Distributed electricity generation: an overview of recent developments and trends

excellence) if the regulatory and institutional framework is not adverse. Therefore, it is especially important to identify the current challenges in the sector and understand how bM innovation may successfully contribute to the prosecution of the country’s goals, namely in terms of market-enabling, sustainability, efficiency, flexibility, resilience and reliability of the brazilian electricity system.

The rest of the paper is organized as follows. section 2 presents a brief overview of the recent perspectives on the dG paradigm, at a global scale. section 3 examines the bM innovations enabled by dG technologies and applications. section 4 analyzes the threats and benefits encountered by incumbent utilities in the era of dG, high- lighting how regulatory innovation may mitigate some of the negative impacts of dG on utilities’ conventional bM. section 5 presents the case of brazil and, finally, section 6 concludes.

2. Distributed electricity generation: an overview of recent developments

are the reflex of an overall institutional framework favoring the transition to a low carbon energy sector, in which dG plays a key role given its greater environmental sustainability both at the demand-side and the supply-side level. The following figure illustrates how both energy efficiency (demand side) and the use of renewable energy (supply side) are expected to contribute significantly to an effective reduction of Co 2 emissions from energy (Gt/year).

Figure 1. expected pathways to reduction in Co2 emissions from energy

source: ireNa (2017)

on the demand side, smart grids allow for a much more effective demand- response, increasing the energy efficiency performance of the overall system. The de- velopments on metering, controlling and digital communication allow consumers to monitor much closer their energy consumption, allow firms to implement dynamic pricing schemes and allow consumers to respond to such price signals much faster (even in real-time), making them more effective.¹ according to accenture (2016), “de- mand response tools … will become a key tool for electricity distributors to manage peak load and maintain reliability of supply. Accenture modeling indicates that demand-response solu- tions could provide meaningful changes to peak demand through programs that incentivize action on very few hours per month” For example, a response program covering 2 hours a month may lead to a variation in the peak load of 1,5%, approximately. if the program covers 6 hours a month or more, the relative change in the peak load may reach values around 4% (or more).

on the supply side, dG facilitates the electrification of the energy systems and promotes the decarbonization of the electricity sector, through a greater participation

1 eurelectric (2015) estimates that “accelerated innovation in power supply technologies and business models for energy efficiency could be worth €70 billion to the EU economy by 2030. Additional benefits are also expected in terms of energy security, lowering of system costs, and enhancing consumer satisfaction.”

of res on the generation electricity-mix, in line with the sustainable energy transition pathways established by 2015 uNFCCC paris agreement (uNFCCC, 2015). Figures 2 and 3 below illustrate this trend, showing that res are growing at a fast rate (world- wide) and pV solar capacity is the one growing the most in recent years.

Figure 2. renewable power capacity and annual growth rate

source: ireNa (2017)

Figure 3. pV solar global installed capacity and projections

source: ireNa (2017)

reN21 (2016) estimates that by mid-2015, around 44 million off-grid pico-solar products were sold worldwide (corresponding to an annual market of 300 million of usd). The increase in pV solar in recent years echoes the expansion of distributed energy production worldwide, both in industrialized countries (such as usa, Japan, Germany, italy or China) and developing countries, where distributed energy projects are key to provide energy services to people living without electricity.²

2 according to reN21 (2016) around 1.2 billion people live without electricity. an increasing number of of small-scale distributed energy production projects are being implemented in order to reduce this impressive figure.

Figure 4. Cumulative installed pV solar capacity by country, 2015

source: ireNa (2017)

looking at the worldwide cumulative installed pV solar capacity, its asymmetric distribution is quite evident. Figure 4 shows that some countries are very active in this field (namely China, usa, Japan, Germany and italy), whereas other countries still have very limited installed pV solar capacity, including countries with a great production potential (e.g. brazil). in this respect, it is important to note that, at a country-level, the increase in pV solar capacity may have not only very important en- vironmental impacts but also significant economic ones. Grijó and soares (2016) find that pV solar installed capacity have a positive impact on Gdp. using a fixed effects model with panel data for 18 european countries, the authors found that “1% increase in PV Solar installed capacity and in electricity production from renewable sources has a positive impact on GDP of 0,0248 and 0,0061 %, respectively.” When they account for differences across countries, they find that Germany, France, italy and the uK are the countries in which pV solar has the largest economic impact.

it is also interesting to note that this increase in res capacity has been accompa- nied by a significant reduction in the levelised cost of electricity (lCoe) from res.

