toward a new balance of power, bcg

8/11/2019 Toward a New Balance of Power, BCG

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T NB PIS GERMANY PIONEERING A GLOBALTRANSFORMATION OF THE ENERGYSECTOR?


2/38

Th Boto Cotig Gop (BCG) i a goba maagmt cotig m ad th wod

adig advio o bi tatgy. W pat with cit fom th pivat, pbic, ad ot-fo-

pot cto i a gio to idtify thi hight-va oppotiti, add thi mot citica

chag, ad tafom thi tpi. O ctomizd appoach combi dp iight ito

th dyamic of compai ad mat with co coaboatio at a v of th citogaizatio. Thi that o cit achiv taiab comptitiv advatag, bid mo

capab ogaizatio, ad c atig t. Fodd i 1963, BCG i a pivat compay with

78 oc i 43 coti. Fo mo ifomatio, pa viit bcg.com.

The BCG Game-Changing Program

W a ivig i a ag of accatig chag. Th od way a apidy bcomig obot, ad

w oppotiti a opig p. It i ca that th gam i chagig. At Th Boto Cotig

Gop, w a optimitic: w thi that th fdamta div of gowth a tog tha thy

hav v b bfo. Bt to capitaiz o thi td, ad d to b poactiv, to chag

th tat qo, to ma bod movthey d to chag th gam, too. Th dciio thy maow, ad ov th xt t ya, wi hav a xtaodiay ad dig impact o thi ow

fot a w a o tho of thi ogaizatio, th goba coomy, ad ocity at ag. To

hp ad ad to ma o ith aivay, BCG i pig togth th bt ida, iight,

ad way to wito ow th ft. Thi pbicatio i pat of that davo.


3/38

Toward a New

BalaNce of PowerIS GERMANY PIONEERING A GLOBAL TRANSFORMATIONOF THE ENERGY SECTOR?

March 2013 | The Boston Consulting Group

DIeTer Heuskel

PHIlIPP GerBerT

sTeFAn sCHlOTjunker

PATrICk HerHOlD

jens BurCHArDT


4/38

2 | Toward a New Balance of Power

coNTeNTs

EXECUTIVE SUMMARY

A Power revolutionled by

GERMANY?

MAssive drivers of ChAnge in gerMAny

Powerful Government InterventionCost Reduction and Technological Innovation

new PArAdigMs for gerMAnys Power industry

Changing Energy Economics

The Potential for Achieving Aordabilit, Securit of Suppl, and

Sustainabilit

The Need for a New, Holistic Market Design

A Hard-Hit Power-Suppl Industr

Imperatives and Opportunities for Stakeholders

following gerMAnys PAthRole Model or Special Case?

Mandates and Opportunities for Global Stakeholders

for further reAding

note to the reAder


5/38

The Boston Consulting Group | 3

G in the early stages of a trans-formation. Conventional centralized, dispatchable, fossil-fuel-based generation is gradually ceding ground to renewable (including

m) c a a. t

ultimately have a profound impact on how electricity is produced and

cm. i, c a aa .

Germany, whose ambitious plan to reshape its energy sector placesheavy emphasis on renewable-energy sources, distributed generation,

and energy efficiency, is at the vanguard of this transformation. As

such, its efforts bear scrutiny.

Germanys move toward renewable-energy sources, distributed

generation, and increased energy efficiency will lead to paradigm

shifts within the countrys power system.

Growth in power demand will likely cease: most projections callfor stagnant demand for the foreseeable future, with rising energy

cc ma c cmc .

sma, gma a p-a capac need to increase substantially; capacity could reach more than 250

gigawatts in 2030, compared with 158 gigawatts in 2010, driven

primarily by increases in wind and solar photovoltaic (PV) energy.

ra a a gma p a exceed 50 percent in 2030, up from 20 percent in 2011.

t ca a ca mproviding baseload power to serving as backup capacity during

periods of limited wind or sunshine.

A gma capac m a a a-tion increases, its power-supply system will become more diverse,

execuTive summary


6/38


m ma, m am, m ca, a m

x.

Distributed generation will become increasingly prevalent in

Germany. At the same time, energy self-sufficiency may well

become viable for growing numbers of German consumers andcommunities.

Current planning scenarios imply that by 2030, approximately50 pc gma p cm m

c, c a p a Pv aa a am,

compared with approximately 15 percent in 2011.

i 2011, p m p a Pv aa cam capfor many German consumers than power from the grid.

t m fm, a ma, a a 80 km b a a p p a

heat supply system from local, renewable-energy sources, may

prove attractive in other rural areas of the country.

The economic argument for distributed renewable-energy sourc-

es in Germany will become increasingly compelling.

d - a ca-m c, -ized cost of energy (LCOE)the price at which a technology

breaks evenfor power generated by conventional power plants

will rise; we expect an LCOE of 78 eurocents per kilowatt hour(ct/kWh) for lignite, 79 ct/kWh for hard coal, and 710 ct/kWh for

combined-cycle gas turbine generation by 2020.

Simultaneously, innovation and declining equipment costs willmake the generation costs of numerous renewable-energy sources

competitive with those of conventional sources in Germanythe

LCOE for onshore wind and solar PV, for example, will drop to

56 ct/kWh and 1011 ct/kWh, respectively, by 2020.

System costs and retail power prices in Germany will climb sig-

nificantly to 2030; in the very long term, however, the move to a

renewables-based system may also have cost benefits.

In 2030, unit power-supply costs in a renewables-based system willlikely be approximately 15 to 35 percent higher than the costs of a

conventional, fossil-fuel-based system would be, depending on

fossil fuel prices and the costs of carbon emissions.

Am a pc mcam, a p pc residential customers in 2020 in a renewables-based system will be

35 pc a 2010a ca ca

than the recent 42 percent increase experienced by residential

customers between 2000 and 2010.

gma p a a a creliance on imported fuel and may deliver cost advantages to


7/38


consumers over the long term, depending on the evolution of fossil

fuel and carbon emissions costs.

Germany will need to redesign its power market to support the

transition to a power system that places a significant emphasis

on renewables.

The new design will need to ensure the economic viability ofackp p pa, c m c

climate protection and carbon abatement, improve the cost

cc a- pc, a pp mak

integration of power demand. It will also need to ensure provision

of an upgraded network.

In the short term, the imperative for policymakers is to improve c cc a a a ac

c ackp-p-pa capac; measures will buy the time required to develop a sustainable,

holistic market design compatible with other European power

markets.

The ownership of Germanys generation assets will continue to

shift away from utilities as more and more new companies en-

ter the power industry.

Private individuals, cooperatives, industry players, and others arecapturing growing shares of power generation assets; in 2010,

pa a 47 pc gma a aPV capacity, compared with about 1 percent ownership by Ger-

ma b f .

Infrastructure funds, independent system operators, and otherbusinesses will continue to take growing ownership of electricity

transport grids.

The threat to incumbents posed by the paradigm shifts within

the power industry is severe and will force them to make hard

strategic choices.

gma b f m ca- a cc ac, c m

mandated phaseout of nuclear energy; the priority given to

renewable-energy sources with zero marginal costs and the related

decline in wholesale power prices; the falling number of full-load

hours of operation for conventional power plants; and the emer-

gence of new competitors that have lower expectations for returns

on capital.

A a , cm a c; return on capital employed in centralized generation, for example,

will likely sink from more than 15 percent before 2011 to 8 to 10

percent by 2030 (assuming a yet to be established mechanism that

adequately remunerates power plant operators for providing

capacity and ensuring security of supply).


8/38


t b f, ac m p mmarket, have two viable options: attempt to diversify and become

cmp pcc mak m gma c

c.

Germanys power industry will deconstruct and new businessmodels will emerge.

t x -a a ca (cmp a-tion, trading, transport, distribution, and retail) will deconstruct, as

distributed generation becomes increasingly prevalent and

consumers become pro-sumers, who both consume and produce

energy.

Regulatory pressure, increasing competition, decreasing margins,and new business models will accelerate the transformation of the

aa, ca a a ca aza, a acc a mca

power.

New business models based on distributed generation and more-x p ma ca ak c a.

t mm- a -m k gma p is highly uncertain and will hinge to a large degree on government

policy and regulation.

To date, few countries have indicated an intention to closely fol-low Germanys path.

Among large economies with traditional power systems, Germanyseems to have the most ambitious and far-reaching targets for the

adoption of renewable-energy sources.

Japan seems to be the only country whose emerging energy policyparallels that of Germanythough its choice is largely driven by

necessity; the policies of Switzerland and Italy are roughly compa-

a gma m ac ca a

renewable generation.


