25 April 2020
Blog: Understanding Prosumer Business Models for Local Energy Futures
This blog represents a reflection on the 1st international workshop of the PROSEU project, hosted by Leuphana University, The University of Leeds and DRIFT in March, 2020.
By Fabi van Berkel, DRIFT
With Prosumerism on the rise and prosumer subsidies on decline, it is necessary to rethink how sustainable energy services are to be organised and financed in the future. Many valuable energy initiatives and collectives have been founded over the last years, with much hard labor and efforts from innovators and frontrunners. But, in order to widely make use of the potential of prosumer technology, the conditions that enable local prosumer systems should be improved. Currently, many EU countries' institutional settings prohibit or complicate the development of small-scale energy production. This is because regulations are not yet designed for energy collectives, energy markets are not equipped to deal with the participation of new local energy actors, and the energy system or grid requires (re)adjustment in order to handle new energy flows or drops in energy demand because of self-reliance of households. At the same time, anticipated digitalisation, the trend of decentralisation and the COVID-19 crisis provide space for the redesign of socio-economic and/or political systems.
In this process of redesign, new business models could provide support. They can be used as a lens to reflect on value creation and identify important stakeholder relations. If we rethink what values are, then external effects that are not taken into account by using classic economic measurements could become part of the broader value scheme. As such, business models in which citizens are not merely seen as consumers or in which multiple values are taken into account, could open doors for mainstreaming prosumerism throughout the Energy Union. In this article, I raise three key issues to understand when developing prosumer business models, and conclude by providing my own take on these insights.
1. Broader value horizons for prosumer energy
There are different ways that the business model-lens can change our thinking. One way is by changing our view on what value is. Business models provide a framework to reflect on how value is created or captured. From a classical economic perspective this is approached from a narrow sense: creating economic value, aiming for maximisation of profits. This perspective excludes a lot of other values that are created in the organisation, development or delivery of a product or service. For instance negative and environmental values like carbon emissions and pollution, but also positive and social values, like the increase of community sense in neighborhoods. The true value of the production of a product or service is thus often not captured in the business model, but externalised elsewhere. This could mean that the value should be addressed in another way, e.g. through investments from municipalities in neighborhood development, or carbon off-sets to maintain clean air. If these values are taken into account in reviewing energy production, it could become visible that local prosumerism has more and diverse benefits than economic paybacks would indicate on their own.
Besides changing our perspective on the creation of value, another way to develop new business models is to change how we look at its output: what is created? In the energy market, energy has mostly been considered as a product, which means you buy a unit of energy (gas or electricity). But when reviewing energy as energy-as-a service (Eaas), a different business model logic arises. With this concept, energy providers (or other energy actors) focus on the ability of clients to use energy, for which clients are not required to do investments themselves - like buying solar panels. Clients would still produce energy in their houses or communities, but they would not have to own or invest in the energy producing device (solar panel, heat pump, etc), or related software or management systems. Even though the conditions for the use of this business model would change in relation to other schemes (like using longer-term contracts), it would make sustainable local energy production more accessible for a wide range of people.
2. New actors entering a complex system
As shown by a mapping exercise conducted by researchers of the University of Exeter, energy systems and their web of related institutions, actors and relations are highly complex and often far from transparent. While it could be argued that this only represents the UK, which is very liberalised, it is likely that the institutional context in other countries have similar complexities. The entry of new local players to the market would significantly change relations and add more complexity to the equation, especially if outdated regulations or connections are not changed. At the same time, it is interesting to keep in mind that there is also a scenario imaginable where prosumers go off-grid and no longer engage with the existing system, because local systems are built. Still, this would also impact existing energy systems: more self-reliance, means less customers for energy providers and therefore less market share, which could instigate an increase in energy prices for those who are not prosumers. Traditional energy corporations therefore need to innovate and develop in the market, to also change their business models.
Relations in the energy market will also change because of the entry of other newcomers besides prosumers. Developments in digital technology and upcoming platform-based services will impact relations, tasks and responsibilities of organisations in the energy system tremendously. As is already proven by the rise of platforms as an aggregator between small-scale renewable energy producers and consumers (e.g. VandeBron in the Netherlands).
New organisations that provide digital technology, like blockchain to make local trading and exchange possible, have potential to stimulate the development of prosumerism, as they are able to manage technology and services that energy communities benefit from. Besides, innovations in sector-coupling will allow organisations specialized in electric mobility to join the market. Through this, a wide expansion of players in the energy landscape is possible. However, the promise of new business models to transform the enabling or constraining of regulations, as well as political, business or consumer choices, will determine how this will develop.
