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Rearranging Utility-driven Demand Side Management (DSM) to respond market conditions: a Finnish case study. The role of large incumbent energy utilities in promoting energy saving. Apajalahti, E-L., Lovio, R. & Houtbeckers, E. Aalto University School of Economics Organization and Management

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The role of large incumbent energy utilities in promoting energy saving

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The role of large incumbent energy utilities in promoting energy saving

Rearranging Utility-driven Demand Side Management (DSM) to respond market conditions: a Finnish case study

The role of large incumbent energy utilities in promoting energy saving

Apajalahti, E-L., Lovio, R. & Houtbeckers, E.

Aalto University School of Economics

Organization and Management

Corporate Environmental and Social Responsibility Research


Why would energy companies want us to save energy the very product that it gets profit from

“Why would Energy Companies want us to save energy, the very product that it gets profit from?“

Source: NCRC –survey 2009


Why energy efficiency

Why energy efficiency?

  • Improving energy and electricity end-use efficiency 40-63% of the solution (IEA WEO 2008).

  • Transition to renewable energy sources is a long process

  • Energy efficiency improvements may be faster and more cost-effective.

63 %

40 – 50 %

Eeva-Lotta Apajalahti 10.6.2011


Policy obligations on energy utilities

Policy obligations on energy utilities

  • EU Directive (2006/32/EC) on energy end-use efficiency and energy services (ESD)

    • Indicative national 9 % energy saving target 2008-2016.

    • Minimum requirements on reducing energy end-use of its clients.

    • Directive will be revised (and tighten) in 2013.

    • In Finland implemented through renewed voluntary Energy Efficiency Agreement system, obligate 80 % of energy utilities

  • National, ESD complimenting law on energy efficiency services, obligate all energy utilities (1211/2009).

  • Remote reading, billing must be based on verified energy use by 2014.

  • EU 20-20-20 targets

    • Obligate energy utilities through different ways e.g. City of Helsinki engagement to carbon neutrality by the 2050.

Eeva-Lotta Apajalahti 10.6.2011


Energy utility as an energy saving promoter

Energy utility as an energy saving promoter

  • Role of energy utility...

    • has been traditionally strong but reduced since market liberalisation.

    • has been decreasing since new intermediary organisations, energy saving companies (ESCOs) have taken the task (Breukers et al. 2009, Heiskanen et al. 2009, Bertoldi et al. 2006).

    • is not natural in implementing energy saving (Demand Side Management, DSM) initiatives because it does not gain monetary benefits of doing so (Didden & D’haeseleer 2003).

    • in developing new energy-efficient products and services in liberalised and privatised energy markets is uncertain (Vine et al. 2003).

  • Past DSM efforts often led to negative business experiences.

    • Past experiences and learning outcomes of load shifting and DSM initiatives/programs introduced in 1980-1990 in US. (Strbac 2008, Gehring 2002, Eto 1996, Vine 1996).

Eeva-Lotta Apajalahti 10.6.2011


Electricity retailers operating environment in finland

Electricity retailers operating environment in Finland

  • Energy Market Act (1995/1998)

    • Large energy users (1995) and small energy users (1998).

    • Unbundling electricity trade operations from other trade operations.

    • Separating electricity network operations from other business operations.

  • Operating environment of electricity retailer

Energy delivery

Energy trade

Power generation

NordPoolSpot – Nordic power exchange

District heating trade and distribution

Energy end-use:

Households

Industry

Electricity retailer

Electricity network

Eeva-Lotta Apajalahti 10.6.2011


Motives to improve end use energy efficiency of finnish energy utilities vs case utility n 7

Motives to improve end-use energy efficiency of Finnish Energy Utilities vs. case utility (n=7)

Eeva-Lotta Apajalahti 10.6.2011


Current energy saving activities by finnish energy utilities vs case utility

Current energy saving activities by Finnish Energy Utilities vs. case utility

  • Energy utilities have long and active role in energy saving advising.

  • Next step is utilizing hourly basis metering in load shifting and energy saving.

Eeva-Lotta Apajalahti 10.6.2011


Why promoting electricity saving further is challenging household perspectives n 289

Why promoting electricity saving further is challenging? Household perspectives (n=289)

Basic energy saving advising is

wanted from own energy utility

but...

energy saving

contract model

... sceptical perspectives emerge when integration level increases.

Selling energy saving

services

Sceptisismcurve

“Energy utilities are listed privately owned companies, why would them want to save energy, the very product that they get profit from?“

Source: NCRC –survey 2009

Basic energy saving advising

Eeva-Lotta Apajalahti 10.6.2011


Why promoting electricity saving further is challenging case utility s perspectives

Why promoting electricity saving further is challenging? Case utility’s perspectives

  • Unbundling the business operations:

  • reduced flexibility of sharing the costs between the units.

  • operating environment narrow -> slim profit marginal

  • A production utility becomes an energy service provider

  • Is there willingness to pay for services?

  • Pricing problems of contract model:

  • How electricity providing, saving incentives, advising and services are combined?

  • Energy saving -> absolute reduction or reduction from trend consumption?

  • Is the product interesting?

Eeva-Lotta Apajalahti 10.6.2011


Energy utilities are motivated and active but

Energy utilities are motivated and active ... but

  • Energy market privatisation have had some negative side-effects

    • energy end-users mistrust towards energy utilities have increased: whose benefits energy utility is driving for?

    • stresses the business logic of offering energy saving business solutions.

    • which in turn create more uncertainty in developing business.

  • Unbundling business operations

    • responsibilities between different business units are unclear.

    • the past DSM principles work poorly for electricity retailer.

  • Growing pains: energy producer becomes energy service provider.

  • Pricing difficulties:

    • energy end-users are not ready to pay for services

    • fear of unprofitable business operations

Eeva-Lotta Apajalahti 10.6.2011


Implications

Implications

  • To decrease mistrust, new strategic reorientation towards energy saving is needed?

  • Competing with energy saving products and services might fit better:

    • For publicly owned utilities who have strong traditions in advising.

    • For those who cannot compete with production: strong carbon lock-in.

  • But if they success, it might be copied elsewhere.

  • Remote metering advances provide new possibilities for energy use load shifting.

  • If/when energy prices rise, the demand for energy saving business solutions might increase.

  • New ideas and innovations often follow new entrants - new retailers focusing energy saving might emerge?

Eeva-Lotta Apajalahti 10.6.2011


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