This fact is illustrated in the figure below that represents the lCoe for utility-scale power (range and averages).

Figure 5. levelised cost of electricity for utility-scale power (ranges and averages).

source: ireNa (2017)

The figure illustrates a remarkable reduction in the lCoe of res. in addition, it also shows that onshore wind lCoe is now within the fossil fuel cost range (becoming more and more competitive). Finally it also points out the increasing competitiveness of pV solar, which is the energy source registering the greatest reduction in the lCoe.

This trend is expected to continue in the future: as more and more pV solar capacity is exploited (both at the end-user scale and the utility scale), further cost reductions are expected to occur due to scale and learning economies.

at the present moment, solar production plants remain quite heterogeneous, with end-user micro projects coexisting side-by side with very large utility-scale power plants. This is illustrated in Figure 6 that shows the proximity of global rooftop capacity and utility scale solar capacity. it also shows that both generation modes are likely to growth further in the near future. Hence, some players will probably continue to exploit more conventional bM (e.g. large-scale pV solar plants, whose produc- tion can be brought to the market), whereas other projects (e.g. community-based small pV solutions or new services bundling pV solar production with storage and aggregation) are opening the door to new players and pushing utilities to create new lines of business.

Figure 6. scenarios for pV solar rooftop and utility scale segments development until 2019

source: solar power europe (2015)

The transition towards a low-carbon decentralized power system in which many heterogeneous agents interact raise important challenges, including:

(i) technical issues related to the intermittency³ and the integration of dG resources in the grid;

(ii) economic issues, related to: the significant investment amounts needed to build a smart interconnected grid; the economic and financial sustainability of the dis- tribution operators, which now have to manage a much more complex system but are deprived of an important revenue bulk if the current volumetric tariff sys- tem remains unchanged; the design of appropriate market-based mechanisms to provide economic agents with appropriate investment, storage and consumption incentives;

(iii) regulatory issues related to the appropriate regulation framework and market design in the context of an interconnected grid, with many heterogeneous stakeholders.

Given the stirring developments arising in electricity markets, there has been a growing interest in understanding how countries may fully benefit of the dG (envi- ronmental and economic) potential, overcoming the challenges mentioned before. in

3 For example, as referred by alves et al. (2017), in California, as a consequence of the increasing weight of res there has already been an increase in the slope of the “duck curve” reflecting ramping problems, which may affect the reliability of energy systems during certain periods of the game. in order to avoid the collapse of the system during the demand peak periods, it is crucial to ensure an effective coordina- tion among the agents in the system. This may not be easy to achieve both in the short-run (where effec- tive price signals may result in too complex dynamic pricing schedules) and in the long-run (where the incentives to invest in back-up capacity may be almost inexistent).

this context, scholars have been trying to understand the technical, economic, envi- ronmental and social dimensions behind dG deployment. bM innovation has been a particularly fruitful are of research since understanding the business dynamics is a necessary condition to identify the economic impacts of dG and then understand how the challenges dG raises can be overcome.

Consequently, the number of articles published in the field of bM in electricity markets have increased exponentially in the recent years. This is illustrated in the figure below, which shows the yearly production of scientific articles (indexed in the scopus bibliographic database) that combine the terms “business model” aNd “distributed generation” in their title, abstract or keywords.

Figure 7. Number of yearly publications simultaneously covering the areas of bM and dG

source: scopus

The recent interest of energy economists on business model innovation is not sur- prising considering that the policy shifts and the drastic innovations taking place in electricity markets are leading to a decentralized business ecosystem, which calls for novel market design and innovative business strategies. in the following section we pro- vide an integrated overview of the wide business model constellation currently emerg- ing in power systems.