3. Who leads the way? A normative dimension of business models
Going beyond the identification of new actors in the energy landscape, is the question who we want, desire or allow to lead the way in the energy transition. Current liberalised energy markets are designed for private organisations to have a dominant role in energy production. However, it is acknowledged by many different societal or political groups (including liberals), that neoliberalism has not provided us with the expected or desired effects, and, arguably, is on its return. It is important to review what it means if there would be a shift to other modes of governance, like community-driven or municipal-driven governance. Hypothetically, and taking into account the characteristics of a future carbon-neutral or prosumer-based energy sector, it is imaginable that actors from state, community or third sector become dominant and others, i.e. the market, gain a more supportive role.
From a normative perspective, there are three paradigms of governance that can be identified, as argued by Brown et al (2020)*. From this view, prosumer business models that adopt Energy-as-a-service could be considered market-driven or municipal-driven. This means that it could be private organisations that remain the dominant stakeholder in securing carbon-neutral energy, or municipalities (or state-owned organisations) that invest in infrastructure to secure carbon-neutral energy production. Arguably, considering the need to include individuals and households in the energy transition, and many other social challenges in contemporary society - think of polarisation, loneliness and (energy) poverty - it could also be highly valuable to build on community-driven developments for multiple wins. That said, while most regulatory systems are not yet designed for municipal or community actors to prevail in the energy landscape, the success of many energy collectives or community energy systems is impressive. Considering they are now trapped in a market-oriented web of regulations, making it difficult to win ground, we can only imagine the value that can be unleashed by supporting community-based business models, and regulating the energy landscape in a way for them to thrive.
4. Moving ahead: Opportunities to stack finance and collaborate with ‘the giants’
In my view, an energy landscape in which private organisations, and/or municipalities adopt Eeas-schemes to support prosumers, as well as community energy initiatives that create and include alternate values, could go hand in hand. For this to work, it would be crucial to acknowledge that these governance modes require different justifying frameworks, as: 1) value is created in different ways 2) they have different output, and 3) they create value for different stakeholders. There is no one-fits-all-solution to speed up the energy transition in the EU, but as long as these different justifications are kept in mind, big corporations, digital platforms, small energy providers, community initiatives and individual agents can all find their place in the system, and contribute by adopting prosumer technology.
I suggest three arguments that support this approach. Firstly, with an eye on the costs of the transition and the condition for fair distribution of the costs and benefits, it is necessary to not exclude bigger (energy) corporations from a prosumer-oriented transition. Not only do these ‘giants’ have the financial capacity to invest in renewable assets, infrastructure and management services, they have also been extracting much capital from society over the last years, for which it would only be fair if money flows back to current energy transformations and decentralised energy systems. Energy corporations could adopt a more supportive, not predominantly leading, role and take societal interests more seriously, e.g. by investing in and leasing prosumer technology, or by financing grid adjustments needed to transfer or trade energy locally. Potentially, this role could also be taken up by local governments, grid operators or other (new) market parties potentially from outside the energy sector.
Second, depending on national context and local conditions, certain business model schemes could be more desired or promising than others. If Energy-as-a-service is the guiding business model, and both prosumers and energy giants can have a significant role, a fair distribution of effort, costs and benefits of system(s) is possible. A community-based business model could, on the other hand, have the potential to include other relevant societal actors and their financial means - like housing corporations, real estate agents or even healthcare institutes - in order to account for other relevant social or environmental values that are created. If you keep in mind that social cohesion, generated by energy communities could prevent individuals from becoming isolated, and prevent the healthcare system to be more pressured, or support integration without specific programs on this matter, this value adds up. Thus by making such values explicit in a project's business model, it becomes possible to extract financial means from the ‘right’ pocket, stack these finances and formulate arguments for multiple value creation that supports decision-making for a Prosumer project.
Third and finally, the inclusion of municipalities or market players is important to ensure that Prosumerism does not become an activity only accessible for the privileged. Not everyone wants to or can be part of an energy collective. If energy is to be considered a human right, equalising mechanisms need to be built in so that all can enjoy carbon-neutral and affordable energy.
All in all, I think the energy transition will and should not be a ‘purist game’. I do believe that a supportive institutional framework needs to be built in order to ensure a fair and equal transition. Varying collaborative forms are possible, but hybridity does come with pitfalls: polycentric governance is not easy and the complexity that comes with that is challenging. Transparency and agreements on roles and responsibilities should therefore be regulated. If simultaneously these collaborations can be assessed, legitimized or judged on other grounds than efficiency or maximisation of profits, I think there is much to gain. The different values exhibited in prosumer developments or projects must therefore become more explicit, so that the distributive challenge of mainstreaming Prosumerism can be tackled.
Find all the matierials from the workshop here.