9/38


a Power revoluTioN

led By GermaNy?

T is under- a p ca. d acc cc am m

being environmental concerns, worries over

energy security, and advances in technolo-

gycountries are beginning to move away

from conventional, fossil-fuel-based power

generation in favor of renewable-energysources, distributed generation, and managed

demand. Increasingly, they are even rethink-

ing their use of nuclear powerfor safety

reasons in some countries, for economic

reasons in many others. As this trend, which

is still in its early stages, broadens and

gathers pace, it will transform virtually every

aspect of how electricity is generated and

consumed, with the long-term potential for a

cleaner environment, greater energy security,

and increasingly competitive electricity

prices.

b a aa m ca

power generation promises to be rocky for all

parties. Grids and system stability will be se-

verely strained as the share of intermittent

renewable-energy sources in the energy mix

increases. Governments may struggle to en-

sure that there is sufficient investment to

fund the huge necessary expenditures. Retail

electricity prices will rise for a decade or two.

Conventional utilities, which have long pre-

ac a -

sured system stability, will find their revenues

and profits under intensifying pressure as

their traditional business model becomes less

relevant. Indeed, some utilities may be driven

to extinction.

Germany, whose government has defined a c a

strongly emphasizes renewable sources and

cc ( fa M

ecmc a tcEnergy Concept

for an Environmentally Sound, Reliable and Af-

fordable Energy Supply,issued in September

2010), is at the forefront of this move away

from conventional generation. Although Ger-

ma ccmac a q k -

spectsnotably the strong stance against nu-

clear energy and aggressive targets for the

adoption of renewable-energy sourcesthe

c a c ac

the rest of the world. If successful, Germany

could serve as a model for countries with sim-

a apa. f a, -

xam gma m

detail.


10/38


massive drivers of

chaNGe iN GermaNy

G beingfundamentally reshaped. According to m maa, a

sources and distributed generation, once

maa pa c

scheme, are to meet a substantial and rising

a gma . C-

tional generation, in turn, will gradually see m p k

a ackp a

solar and wind during cloudy and windless

periods. The end result could be an industry

barely recognizable from the vantage point of

today.

The development of the German energy

landscape is being driven primarily by two

powerful forces. The dominant one is govern-

ment intervention; the other is technological

innovation and its attendant cost reductions.

P GnntintntnAs in many countries, the government of Ger-

many considers the energy sector to be a stra-

tegic one, and hence it is subject to extensive

pcmak. gma pc

shaped largely by three aspirations: security

of supply, cost effectiveness, and, more re-

c, aa. f xamp, pcmak-

ers have done the following: mandated the

legal separation of the generation, grid, and

retail businesses; established wholesale trad-

ing markets for electricity; applied controls

capa; p-

ority to renewable generation and instituted

subsidized feed-in tariffs for renewables; and

considerably raised taxes and fees on power.

As a result of this legislation, as well as liber-

alized market forces and growing costs forprimary energy, power prices in Germany

have soared in recent yearsby 42 percent

for residential customers from 2000 to 2010

on an inflation-adjusted basis. Interestingly,

however, higher prices have not caused the

public to question policymaking but rather to

increasingly lose trust in utilities. Indeed,

large utilities, amid record earnings, have

been pilloried since 2008.

In this environment, policymakers have con-

tinued to think in bold strokes. Take Germa-

pc ca , c a

seen three fundamental shifts over the past

ten years. In 2001, the RedGreen coalition

government voted to phase out most nuclear

generation by 2021; in 2010, the ruling con-

servativeliberal coalition granted nuclear

generation an extension until approximately

2033. Then, following the tsunami-triggered

acc a Japa fkma dac c -

ar plant in March 2011, the same coalition

imposed an immediate shutdown of eight

nuclear-power plants and directed the ener-

gy industry to fully exit nuclear generation

by 2022.


11/38


The move away from nuclear energy, which

supplied approximately 25 percent of Germa-

cc Mac 2011, a -

terred policymakers from pursuing the trans-

formation of the German energy system

defined inEnergy Concept for an Environmen-tally Sound, Reliable and Affordable Energy Sup-

ply.Policymakers remain committed to the

broad vision and its stated goals, in particular

a 50 pc gma cc

provided by renewable sources by 2030 and

80 percent by 2050.

German policymakers will have to remain ac-

tive to make their vision a reality, since mas-

sive challenges remain. These include grid ex-

tension and stabilization (which are vital ifthe electricity supply system is to cope with

distributed and renewable generation); defin-

ing a market design that ensures sufficient

dispatchable capacity to compensate for the

intermittent nature of wind and solar photo-

voltaic (PV) generation; and establishing mar-

ket-driven investment incentives to encour-

age climate protection measures and

cost-efficient deployment of renewable gen-

eration. And the government will have to ad-

dress these challenges while keeping power

price increases manageable for consumers,

businesses, and industry alike. An enormous-

ly complex task lies ahead for Germany, withlittle to learn from other countries.

ct rtn nTng inntnWith its topography ruling out the potential

for large-scale use of hydroelectric power,

Germany historically has generated a small

share of its power supply from renewable-

c. b 1990, 3 pc

cc cam m a. gmagradual shift to renewable generation began

in the early 1990s with the adoption of wind

energy. Since then, the country has continued

to actively shift its energy mix away from

coal-fired and nuclear generation toward re-

a. (s a, gma e-

lacap ta.) b 2011, a -

stalled 65 gigawatts (GW) of renewable-

To full appreciate the signicance of the

transformation taking place in German, it

is helpful to understand the countrs

energ landscape as it stands toda and its

recent evolution.

egy Mix.In recent decades, Germans

energ mix has relied on a conventional,

centralized mix of power sources. In 2010,

lignite- and hard-coal-red generation

accounted for 44 percent of overall genera-

tion; gas-red generation accounted for

16 percent, nuclear generation for 23

percent, and renewable generation (from

such sources as biomass, wind, solar, and

hdroelectric) for 18 percent.

Va Chai.Todas value chain largel

follows a traditional one-way model of

generation, trading, grid operation at the

transport and distribution levels, and sales.

Except for the phaseout of nuclear plants,

conventional power generation in German

is unregulated, as are electricit trading

and sales. Grid ownership and sstem

operation are controlled b return-

regulated geographic monopolies.

ky Pay.These include the Big Four

incumbents, municipalities, and sales

businesses.

The Big FourE.ON, RWE, EnBW, andVattenfallown a major share of each

segment along the entire value chain,

excluding transport grids. To date, their

generation mix has been dominated b

fossil-fuel-red and nuclear plants.

Their returns on capital emploed

regularl exceeded 10 percent before

2010 but fell in 2011, weighed down b

eects from the rst phaseouts of

nuclear plants, the priorit assigned to

renewable feed-in, and other factors.

A few of Germans approximatel1,000 municipalities own generation

assets; more commonl, the dominate

GERMANyS ENERGy LANDSCAPE TODAy


12/38


generation capacity, which produced about

20 pc gma cc.

This growth in capacity has been driven

largely by an apportionment-based subsidy

scheme that makes all power consumers cov-

a a c a

a. b ca a xpc

curve effects financed by this subsidy scheme

have made some renewables gradually ap-

proach the point where their growth will be

fueled by their underlying economics rather

than by subsidies. Indeed, we expect a num-

ber of renewable-energy sources to become

cost competitive, without subsidies, with con-

ventional generation by 2020. (See Exhibit 1.)

Onshore wind, for example, will likely have a

levelized cost of energy (LCOE) of 56 euro-

cents per kilowatt hour (ct/kWh) by 2020,

while solar PV will have an LCOE of 1011 ct/

distribution and sales in their local

markets. Their returns on capitalemploed have historicall been below

those of the Big Four. Given their

relativel modest expectations for

returns and their local proles, munici-

palities see themselves as being

advantageousl positioned for Germa-

ns transition toward distributed

generation.

Numerous nationwide energy-asset

lite businesses have entered themarket in recent ears, as policmakers

have sought to liberalize sales and

introduce competition. These business-

es source power and gas at wholesale

markets and suppl them to retail

customers. They have struggled to

achieve protabilit, however.

natioa Poicymaig ad rgatio.

The industr has been subject to massive

policmaking, largel through nationallegislation. Legislation has targeted a range

of issues, including the following:

Unbundling. To foster competition andprovide fairer access to grids, the power

generation, grid operation, and retail

power businesses were required to split

into separate legal units, each with

independent management, in the rst

decade of this century.

