection and energy waste
Example
5 solar panels
14% electric bill
reduction
360€ average
annual savings
Price of 77€/month
(36 months)
3 panels 4 panels 5 panels 6 panels 8 panels
Savings% Electricity bill reduction 9% 12% 14% 16% 19%
1st year savings 193 € 248 € 297 € 339 € 405 €
Average annual savings for 25 years(1) 233 € 300 € 360 € 413 € 497 €
Solar Energy% Self-consumption 91% 88% 84% 80% 72%
% Injected energy 9% 12% 16% 20% 28%
Home electricity
% from solar system 10% 13% 16% 18% 22%
% from the electric grid 90% 87% 84% 82% 78%
Solar Energy Solution
Installed power capacity (kW) 0,75 1 1,25 1,5 2
Annual solar energy production (kWh) 1052 1402 1753 2104 2805
Minimum space for panels 6 m2 8 m2 10 m2 12 m2 16 m2
50 €/month 64 €/month 77 €/month 90 €/month 5900 €(36 months) (36 months) (36 months) (36 months) (upfront)
Licensing cost with VAT 0 € 0 € 0 € 0 € 70 €
Extra costs for selling energy with VAT(3) 0 € 0 € 0 € 0 € 0 €
Environment
CO2 emissions avoided (Kg/year) 240 321 401 481 641
No. of trees with equivalent CO2 absorption 24 32 40 48 64
Price (includes installation and VAT)(2)
Self-consumption
Recommended system
25
EDP solar energy customers receive edp re:dy for free, a home energy management system...
Simple so easy to use
No worries it does it for me
Comfort it feels good being at home
Efficient saves energy and money
Control do what you want
26
... that allows customers to monitor their generation and be alerted if failure occurs
27
Distributed generation
House equipment
Electric gridElectric mobility
Storage
Energymanagement
system
When to turnon equipment?Where to get the energy from? Grid? Production?Battery?
How does my house interact with the grid (e.g. DSM)?
How does theelectric installationsupport EV charging?
Buy from thegrid now to consume later?
Consume, store or sell the production?
edp re:dy not only controls solar energy, but is evolving to be the automated manager for all the home’s energy
28
With solar and re:dy combined together, customers started to use more the web portal and app
• More than 244.000 sessions
• More than 600 daily sessions
• More than 5 pages visited per session in the portal
We
b p
ort
alA
pp
• More than 277.000 sessions
• More than 650 daily sessions
• Android prevails
29
With this knowledge, customers were able to change their consumption habits, to maximize the use of their solar asset...
Month March April
Total production 194,18 kWh 193,80 kWh
Self consumption 43,69% 67,29%
Total consumption 303,25 kWh 353,29 kWh
Consumption from solar 27,98% 35,90%
Example of a Monday in March Example of a Monday in April
30
...helping to increase the system’s flexibility
2016
March April
31
Key messages
• In order to reach Europe’s ambitious decarbonization goal, a strong push for RES and efficiency is needed
— The costs of renewable energy have decreased steeply, namely for wind and solar PV, leading to frequent upwards revisions in the forecasts of installed capacity for these technologies
— This increase in intermittent power generation needs to be accompanied by investments in technologies that provide flexibility to the system (ex: storage, smart grids, DSM...) to guarantee grid stability
— In this context, the concept of “energy efficiency” is evolving from consuming less to consuming smart
— Electrification of transports and H&C is essential for the decarbonization process, not only due to reduced overall energy consumption (more efficient electric technologies), but also due to the ability to use RES sources in electricity
• There is a mismatch between costs and revenues structure in the power sector, which generates several distortions, namely biased signals for investment decisions and financial imbalances in the system
— The fact that fixed costs are being recovered through a variable tariff leads to biased price which favors reduction of grid demand, which in turn will lead to a “vicious cycle” where system costs will be charges over few(er) consumers
— Furthermore, distorted tariff structure favors investments in distributed resources over centralized plants, which implies a social welfare loss
• EDP Comercial has launched its solar energy offer, with solutions designed to fit each customer characteristics
— EDP solar energy customers receive a re:dy for free – a home energy management system – which allows them to monitor and optimize their energy consumption pattern and use of solar energy, thus contributing to maximize the benefits of clients’ investment and to improve system’s flexibility