The Potential of Digital Business Models in the New Energy Eonomy

Photo-illustration: Unsplash (Bill-Mead)

The pace of digitalisation in the energy sector has accelerated rapidly in recent years, leading to a transformation of many traditional business models. Thanks to innovative technologies and access to new types of data, new revenue streams and services have emerged, costs have been reduced and barriers to new market entrants have been lowered. Energy companies continue to find novel ways of doing business and engaging with their customers.

This article highlights the potential of digital business models to facilitate clean energy transitions, with a particular focus on how they can enhance energy efficiency and demand-side flexibility. It also identifies a set of general recommendations for governments to support the scaling up of innovative business models.

The energy system is undergoing deep structural change as electrification becomes more prevalent across industries and energy-demand patterns shift. 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. 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) quadruples to accommodate variable sources of renewable power. Batteries and greater demand-side response deliver about half of NZE flexibility improvements. Thus, accelerating action in the current decade is crucial for meeting these climate objectives.

Under the NZE, annual investments in clean energy increase to around USD 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 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.

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 labour-intensive and yield limited insights.

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.

Source: IEA