Subsidies for Renewables. Power gener-ated b renewable-energ sources

enjos priorit feed-in to the grid as well

as feed-in taris that are xed for the

rst 20 ears of the assets operation.Costs for subsidies are covered b an

apportionment scheme that requires all

power consumers connected to distribu-

tion grids to pa a certain contribution

per kilowatt hour consumed (3.59 ct/

kWh in 2012), regardless of whether the

power is generated b renewable or

conventional sources. The predecessors

to todas scheme have been in place

since 1991.

Regulation on Returns for Grid Operators. Both transportation and distribution

grids are considered geographic mo -

nopolies that fall under so-called

incentive regulation. This regulation

caps the revenues of grid operators

based on the size of the asset base, its

ecienc, and the required investment.

Essentiall, regulators are granting

these companies an 8 percent return on

capital emploed.

eopa Poicymaig ad rgatio.

European regulation has alread resulted

in a Europewide carbon-emissions pricing

scheme. To date, the European Commis-

sion has contemplated a European super-

grid and power-market integration,

although it is too earl to predict whether

these will come to fruition or what the

impact on the German market will be. For

the foreseeable future, we expect that

European energ polic will continue to be

dened primaril at the national level.

GERMANyS ENERGy LANDSCAPE TODAy(continued)


13/38


kWh.1These costs compare with projected

costs of 78 ct/kWh for lignite, 79 ct/kWh

for hard coal, and 710 ct/kWh for natural

gas used in combined-cycle gas turbine

plants.

To be sure, the integration of renewables into

the power generation system will incur addi-

tional costs, such as grid extension and the

ackp capac. b

clear: most renewable technologies will see

their costs continue to fall, with some ulti-

mately expected to reach competitive levels.

In contrast, the costs of most forms of con-

ventional generation will likely remain stable

or rise, depending on prices for fossil fuels.

Innovation is taking place not just in renew-

able-generation technologies themselves but

also in such related areas as transmission, dis-

tribution, and storage. (See Exhibit 2.) Power-

to-gas storage technology, for example, which

is at a nascent stage of development, allows

excess electricity generated from solar PV

and wind sources to be used to generate hy-

drogen or methane, which can be stored in

existing gas-storage facilities and transmitted

over existing gas pipelines. This gas can sub-

sequently be used as a vehicle fuel or to gen-

erate electricity for heating. Power-to-gas stor-

age technology may thus offer a scalable

option (albeit one with an efficiency level of

only around 40 percent) for overcoming the

drawbacks of intermittent renewable-energy

sources.

dp c a c p

p a caz m-

els, in contrast, are problematic. Carbon cap-

ture and storage, for example, is unpopular,

nuclear fusion is in its infancy, and large

hydroelectric plants face site limitations that

limit their growth prospects. In fact, the only

centralized-generation technologies that may

see growth over the next decades are offshore

wind and selected conventional (for example,

gas-fired) plants that are needed to provide

backup capacity.

Power price for households, 2011 (excluding value-added tax)

Rise/drop in electricity generation costs, 20102020

20

Solar PV2

15

10

5

0

BiogasWind(offshore)

Natural gas(combined-cycle gasturbine)

Biomass Hard coalNuclear LigniteRun-of-riverhydroelectric

(


14/38


The upshot: most of the innovation taking

place in the industry seems to support the

growth and integration of distributed renew-

able generation. This will transform Germa-

cc c a pa -

m. b a ap

industry look like?

1. The LCOE is the constant price per unit of electricitythat allows a given technology to break even.

Technologies and their positions in the product life cycle

Research anddevelopment

Prototyping andfield testing

Marketintroduction

Marketpenetration

Marketsaturation

Cash flow

Geothermal

Wind (offshore)

Wind (onshore)

Solar PV

Biogas

A-CAES

Batteries(large scale)

HVDC lines

Smart meter

Smart grid

Home automationof power usage

Batteries(small scale)

Micro-CHPs

Solid biomass

Pumped hydroelectricstorage

CCS

Nuclear fusion

Power to gas

TimeStorageGeneration Distribution and transportation Other

Source:BCG aayi.Note:A-CAes = adiabatic compd-ai gy toag; CCs = cabo capt ad toag; HVDC = high-votag dict ct; CHP = combidhat ad pow ytm. I Gmay, advacmt of ctd tchoogi i th podct if cyc ha b div by bidi.

Ex 2 |Widespread Innovation Is a Key Factor Driving the Transformation of GermanysPower Sector


15/38


T ,fossil-fuel-based generation to a worldcentered on renewable and distributed

renewable generation can deliver a host of

gma c. b

ma cm a xp gma

established energy industry, which will be hit

hard by the resulting deconstruction of theindustry and declining returns. The transition

will also present a cost challenge for residen-

tial and industrial power consumers for at

least two decades.

cngng eng ent cmc

will change significantly as Germany moves

ahead with its vision. These changes will have

a a mpac m

mix, the design and function of power mar-

kets, and power prices for consumers.

Dowwad P o Pow Dmad

rtig fom riig egy ecicy.Since

2008, gma - ma

electricity has been essentially stagnant.

g a, m am

to actually reduce demandby 10 percent by

2020 and by 25 percent by 2050 compared

with 2008 levels. This goal is based on

aggressive assumptions regarding potential

aa cc mpm a m

of economic segments. It is also based on the

expectation of a structural change in the

German economy: industrial production will

represent a much smaller share of total

economic growth in the future. The govern-

ment assumes that industrial production will

grow at a rate of 0.5 percent per year, while

gma gdP a a a 0.8

percent. (See Exhibit 3.)

These assumptions deserve to be challenged.

If we assume a constant share of industrial

value added and the efficiency improvements

indicated on the right side of Exhibit 3,

gma p ma mc m

likely to be stagnant than to decline.

Moreover, we believe that Germany can

realize its broader ambitions with even a

constant demand for power. Assuming that

renewables do indeed account for 80 percent

or more of generation capacity by 2050, the

maj gma p ca,

domestically generated (that is, not reliant on

imports), and independent of any potentially

limited fuels. There is thus no pressing need

to limit power consumption by households or

industry.

In subsequent sections, we will refer to the

two courses depicted in the left and right

graphs in Exhibit 3 as the declining power-

demand scenario and the constant power-de-

mand scenario, respectively. Though the sce-

narios differ materially in some of their

assumptions, there is one common thread:

growth in power demand is expected to end.

New ParadiGms for

GermaNys PoweriNdusTry


16/38


A Divid, Ditibtd, Voati egy

Mix.If Germany is to realize its ambitions,

c a p-a capac

a ca ca, m 158

GW in 2010 to more than 250 GW by 2030.

Exhibit 4 shows two scenariosone from

bCg a m gma tam

System Operatorsof the potential composi-

tion of that capacity. Excluding the target for

p ma, bCg ca m

a m jc, c

an 80 percent carbon-emissions reduction

(across all sectors) and an 80 percent share of

power generation by renewables by 2050.

b a c, capac -

creases will be in wind and solar PV, making

them the technologies with the largest shares

of total generation capacity in 2030. Wind

and solar PV are intermittent energy sources,

za gma mx

will pose challenges to the system as a whole.

To ensure an adequate supply of electricity

and avoid blackouts when the sun is not shin-

ing or the wind is not blowing, Germany will

need roughly 80 to 90 GW of dispatchable ca-

pacity by 2030 as backupnearly as much as

the total conventional capacity available to-

day. In the short term, lifetime extension of

gma x -- pa

seems an attractive option for ensuring this

capacity. In fact, by keeping all of the coun-

c a p pa

until 2022, Germany could close the gap in

generation capacity caused by the phaseout

of nuclear energyprovided networks are

strengthened to cover geographic imbalances.

i ac bCg ca pc

in Exhibit 4, Germany will need to largely

maintain its existing conventional capacity

while building a renewable-generation-based

system on top.

With this capacity mix, renewable energy will

m appxma 70 pc gma

gross electricity demand in 2030well ex-

c m 50 pc a.

