Utilities between the pillars of energy transition

As the 4th largest economy in the world and a global export powerhouse, Germany has been a key player in the globalized economy. As outlined in previous articles of this series, one vital factor of the German success story was secure, affordable and reliable energy supply. Naturally, the big players of the German energy system (large utilities all the way to several hundred local utilities, the “Stadtwerke”) were and still are positioned at the heart of any development concerning Germany’s (and Europe’s) energy generation, supply and market design.  The 2022 invasion of Russia in Ukraine has triggered yet another acceleration of an already ongoing, multi-faceted change process (“Energiewende”). This comes on top of the accelerated nuclear phase out following Fukushima in 2011. In comparison, the late 20th century decades could retrospectively almost be described as steady state period of operation.  

Utility industry in the course of time

Figure 1: Timeline of the key events that shaped the industry, Source: ING Research 

The energy system is being continuously rethought and adjusted to reflect changing requirements. That is the reason why ING with its clients constantly assess its implications for the utility business model going forward, as they are the ones that are not only the most impacted but also best positioned to lead the (r)evolution.  

The overall energy transition challenge is a broad and highly complex matter, impacting almost every industry. How does the continuously changing market setup translate into our “energy supply characteristics”? We argue in this article that Utilities constantly strive to optimize what we call the “Power Square”.  

Figure 2: Optimizing the “Power Square”, Source: ING 

Electricity supply to customers can be assessed looking at four key criteria: customers want an affordable power supply, whilst reliability is key especially in a highly industrialized country such as Germany; a secure sourcing and generation activity is the base ingredient to make the power supply work whereas sustainable and low emission power generation has become increasingly relevant.  

Based on the power square, we can characterize some key periods of the last 2 decades and attempt an outlook towards 2030. 

• Energiewende (2000): The power square operated at something of a sweet spot, with affordability, reliability and security of various energy sources being near optimum, whereas environmental impact was at the time still largely ignored by all the relevant stakeholders alike.  
• Fukushima (2011): The then chancellor Angela Merkel accelerated the nuclear exit, preponing the timeline from 2030 to 2022 following the events in Fukushima. Power square in the decade starting 2010 bore a very similar look to the one in 2000, at the onset of Energiewende but with rising concerns regarding reliability of power supply in anticipation of nuclear powerplant shutdowns. 
• Russian invasion of Ukraine (2022): Gas was primed as a perfect transition fuel esp. during Germany’s simultaneous exit from nuclear and coal-based power generation, as it was cleaner compared to the other fossil alternatives, relatively abundant and affordable, thereby poised to play a key role until renewables were widespread and new energy technologies such as battery storage and hydrogen were in place to provide lion’s share of power sourcing. This year we see the power square shifting first gradually and then dramatically, as all the three key pillars of the German economic success of the late 20th and early 21st century, i.e. affordability, reliability, and security took a turn for the worse, with only sustainability of the square showing an improvement compared to 2011.  
• Path towards net zero (2030): We anticipate that mid- to long-term the Russian invasion of Ukraine since February 2022 will have further accelerated the trend towards renewables and provided a fresh impetus on reduction of excessive dependence on Russian energy imports. The EU is now primed to massively increase investments in renewables as well as diversify its energy sources by e.g. signing LNG deals with the United States and other allies to ensure adequate supplies of natural gas for the near- to mid-term until new energy technologies can be deployed at a commercial scale.

Industry 4.0 and the role of utilities 

Whilst “ignoring” environmental aspects, an optimum power square (affordable, secure, reliable) could be established in the past at a limited cost, however, it is now common sense that climate change is not a theoretical concept but a threat that the global community needs to address as soon as possible. Such an effort will as per our opinion warrant certain concessions to the three other criteria along the way. However, as noted in the article, increased investments in renewables and new energy technologies in combination with a diverse supply of fossil fuels during the transition period can act as an optimum solution.  

The above-described transition journey requires various stakeholders stepping up to the plate and contributing commensurately. The energy companies remain at the heart of the economic value chain for so many industries, be it chemicals, steel or automotive to name a few. They all depend on energy supply to continue their businesses. There is more to it than that. Energy utilities will play a defining role in the upcoming phase of the ongoing transition. They will support Germany in becoming independent from Russian gas, building energy grids throughout the country to make Germany ready for LNG or alternative fuels such as hydrogen and create the infrastructure to store energy for hard times. 

Next to that, energy utilities provide crucial know-how to herald the start of industry 4.0 by killing two birds with one stone. They are key in building Germany’s energy grid and at the same time providing lightning-fast Internet to rural areas. Trends like real time economy, autonomous driving or electromobility can only become common and popular if energy utilities embrace their crucial role and responsibility. 

ING is ready to leverage both its balance sheet and its industry knowledge and advisory expertise to further guide its energy customers and help them make a smooth transition to a sustainable economy. 

[1] https://de.statista.com/statistik/daten/studie/157841/umfrage/ranking-der-20-laender-mit-dem-groessten-bruttoinlandsprodukt/

Over the course of this series, ING colleagues will share real life stories how these challenges translate to different industries, how they are being approached by our clients – and how ING supports them on their way. Give them a read – it will be worth your time.