How Digitalisation Can Ease Transition to Net Zero
The pace of digitalisation in the energy sector has accelerated rapidly in recent years, leading to a transformation of many traditional business models, said the Paris-based International Energy Agency (IEA).
This is due to innovative technologies and access to new types of data, new revenue streams, and services. This has led to costs being reduced and barriers to new market entrants lowered.
“Energy companies continue to find novel ways of doing business and engaging with their customers,” the IEA said.
Digital business models, the IEA said will facilitate clean energy transitions, especially how they can enhance energy efficiency and demand-side flexibility.
Already, there has been an increase in the number of digital start-ups in the energy sector raising venture capital in recent years. Despite expectations of a slowdown in venture capital financing due to the Covid-19 pandemic, early-stage investments in clean energy start-ups actually increased in 2020.
In 2020, these aggregated to about $900 million (excluding outlier investments of $150 million in a single deal), an increase of 20 percent from 2019, and three times the level of financing in 2016. Preliminary analysis for the first half of 2021 indicates the level of investment has remained stable year on year.
Unlike traditional business models based on sales of physical products or units, digital business models focus on sales of services and give customers strong incentives to invest in efficiency and maintenance as a strategy to directly increase profits.
Digital business models prioritise access to granular data and advanced analytics for new insights. It is software-driven and more reactive and flexible providing greater opportunities to adjust to changes in the market due to shorter development lead times, the IEA said.
The Paris-based agency said the energy system is undergoing deep structural change as electrification becomes more prevalent across industries and energy-demand patterns shift.
This shift is also seen locally as renewable energy companies including in Nigeria are digitizing their services. Mobile payment systems is helping customers in rural areas to pay for access to solar energy facilities.
Solar systems deplored in many places now have advanced, remote monitoring systems, and customers now have the ability to control their systems using apps on their mobile phones. In Energy as a Service model, customers pay a subscription fee in return for a package of energy services
According to the IEA’s Net Zero Emissions by 2050 Scenario (NZE), 240 million rooftop photo-voltaic solar systems and 1.6 billion electric cars are integrated into the power system by the middle of this century, while more than 85 percent of the world’s existing building stock is retrofitted to meet standards that are zero-carbon ready.
It said the average annual rate of economy-wide energy efficiency improvement doubles through to 2030, compared with the average over the last ten years to 2020, in NZE.
To achieve this, the flexibility of future low-carbon electricity systems (based on hour-to-hour ramping needs) will quadruple to accommodate variable sources of renewable power.
Batteries and greater demand-side response deliver about half of net-zero emissions flexibility improvements. Thus, accelerating action in the current decade is crucial for meeting these climate objectives.
Under the NZE, annual investments in clean energy is expected to increase to around $4 trillion by 2030. Close to 70 percent of that is borne by the private sector – consumers and investors, who will be reacting to price signals and government policies, the IEA said.
“The required measures – including building retrofits, installations of electric vehicle (EV) charging infrastructure and other initiatives – all involve high up-front capital investments. Reaching this level of financial commitment is a huge challenge, particularly – but not exclusively – in emerging markets and developing economies,” the report said.
However, given the magnitude of the investments needed, and the rapid pace of change required, many legacy business models in the energy-service sector may not be up to the challenge.
Rapidly adapting their physical equipment and infrastructure to customers’ changing needs is difficult, for example, and their analog methods of data collection are labor-intensive and yield limited insights, the report said.
In contrast, digital business models are software-driven. Having access to more granular data, combined with advanced analytics capability, allows digitally-enabled companies to more accurately quantify the benefits their solutions bring to customers. This can also help speed the development of new products and services.
Digital tools and platforms can ease and accelerate the energy transition by facilitating efficiency and demand-side flexibility. At the same time, digitalisation creates new business opportunities and revenue streams for energy service providers, while helping consumers to better understand their energy use and lower their bills.