(s bCg pjc ex 5.) C-

spondingly, conventional generation will

gradually be crowded out of the energy mix,

Net power demand (terawatt-hours)

402

44

144

108

3353

450

516

219

140

62

79

512

Households, electric appliances

Households, other

Business

Industry

Mobility, electric cars

Mobility, railway

Annual efficiency gains (electric appliances) 2.4% 1.3% (projected from reference scenario2)

Annual growth in gross domestic product (real) 0.8% 0.8% (1.4%,19912011)

Annual growth in industrial production (real)3 0.5% 0.8% (1.4%,19912010)

Annual efficiency gains (electricity usage, industry) 1.5% 0.7% (0.4%, 20002010)4

Net power demand (terawatt-hours)

33

516

44

227

108

83

515516

219

140

62

79

20502020 20302010 20502030 2010

Government targets Constant power demand1

2020

484

16 21

Two scenarios for the development of net power demand, 20102050

16 21

Sources:egy eviomt Focat ad Aayi; Fda statitica Offic of Gmay (Dtati); uivity of Coog Ititt of egyecoomic, Pogo, ad Gchaft f Witchaftich sttfochg, Energy Scenarios, Agt 2010; BCG aayi.Note:Appat dicpaci i tota a d to odig.1Bad o dogo-dmad modig.2rfc caio fom Fda Miity of ecoomic ad Tchoogy, Energy Concept for an Environmentally Sound, Reliable and Affordable EnergySupply,sptmb 2010.3Idtia podctio i dfid a go va addd at facto pic (ba ya, 2000).4efficicy gai a comptd bad o go va addd at facto pic (ba ya, 2005).

Ex 3 |Constant Long-Term Demand for Power in Germany Is a Reasonable Assumption


17/38


917

28

65

65

~ 262

14

21

40

3

Installed capacity (gigawatts)

BCG projection TSO projection1History

Nuclear: 21

20

25

246611

27

18

280285

158

Projected development of installed generation capacity, 20102030

101

1993 2010 20302030

Hard coal: 2025

Natural gas: 4045

Other fossil-basedfuels:


18/38


with the total share of generation represented

by nuclear and fossil-fuel-based sources fall-

ing to 30 percent by 2030 versus 83 percent in

2010. Ca a

from providing baseload power to providing

backup capacity.

Exhibits 4 and 5 imply some additional para-

m gma p-pp m:

The system will become more modular. Utility-scale power plants, with several

hundred megawatts of capacity, will be

complemented by smaller, consumer-scale

assets with kilowatts of capacity. The

number and types of players in the

industry will increase correspondingly.

The system will become more distributedinseveral ways.While feed-in has primarily

occurred at the transport level of power

a, a ca a c-

tricity in the future will be fed in at the

distribution level. The percentage of

distributed generation will rise from

approximately 15 percent in 2011 to

appxma 50 pc 2030. f-

thermore, we will witness the advent ofpro-sumers, who both consume and

produce energy, as partial self-supply of

energy becomes increasingly viable.

The system will become multidirectional. Inthe past , power supply followed a one-way

paradigm, from power plants to consum-

ers via transport and distribution grids. In

, p, a c

value, will be multidirectional.

The system will become more uctuatingand thus need to become more intelligent.

Successful integration of intermittent

renewable generation requires an intelli-

gent system control, in particular at the

distribution grid level.

The system will become more exible. Supply follows demand has been the

paam; ca

supply, the challenge will be to make

ma m x.

Th nd fo Gid extio.Rebuilding

gma p-a m

viable if the grid is strengthened simultane-

ously. The growth of distributed generation

demands greater capacity and flexibility of

distribution grids; transport grids, for their

part, require capacity expansion, as a

significant percentage of new generationcapacity will be built far from the sources of

demand. (Onshore and offshore wind

capacity will be built predominantly in the

northern parts of the country, while heavy

industrial consumers are concentrated in the

.) A a 2012, gma fa

Grid Agency was calling for the construction

of 2,800 kilometers of new transport lines

and the strengthening of an additional 2,900

kilometers.

sizab Ivtmt.We estimate that the

minimum investment necessary to ensure

a gma m ca p a

power infrastructure and supply will exceed

370 billion from 2010 to 2030. (See Exhibit

6.) Close to 90 percent will go toward grid

extension and the buildup of renewables.

(Were Germany to pursue a conventional,

fossil-fuel-based system, the investment

necessary to maintain the current infrastruc-

a pac ca a-generation would amount to approximately

150 billion over the same period.)

Conventional generation will

shift from providing baseload

to providing backup capacity.

b a, k aa

investments in self-supply solutions, with the

am m mak

and power-pricing mechanisms. Solar PV

combined with storage, for example, is likely

to draw growing interest and investment from

residential pro-sumers, because the business

case for that technology (based on current

regulation) is projected to turn positive some-

time around 2017.

riig sytm Cot ad Pow Picbt

a eqay Coty Atativ?h

gma ama ac m c

and, eventually, prices? Exhibit 7 depicts the


19/38


potential evolution of the unit costs of

power supply to 2020, 2030, and 2050. (Unit

costs include the full costs of power

generation and the power grid, covering

annualized capital expenditures as well as

operating expenditures, including fuel and

ca x m eu

trading scheme.) Unit costs are shown for

renewable scenarios with both declining and

constant demand for electricity and for a

hypothetical fossil-fuel-based system. The

fossil-fuel-based system is a reference

ca c gma a mx

remains unchanged from 2010 but includes

the phaseout of nuclear energy and its

replacement with natural gas. This scenario

allows for the comparison of unit costs

under the renewables scenarios with the

projected costs were Germany to maintain

a --a p m.

Points worth noting about the comparisons

include the following:

i 2010, gma p c around 10 ct/kWh; the capital cost of the

existing system, including the grid and all

fossil-fuel-based and renewable-genera-

tion assets, accounted for about half of

those costs.1This capital stock declines

m a a a .

b 2030, c ascenarios will increase by 50 to 60 per-

cent.

Under the renewables scenarios, unit costsin 2030 will be 15 to 35 percent higher

than those in the fossil-fuel-based system,

depending on fuel and CO2prices.

In the renewables scenarios, the main costdrivers are capital expenditures for

renewable generation and the related grid

extension.

Costs for operations and maintenance arealso higher in the renewables scenarios, as

both a conventional backup infrastructure

and a renewables system need to be

maintained.

~ 216

~ 77

~ 64

~ 58

~ 18

~ 405

~ 372~ 4~ 115

~ 42

~ 44

~ 29

~ 3~ 34

Renewables Fossil fuel based

Power generation Storage Grid

Total(declining

powerdemand)Demand

Grid maintenance

Expansion ofdistribution grids

Rolloutof smart meters

Wind (offshore)

Wind (onshore)

Solar PV

Other renewablesExpansion oftransmission grids

Projected cumulative investments, 20102030 (billions)

Total(constant

powerdemand)

Source:BCG aayi.Note:Bad o Gma Tamiio sytm Opato,Netzentwicklungsplan,2012. Fig icd ivtmt i pow pat aady dcotctio ad timatd maitac ivtmt fom 2010 to 2030. Dviatio btw tota mb ad thi compot a d toodig.

Ex 6 |Germanys Transformation Will Require Sizable Investments in Generation and GridInfrastructure


20/38


In the fossil-fuel-based system, the capa xp a

lower operation and maintenance costs

come at the expense of higher expendi-

tures for fuels and CO2emissions. In the

very long term, rising fuel and CO2costs

ma ma a gma m -

a c .

If these projections were to incorporate the

full costs of carbon emissions (including the

costs of environmental damage), which Ger-

ma fa em Ac (um-

weltbundesamt) estimates at 70 per ton,

unit costs would be almost equal for all sce-

narios starting in 2010. In other words, the re-

newables scenarios would nearly break even

today. At a minimum, the renewables scenari-

os provide a better hedge against dependen-

cy on fuel imports and geopolitical risk: in

ca, gma a mp

natural gas, coal, and oil decrease by around

30 percent to 2050.2

In the medium term, however, increasing sys-

tem costs for power generation and the grid

will translate into higher retail prices for in-

dustrial and household consumers. Clearly,

pricing mechanisms depend strongly on mar-

ket design. Therefore it is difficult , if not im-

possible, to provide projections with confi-

dence.

We can, however, provide some guidance by

pjc pc a a ma-

ket mechanisms. In the renewables scenario

1315~15

16-17

1213

~10

~15

~1213

1011

~16

~13

Capital costs of existing system6Investment, renewablesInvestment, fossil-based fuelsInvestment, storage

Investment, grid and smart metersImportsOperations and maintenance costsEmissions costs

Fuel costs (moderate price path)5

Additional fuel costs (assuming continuationof historical price trend since 1991)4

Fossil-fuel-basedsystem2

Renewables scenario(declining power demand)

Greenhouse gas reduction in the energy sector versus 19903

65% 63% 17%45% 43% 19% 90% 93% 40%18%

+15%+35%

2010 2020 2030 2050

Unit cost of electricity under three scenarios (ct/kWh)1

Renewables scenario(constant power demand)

Source:BCG aayi.1uit cot icd th f cot of pow gatio ad gid ad copod to aa ytm cot dividd by t pow dmad. Th cot ofcabo miio ctificat a accotd fo i th cot fig fo 2010.2A hypothtica ytm that am cotiatio of today mix of gatio capaciti ad compatio by w ata-ga pow pat focapacity ot a a t of Gmay ca phaot.3ecticity cto, ~90%; oth gy-tafomatio cto, ~10%.4Pic ica ti 2050 v 2010 (a): had coa, 248%; ata ga, 178%; igit, 100%.5Pic ica ti 2050 v 2010 (a): had coa, 14%; ata ga, 59%; igit, 0%.6Am that ca pow pat hav aady b witt off i 2010.

Ex 7 |Germanys Unit-Electricity Costs Will Be Higher in 2030 with a Renewables-BasedApproach


21/38


with constant demand, retail power prices

for households will increase by around 35

percent, to 33 ct/kWh, by 2020.3(See Exhibit

8.) This is significant but less than the 42 per-

c ca xpc gma -

idential customers between 2000 and 2010.The main drivers behind the projected in-

crease are a threefold rise in the costs of

c ra e-

ergy Act of 2000 and rising grid tariffs to pay

for grid expansion. A security-of-supply com-

ponent is also factored into our cost projec-

tion, reflecting the need to remunerate back-

up (fossil fuel based) power plants that are

suffering from low utilization. We project

costs of around 1 ct/kWh to compensate

pa. (s t n a n, h -c Mak d, , a c

of these effects.)

f a , a p pc a

for a greener energy landscape. The alterna-

tive, however, is not much cheaper: due to

the potential for rising fossil-fuel prices, retail

power prices for households could reach 28 to

29 ct/kWh in 2020, making the renewables sce-

nario only around 15 percent more expensive

a a - m

through the rest of the decade. This price ad-

vantage could be even smaller, of course, de-

pending on the growth rate of fossil-fuel prices.

This assessment of system costs and power

prices demonstrates that there is no easy way

to determine the precise evolution of the

ca gma pa a-

formation. Clearly, the economics depend

heavily on prices for fossil fuels and carbon

emissions. While there will not be an explo-

sion of system costs under the renewables

scenarios, the path to a greener energy land-

scape will likely be more expensive than thatof the fossil-fuel-based alternative for the

next two decades. On the other hand, Germa-

cm ca x-

posed to fossil fuel price risks. In the long

run, higher fuel prices may very well make

the business case turn profitable, causing the

ama ak p m

a question of whenthan if. The true challenge

~30

2010:22.3

~33

2010:24.4

9.4

3.6

~15

1.26.7

7.3

1.3

3.5

2010:11.9

Wholesaleprice

Securityof supply(1.0)1andoffshore

power (0.25)

Feed-insurcharge

Grid usefees

Accountingand

metering

Marketingand

sales

Fees andtaxes

Households Industry

Projected price change, 20102020

Smallbusinesses

Retail prices

~ 35%

~ 35%

~ 25%

Price components (households)

ct/kWh (including value-added tax)

Sources:Fda ntwo Agcy (Bdtzagt), 2010 va; BCG aayi.Note:Am picig mchaim a thy w i 2010, with th additio of city-of-ppy ad offho compot.1Th city-of-ppy compot cov th gap btw th cot of covtioa pow pat ad v aizd i whoa powmat.

Ex 8 |Retail Power Prices in Germany Will Rise by One-Third by 2020 with a

Renewables-Based Approach


22/38


for policymakers, industry, and society will be

managing the transition until that point is

reached.

T Ptnt angabt, st spp,n stnbti m, gma a-

mation may give the country the opportunity

to fulfill, simultaneously, its three aspirations

of affordability, security of supply, and sus-

tainability. The business case for the plan, as

noted, could eventually turn positive. Germa-

pc a

sharplygas consumption for supplying pow-

er, for example, will fall to 50 terawatt-hoursin 2030 from 200 terawatt-hours in 2010. And

the country will significantly improve its car-

bon footprint as it pursues its emissions

goals, which include a 55 percent reduction in

greenhouse gas emissions from 1990 levels by

2030.

The current markets design

will be challenged by a con-fluence of effects.

Individual communities may seek to move

aa . fm, xamp, a

a 80 km b,

claims to have successfully squared the trian-

gle, having built its own standalone power

and heat supply based solely on local, renew-

a m . fm m,

which supplies two businesses and 145 peo-

ple in 37 households, comprises 43 wind tur-

bines, 2.25 megawatts (peak) of solar PV

modules, a 500-kilowatt-electric biogas-fired

combined heat and power plant, and a wood-

chip heating plant for meeting peak demand.

The village even built its own power and heat

grid to make the system fully self-sufficient.

fm cam a a p pc 16.6

ct/kWh for its residents, 25 percent less than

the price charged by the regional utility. (Par-

ticipating households must, however, pay a

one-time buy-in fee of 3,000, possibly ren-

dering the business case for residents nega-

tive from a purely financial perspective.)

fm ca a m a

aa c a a . b m-

onstrates the pending paradigm shift and

possibly a growing will for experimentation.

T N N, htmkt dgngma a a ca m-

plications for energy markets. Some of the ef-

fects are already evident. Electricity products

that were once highly profitable, for example,

are becoming less so, and this will continue

as distributed renewable generation becomes

more common. Take the sale of peak power.

In the past, power covering the peak demand

hours of 8:00 a.m. to 8:00 p.m. was signifi-cantly more expensive, and hence lucrative

for conventional generators, than base power.

In 2007, for example, the premium averaged

28 pc. b 2011, , pc -

ence had dropped to 12 percent, reflecting

the growing prevalence of solar PV panels,

which increase the supply of generated elec-

tricity during peak daytime demand.

Much more fundamental will be the impact

on the design of the power market itself. Cur-rently, Germany has two major markets for

energy and capacities. These markets, as well

as supporting mechanisms, are illustrated in

Exhibit 9. The so-called energy-only whole-

sale marketoffers trading of electricity vol-

umes based on the short-run marginal costs

of power generation technologies. Transmis-

sion system operators manage so-calledre-

serve energy markets,sourcing capacity (in

gigawatts) as well as energy (in gigawatt

hours) for the short-term physical balancing

pp a ma. gma --

tariff subsidy scheme motivated the installa-

tion of 65 gigawatts of capacity by 2011 that

would not have been built under the energy-

only and reserve energy markets.

This market design will be challenged by a

confluence of effects as renewable-energy

sources come closer to accounting for 80 per-

c m gma a c-

tricity. As noted, the role of conventional

power plants will shift from providing base-

load to backup power; supply will become

highly intermittent; and the merit order

scheme for feed-in to the grid, which is based


23/38


on the short-run marginal costs of power sup-

ply, will become increasingly less relevant

(since wind and PV are free fuels). At the

same time, the levelized cost of energy from

renewable sources will become increasingly

cost competitive. And given rising retail pow-

er prices, self-supply of energy could become

an increasingly attractive option for a grow-

ing number of consumers.

Overall, these effects will demand a rede-

signed power market, with a particular focus

on five considerations. (See Exhibit 10.)

The Economic Viability of Backup PowerPlants.As discussed, the increasing feed-in

of renewable energy will reduce the

utilization of existing power plants. It will

also lower wholesale prices because many

renewable-energy sources have negligible

marginal costs. This combination of

factors will weigh heavily on conventional

a ac. rwe, xamp,

reported that it lost several hundred

m p 2011

c. o aa a

annual economic shortfall for convention-

al power plants will reach 7 billion by

2030. b ca pa a a m

dispensable, as they will provide the bulk

of the capacity necessary to keep the

lights on during cloudy and windless

p. dpaca capac,

critical for providing energy securitywill

take on increasing value.

The good news is that the capacity

provided by existing fossil-fuel-based

plants, and by those under construction, is

c c capac m

the phaseout of nuclear power plants,

provided that no fossil plants are decom-

missioned and grid extension proceeds as

planned. A so-calledstrategic reserve

mechanismcan therefore provide a good

interim solution by facilitating payments

to existing plants to avoid their shutdown.

i ac, gma fa g Ac

has already started to contract with

several older fossil-fuel power plants

during peak winter hours. Such a mecha-

nism would give policymakers more time

Grids

Energy

Tradableproduct

Capacity

Shortterm

Longterm

Conventionalgeneration

Renewables (intermittentand nonintermittent)

DemandStorage(including

pump storage)

Energy-onlywholesale market

Participating capacities

Grid

extension

Action will be required in five key areas

Markets with a high shareof total activity

Flanking markets orincentive mechanisms

Markets and mechanismsunder discussion

Reserve energy markets

Strategicreserve

Compen-sation forshutoffs

Carboncertificate

market

Renewablesfeed-in tariff

Renewablesmarket-

managementpremium

Redispatch through transmissionsystem operators

Source:BCG aayi.

Ex 9 |Germanys Current Power-Market Design Faces Challenges from the EnergySystems Transformation


24/38


for an overdue in-depth investigation ofm a mak- mca-

nisms, such as capacity markets or

hedging ratios for intermittent renewable-

energy sources.

Investment Incentives for Climate Protection. A a ca pc a 8 p

ton, investment in climate protection

measures is hardly lucrative. To reach

gma a a

c a c-c a, a m

that provides long-term, market-driven

incentives for low-carbon investments is

necessary. It could be that the existing

epa ca-cca a

mechanism is the only feasible option,

because other potential solutions, such as

carbon taxes or emission standards for

power plants, might not be able to receive

international agreement. The mechanism

could be enhanced by establishing

long-term binding targets for greenhouse

gas reduction for all participating coun-

tries, as well as through a stepwise

expansion of the program to other

countries.

Market Integration and the Cost Eciency of Renewable Energy.gma rae Ac a c

the adoption of renewables, pushing their

share of power generation from 7 percent

2000 25 pc a

2012. f gma pa a

over the long term, however, renewable

m a cm c c,

and related investments should be based

p cmc. t a, c

c-pcc x - a

have promoted investments in a number

of comparatively expensive generation

technologies.

Short-term approaches to the problem

c a c m x -

a a m mak-, -

market premium model for all new

construction of renewable capacity.

Medium- to long-term options include a

technology-neutral support scheme, such

as a renewable-energy quota system. A

further possibility would be both daring

and potentially economical. Provided that

a long-term binding agreement on CO2

Areas for action Design options

Economic viability ofbackup power plants

No direct capacitymechanisms

Strategic reserve Capacity market Hedging ratiosfor fluctuatingrenewables

Climate protectionNo direct

internalization ofcarbon costs

Carbon taxesCarbon certificate

marketCarbon emissions

standards

Market integration and costefficiency of renewables

Feed-in tariffs anda market manage-

ment premiumfor renewables

Feed-in marketpremium forrenewables

Certificates or aquota for

renewables

Technology-specific tendering

No specificsubsidization

for renewables

Volume-based cost allocation Volume-based allocation:ct/kWh

Volume-based allocation with

consideration of ownconsumption: ct/kWh

Capacity-based allocation:ct/kW

Market integration ofpower demand

Minimal market integrationof demand

Legislation to enableparticipation of demand

flexibilities in energymarkets

Comprehensive technicaltapping of demand forparticipation in market

Current design

Increasing change relative to current design

Source:BCG aayi.

Ex 10 |Germany Will Need to Redesign Its Power Market, Focusing on Five KeyConsiderations


25/38


abatement and a corresponding incentive

cm cm c, gma c

choose to fully dispose of additional

a-pcc pp cm. fm

an economic perspective, this might well

m c appac cmaprotection.

The Viability of Volume-Based Cost Alloca-tion.d a p pc,

partial self-supply of power could become

increasingly attractive economically for

many Germans. Since 2011, in fact, power

m p a Pv aa-

tions has been cheaper than power from

the grid for homeowners in large parts of

Germany. In the near future, this will holdtrue for combined PV and storage solu-

a . h, c pa

can be deceptive. To ensure a secure

power supply, each house will have to

remain connected to the grid, and grid

costs remain the same regardless of how

mc . i cmmca-

tions, such costs are covered by connec-

tion fees. In the power sector, accounting

for grid fees will thus necessitate a

(gradual) transition from price perkilowatt hour to price per kilowatt.

Market Integration of Power Demand. Todayonly a small share of power demand,

mostly from energy-intensive industries, is

x cmp pa a

reaction to power prices. Most consumers

do not react to time-varying power-price

signals. In fact, they cannot do so, because

most households and small businesses pay

a constant power price per kilowatt hour.

In the future, making power demand

m x c a c ma-

sure to balance demand and intermittent

supply.

Market design constitutes a fundamental

challenge for economists and policymakers

alike. Interdependencies in the solution space

outlined above are complex.

dpaca ca p pa a

intermittent renewable-energy sources share

a cmm ca: , gma

current wholesale power market, which is

based on short-term marginal costs, provides

insufficient returns to finance the new

q m gma am-

. f p pa, -a a

wholesale prices are too low; for renewables,

prices achievable during times of strong sun

a/ a c. b c-tional power plants and intermittent renew-

ables need supporting investment incen-

tivesor an entirely new market design.

i, a p mak m -

functional for an energy mix with a large

share of zero-marginal-cost energy forms,

such as solar PV and wind.

Change will weigh heavily on

energy incumbents, particu-

larly the Big Four utilities.

While a solution is not yet at hand, the imme-

diate next steps seem clear: implement the

above-mentioned short-term measures, par-

ticularly the institutionalization of a strategic

reserve and a reform of the Renewable Ener-

gy Act, to buy time to develop a holistic, long-term sustainable solution.

a h-ht P-spp intt -m gma -

ing of its energy policy could be broad and

aa. b ca a

cm, pac-

a b f (rwe, e.on, ebw,

and Vattenfall). Indeed, the effects are al-

ready being felt.

Va Chai evotio: Ctom Bcom

Comptito.dcaza pa

hundreds of thousands of pro-sumers

homeowners with solar PV modules, farmers

with wind farms, and communities with

biogas assets, for examplewho both

consume and produce power. Their emer-

gence will have a threefold effect on the

a ca.

f, a a, pa , a

communities gain the ability to generate their

own power, they will become increasingly

self-sufficient. Worse, from the perspective of


26/38


the utilities, they will feed any excess power

they generate back into the grid for sale, ef-

fectively becoming competitors.

Second, the rise of pro-sumers will change

c a ca.The current one-way model, comprising gen-

eration, trading, transport, distribution, and

retail, will become multidirectional in nature,

with conventional generators and pro-sumers

both acting as generators.

Third, pro-sumers and the multidirectional

value chain will generate a variety of new

business models and draw new entrants into

the market to serve these customers. This will

have a particularly strong effect on the dis-tributed parts of the energy industry. Exhibit

11 illustrates a range of prototypical business

models that might emerge.

At Owhip: Tmdo shi.The

evolution of the value chain and the new

business models that result will be accompa-niedand acceleratedby a transfer of

c m cm p-m. t

aa a. b 2010,

xamp, 47 pc gma a

solar PV and onshore wind-generation capacity

was owned by individuals. Only 1 percent was

b f. (s ex 12.)

Ownership of electricity transport grids is

a ma . n c

infrastructure funds and independent system

operators. Similarly, distribution grids are beingpartially remunicipalized.

Energy fund

Pro-sumer

Build(equipment, hardware, soware)

Service(install, maintain)

Operate(control, run)

Smart home appliance vendor

Solar PV, CHP, and batteryvendors

IT soware, hardware, and service provider

Smart-meterequipment provider

High-, medium-, andlow-voltage system

manufacturers

IT soware andservice provider

Plant equipmentmanufacturer

Connectivity service provider

Grid serviceprovider

IT serviceprovider

Generationserviceplayer

Reseller/installer

Fulfillment provider

EPCcompany

Technologyplayer

Decentralized generationand storage

Decentralizedmarket making1

Metering andcommunications

Distributionand transportation

Energy trading

Centralized generationand storage

Power consumption(including demand-side management)

Biomass, biogas manufacturer

Efficiency contractor

Demand-response-

management optimizer

Projectdeveloper

Decentralized agents

Decentralized generationasset player

Distribution service operator

Energy trader

Generation asset player

Transportation serviceoperator

Business model

Source:BCG aayi.Note:CHP = combid hat ad pow; ePC = gy pfomac ctificat.1egy a.

Ex 11 |The Rise of Pro-sumers Will Result in New Business Models in Germanys PowerIndustry


27/38


Icmbt: Fom sta to Avag.Thechallenges facing incumbents, especially the

b f, p c

a p. A a

returns on their operations in nuclear and

fossil-based generation and strong results in

their trading businesses, the utilities face

having their earnings wiped out in the

German market. Competitors whose business

is based on classic business models, such as

centralized generation and energy trading,

stand to see their revenues plunge, weighed

a cc ac, c

nuclear phaseout, declining wholesale power

prices, the crowding out of their plants by

renewables, a declining spread between daily

base- and peak-power prices, regulation of

revenues for electricity grids, continued loss

of retail customers, and stagnating demand.

f xamp, capa mp

centralized generation will likely sink from

more than 15 percent before 2011 to 8 to 10

percent by 2030, assuming a yet to be estab-

lished mechanism that adequately remuner-

ates power plant operators for providing ca-

pacities and ensuring security of supply; cur-

rent wholesale markets alone would likelyyield negative returns.

The era of double-digit returns for conven-

tional players will thus come to an end. In

fact, absent mechanisms that compensate

conventional plants for providing generation

capacity, returns that have not been written

off will probably be negative. And these utili-

ties will likely have no means of driving re-

p . d a-

tion is today effectively a return-regulated

business, with returns of about 5 to 8 percent.

Even if the industry were to become unregu-

lated, the small scale and intense competition

for solar, onshore wind, and biomass assets

would yield similar returns for the foresee-

able future. Grid operation is also a return-

regulated business, with an expected return

on capital of about 8 percent. Indeed, the

transformation of the energy landscape spells

the end of high returns along the entire value

chain, with 2010 returns probably represent-

ing the high-water mark.

Idty Achitct: Dcotctio,

Fagmtatio, ad stacig.And so we are

2.0

Total,nonutilities

41.9

Projectdevelopers

16%

7.2

13%

5.6

Commercialentities

9%

Big Fourutilities

Farmers

9%

4.2

Privateindividuals

4.0

47%

20.9

0

Total

44.4

1%

0.6

Otherutilities1

5%

Funds/banks

50

40

30

20

10

Ownership of installed onshore wind and solar PV capacity, year-end 2010Gigawatts

100%

Sources:ka novy Ititt, Matat eba-egi-Aag i d stomzgg; Agt f eba egi,Ivtitio i eba-egi-Aag i Dt. 2000-2010; BCG aayi.Note:Th appat dicpacy i th tota i d to odig.1Maiy micipaiti.

Ex 12 | The Transfer of Inuence from Incumbents to Pro-sumers Is Already Under Way inGermany


28/38


29/38


30/38


pacity and the fallout of some of the indus-

p. r pp a

guarantee of profits.)

There are signs, though, that the market for

renewables in Germany may have alreadypeaked: 2010 and 2011 were record years for

solar PV, in particular, and a gradual slow-

m p k. h, -

nue opportunities for vendors will remain, es-

pecially since existing renewables will

eventually have to be replaced. In fact, invest-

ment to replace existing renewables will ac-

count for a signicant share of the projected

13 billion in generation-related revenue in

Germany in 2020. The power-grid-technology

market will also benefit substantially fromgma ama, a-

al revenues growing from around 1 billion in

2011 to around 3 billion by 2030.

b p a c pc,

some technology companies may have oppor-

tunities to pursue integrated strategies with

companies positioned elsewhere on the value

chain. Vaillant, for example, a vendor of

mc-ChP m, pa rwe

and E.ON to sell heat- and power-generatingdevices to residential consumers. Nontradi-

tional competitors will also see increasing op-

portunities as industry boundaries start to

. tcmmca a dc

Telekom, for example, has entered the dis-

tributed-energy business, offering a solution

a ChP c mc-

palities seeking to move toward distributed

generation.

t ca ma- aa

a cap a

from the installation and maintenance of de-

centralized generation assets, a market that

should reach 2 billion to 3 billion by 2020.

t pa a c ca

and relationships, cheap cost structure, and

low expectations for returns will make it hard

for potential competitors, such as utilities and

other industrial companies, to compete

against them effectively.

statp: xpct chag i achivig

caabiity. We expect startups to develop

innovative and partly disruptive business

models, primarily for servicing and opera-

tions at the distributed end of the energy

. e a nx Kak,

example, are pursuing the direct marketing of

x, caz p a a

consumption.

b ap ac ca. f,

must establish a new business model, often

positioned between classical utilities and pro-

sumers, as decentralized market participants.

Second, they must find a way to achieve prof-

itability and scalability with a business model

that generally requires a service force to in-

a a maa qpm a pa

cm ca.

Poicyma: cogiz that th chag iti ahad.gma pcmak a

the goals for the transition to distributed and

a a. b k

work remains ahead of them. Policymakers

will have to drive and support the develop-

ment of critical technology and infrastructure

enablers, such as grid extension.

Above all, the challenge of policymakers will

be to make immediate adjustments, as neces-

sary, as well as develop long-term solutionsfor a sustainable and stable power-market de-

sign. And policymakers will have to do this

while taking great care to find a balanced al-

location of the costs associated with the

transformation.

1. Capa xp a az a

lifetime, with a weighted-average cost of capital of7 percent for renewable generation, 12 percent forfossil-fuel-based generation, and 9 percent for grids.

2. This reduction refers to total final energy consump-tion, including the transportation (mobility) sector.

3. d cmpx a aa a-tions, we cannot discuss in detail the likely trends in pc p. h, government has ensured global competitiveness forpower-intensive industries through exemptions andspecial price regulations, and we expect this commit-ment to continue in the future.


31/38


followiNG

GermaNys PaTh

G lead in trans-forming its energy-supply system from aconventional paradigm to a renewable and

more distributed one. Are other countries likely

gma p? i , a

are the key imperatives for stakeholders?

r m sp c?Not surprisingly, countries are pursuing a

range of different energy policies, reflecting

their distinct geographic, political, and eco-

nomic conditions. (See Exhibit 15.) Currently,

Japan seems to be the only country whose

emerging policy is comparable to that of Ger-

many, although its choice is largely driven by

c. A a m x-

tended freeze on domestic nuclear genera-

c a fkma

dac pa 2011, Japa a a

on imported fossil fuels and is battling an en-

ergy deficit of approximately 10 GW, which

has triggered painful restrictions on energy

consumption in the private and public sec-

tors. Renewable and distributed generation

offer potential solutions that the government

ma c p. h, ca

considerations, namely a lack of space for

centralized, large-scale wind and solar proj-

c, ma m m p.

Other countries are pursuing elements of

gma pc a ac cmpaa ca-

lenges, particularly with regard to nuclear en-

ergy. In Europe, Switzerland is apparently tar-

geting a phaseout of nuclear by 2034, when

c pa a

reached 50 years of age. As the country grad-

ually takes nuclear capacity offline, it will

need to replace it with generation from other

sources (nuclear energy represented 38 per-

c sza cc a 2010). Similarly, Italy, which closed the last of

its nuclear reactors in 1990 and confirmed its

antinuclear stance in a 2011 nationwide ref-

erendum, has had to aggressively pursue oth-

er sources of energy to make up for the short-

fall. It has turned, in particular, to solar PV.

d - a c-

2010, ia a a Pv capac

c a, a

gma.

Notwithstanding its similarities with these

countries, Germany seems to be on a special

path. Most countries continue to embrace nu-

clear energy and largely conventional, cen-

tralized generation. The U.S., fueled by the

goal of energy self-sufficiency and the pres-

ence of abundant shale-gas reserves, which

are complemented by large-scale solar and

wind projects, continues to rely on conven-

tional sources. The majority of non-European

countries also seem likely, for the foreseeable

future, to continue to pursue strategies based

on centralization and conventional sources.

Among major markets, this also applies to

China and Russia, both of which have direct


32/38


access to fossil fuels, vast spaces available for

big, centralized infrastructure projects, and

soaring energy demand. Similarly, South Afri-

ca will likely continue to rely predominantly

on coaleven though cheap solar and off-

shore wind power offer attractive and poten-

a p c

-m -a ca. baz,

for its part, will continue to rely on central-

ized hydroelectric power.

b a c a c ma

m c gma pa.

One is the economic argument for renewable

a pcc c. f

that are rich in sun and wind, for example,

and those in remote locations where the costs

of imported fossil fuels are high, the pure

financial argument for a shift to renewables

is very attractiveindeed, much more

attractive than it is for Germany. Second,

there is a similarly strong business case in

many countriesespecially developing

countries with a need for greenfield

electrification of rural areasfor

decentralized generation for residential

Phaseoutof nuclearenergy1Percentage of power generation from renewables

France

U.K.

Italy

U.S.

Japan

Canada

Russia

Germany

Energyefficiency

17.1 35 50 65 80

15 27

7.4 15

20.1 26

11

3.5

60 (primarily hydroelectric)

17

19.521.5

2009 2020 2030 2040 2050

2009

20202009

2020

2009 2020

Spain 34 38.12009 2020

2009

2009

2009

2009 2015 2020

Decentra-lization2

India

Turkey

China

SouthAfrica

Algeria

Switzerland

Indonesia

Vietnam

Mexico

Brazil 85 (primarily hydroelectric)2009

10

16 18

1.84 13

26 30

13.2 15

50

19

58 75

35

2009

2009 2020

2009 2020

2009 2023

2009

2009

2009

2013

2025

2020

20250.45 20

2017

2009 2050

2030

Target2009 actual

2009

Sources:rwab egy Poicy ntwo fo th 21t Cty; BCG aayi.1Phaig ot o ot mig dvopmt of ca gy.

2Impicit o xpicit pit of a ditibtd pow-ppy ytm.

Ex 15 |Countries are Pursuing a Wide Range of Energy Policies


33/38


consumers. Instead of investing in expensive

grid infrastructure and centralized power

plants, governments in Africa, India, and

Indonesia, for example, could provide power

to remote locations via small rooftop solar PV

installations, batteries, and rarely usedbackup diesel generators. (See Exhibit 16.)

The use of distributed generation and island

grids for electrification would parallel the

role that wireless technology played in

bringing telecommunications to such regions.

Third, an increasing number of countries and

regions have set ambitious energy-efficiency

targetsand renewables and distributed

generation will be critical levers in meeting

those goals.

mnt n opptnt Gb stkTo date, then, it appears that Germany is es-

a mac mm. b

its experiences and lessons learned can pro-

vide valuable guidance to stakeholders in oth-

er countries.

utiiti ad tchoogy compai: ppa

fo bi mod chag.Established

utilities that rely on conventional, centralized

m ac ca k m

the rise of renewable and distributed genera-

tion. Incumbents should be prepared todiversify their generation portfolios early

onand this includes the possibility of

entering the distributed- or renewable-gener-

ation arenas themselves. True, with the

exception of large hydroelectric plants, these

ma c cmpaa

capa. b cmc

will improve considerably over time and may

ultimately be superior to those of more

traditional forms of generation.

As markets evolve, utilities may also have to

experiment with new business models in or-

der to ward off competitive threats from pri-

vate individuals, cooperatives, telecommuni-

cations players, and other third parties.

Potential options include acting as corporate

venture-capital investors and investing in

technology vendors and in companies with

Average power price for households, 2011(ct/kWh, excluding value-added tax)

0.25

0.20

0.15

0.10

0.05

0.002,6002,4002,2002,0001,8001,6001,4001,2001,000800

South Africa

Hawaii

India

California

Spain

Texas

Australia

Greece

Japan

China

Italy

France

New York

South Korea

Germany

Partial self-supply based on solar PVis not viable (grid parity is not reached)

Netherlands

UK

Finland

Partial self-supply based on solar PV is viable (gridparity is reached at 2011 power prices)

Sweden

Norway

Size of electricity market (terawatt hours, 2010)

2.2/Wp2

(2011)

1.5/Wp2

(2013)

1.1/Wp2

(2020)

Isocost curvesof solar PV at

module prices1:

Solar irradiation (kWh per square meter per year)

Sources:rach Ct of th eopa Commiio; BCG aayi.1Iocot cv how a poib combiatio of facto at a cotat cot. Pic a a of ya-d fo a ag ooftop itaatio withottoag ad am th foowig: 85 pct fficicy of th PV mod; 20-ya coomic iftim; 8 pct cot of capita; aa opatigxpdit 1 pct of iitia ivtmt cot; 1 = $1.30.2Wp = watt-pa (a mamt of pa pow).

Ex 16 |Falling Costs for Solar PV Will Make Partial Self-Supply of Power Viable in Some

Locations


34/38


strong capabilities in distributed-asset man-

agementor acquiring such businesses out-

right.

f c cmpa, a

investments accompanying the shift torenewable and distributed generation are a

m pp. f ma, ,

the trend toward distributed generation

changes the structure and economics of their

market. While focusing on large-capital-

expenditure power plants and networks is an

attractive option today, smaller-scale

generation in solar and wind, distributed

storage, and intelligent-network and

consumption management will be important

markets and control points tomorrow. Manytechnology businesses may find their

conventional-technology and large-project-

management expertise, as well as their

utility-focused offering and sales channels,

increasingly ill suited to emerging-market

opportunities. As fundamental capabilities

and business models are challenged, the

necessary changes will be disruptive and

require bold strategies and rigorous change

processes.

Poicyma: hap th oppotiti.There

are few areas in which regulators assert more

c ama mak amc

than the energy sector. Politicians should

reinforce their commitment to facilitating the

mak ama c

business case for renewable generation.

Rather than viewing renewables as expensive

technologies whose primary advantage is

their impact on greenhouse gas emissions,

policymakers need to remind themselves that

the argument is increasingly about econom-

ics. A move to renewable generation means

growing independence from fossil fuels and

related price volatility. Last but not least, the

rebuilding of the energy infrastructurenecessary to accommodate a growing empha-

sis on renewable generation could provide a

tremendous stimulus to the larger economy.

While many countries do not seem ready to

mak a pa a a a gma,

m aa m a -

ca ca a a

energy mix.

i c, a c pc a

help determine its industrial competitiveness10 to 20 years from nowand renewable

generation can be a weapon that should be

leveraged to its fullest potential. This is par-

ticularly true for countries that have relative-

ly advantageous geographic conditions. The

southern part of Italy, for example, has nearly

double the solar radiation of Germany. South

Africa has even more, and it also has consid-

erable open space that could accommodate

wind parks as well as very favorable condi-

tions for offshore wind generation. Govern-ments need to be aware of such national as-

sets and take steps to exploit themin order

to shape a new balance of power.


35/38


for furTher readiNG

The Boston Consulting Group haspbihd oth pot ad atico atativ gy that may bof itt to io xctiv.rct xamp icd:

Trend Study 2030+: An EconomicAssessment of Germanys EnergyTurnaroundA pot by th Gma IdtyAociatio ad Th Boto CotigGop, Fbay 2013

Toward a Zero-Carbon World:

Can Renewables Deliver forGermany?A Foc by Th Boto CotigGop, j 2012

Toward a Distributed-PowerWorld: Renewables and SmartGrids Will Reshape the EnergySectorA Whit Pap by Th BotoCotig Gop, j 2010


36/38


NoTe To The reader

About the AuthorsDieter Heuskelis a senior partnerad maagig dicto i thDdof oc of Th BotoCotig Gop.

Philipp Gerbert is a senior partner

ad maagig dicto i th mMich oc.

Stefan Schlotjunkeris a seniorpat ad maagig dicto iBCG Ddof oc.

Patrick Herholdis a principal inth m Mich oc.

Jens Burchardtis a consultant in

BCG Bi oc.

AcknowledgmentsTh atho wod i to thaCoi Ag, Ga Hig,Fa ko, ad Moitz Pa fothi cotibtio to thi pot.Thy a ao gatf to Gy Hifo witig aitac ad kathi

Adw, kim Fidma, GiaGodti, ad saa staitfo cotibtio to ditig, dig,ad podctio.

For Further ContactFo fth ifomatio abot thipot o to a mo abot BCGcapabiiti i thi d, pacotact o of th atho.

Dieter Heuskel

Senior Partner and Managing DirectorBCG Ddof+49 2 11 30 11 [email protected]

Philipp GerbertSenior Partner and Managing DirectorBCG Mich+49 89 23 17 [email protected]

Stefan SchlotjunkerSenior Partner and Managing Director

BCG Ddof+49 2 11 30 11 [email protected]

Patrick HerholdPrincipalBCG Mich+49 89 23 17 [email protected]

Jens BurchardtConsultantBCG Berlin

+49 30 28 87 [email protected]


37/38

Th Boto Cotig Gop, Ic. 2013. A ight vd.

Fo ifomatio o pmiio to pit, pa cotact BCG at:e-mai: [email protected]: +1 617 850 3901, atttio BCG/PmiioMai: BCG/Pmiio Th Boto Cotig Gop, Ic. O Baco stt Boto, MA 02108 usA

To d th att BCG cott ad git to civ -at o thi topic o oth, pa viit bcgppctiv.com.

Foow bcg.ppctiv o Facboo ad Twitt.

3/13


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A da

Amsterdam

Athens

Atlanta

Auckland

bakk

baca

bj

b

b

b

b

bap

Chennai

Chicago

Cologne

Copenhagen

daa

d

da

d

fak

Geneva

ham

hk

h K

Johannesburg

Kiev

Kuala Lumpur

Lisbon

London

Los Angeles

Madrid

Melbourne

Mexico City

Miami

Milan

Minneapolis

Monterrey

Munich

Nagoya

n d

New Jersey

New York

Oslo

Paris

Perth

Philadelphia

Prague

Rio de Janeiro

Rome

sa facc

Seoul

Shanghai

Singapore

Stockholm

Stuttgart

Sydney

Taipei

Tel Aviv

Tokyo

Toronto

Vienna

Warsaw

Washington

toward a new balance of power, bcg

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