The energy market has been dominated by major energy companies for a long time. New market opportunities and digitalization could lead to a higher market penetration of startups.
1. The 100 percent green energy goal
More and more countries pursue ambitious green energy goals. Germany sets one of the latest examples. In the amendment of the Renewable Energy Act that will come into force on January 1, 2021 (REA 2021), Germany declares its aim to provide the amendment for the legal conditions to ensure that all electricity produced in Germany is greenhouse gas-neutral (at the latest) from 2050 onwards. As an interim goal, Germany expects that 65 percent of the electricity consumption in Germany in 2030 is to come from renewable energies.
A particularly positive aspect is the considerable increase in the legally required expansion volumes for renewable energy plants. In total, renewable energy plants with a total installed capacity of almost 200 GWs are expected to be erected in 2030. Especially for solar plants and offshore wind energy, the currently installed capacity would be more than almost doubled if the newly set legal targets are met. The new expansion target for onshore wind energy plants also corresponds with a planned increase of about one-third of the currently installed capacity.
To reach those goals, the REA 2021 is flanked in particular by adjustments of the planning, approval and nature and species protection laws to allow a faster and simpler approval procedure. For the expansion of onshore wind energy plants, the REA 2021 seeks to improve the acceptance of wind turbines in the communities where they are located by providing a financial participation of the respective community in the amount of 0.2 cents per kWh of electricity production.
1.1 Virtual power plants
While the construction of nuclear, gas or coal power plants requires a considerable investment that exceeds the financial capacity of many startups or growth companies, investments in renewable energy plants are done by a more diverse group of investors, e.g., private equity investors or land property owners (e.g., farmers, owners of residential buildings, industrial real estate owners, etc.). An investment into renewable energy is, therefore, not required. Rather, the business opportunity consists of the combination of those various (individually rather small) renewable energy plants to form one virtual power plant with a sizeable amount of energy production comparable to the one of a classic power plant. The combination in one virtual power plant allows the professional marketing of the produced energy in which single small-scale renewable energy plants on their own could not participate. Startups have identified this opportunity and started to build their virtual power plants with the promise to market the power for more attractive commercial terms than the ones available under the statutory fixed-price regime (see 1.2 below).
1.2 End of the first fixed-price period under REA
We are, however, still waiting for a clear breakthrough of virtual power plant operators. In Germany, the growth was limited by the very attractive and easy-to-handle remuneration system for (small) renewable energy plant owners. Once the renewable energy plant was constructed, the power network provider was legally obliged to connect the renewable energy plant to its network and to pay a statutory fixed purchase price per kw/h for a period of 20 years.
This situation is changing and will increasingly change in the next years. The aforementioned 20-year period started with the first REA taking effect in 2000. This means that the period is due to run out at the end of 2020, leaving the renewable energy operators to handle the marketing of the power production on their own in the future. Looking for example at solar plants, this change affects about 18,000 solar plants with a total capacity of approximately 114 MWs by the end of 2020. By 2025, this will expand to about 120,000 solar plants with a total capacity of more than 2 GWs, and this number will further increase in each of the coming years. This increase is even more substantial with respect to onshore windfarms. At the end of 2020, windfarms producing about 4 GWs will have to market their power on their own and it is expected that this number will increase annually by 2.4 GWs on average in the next years.
It is, therefore, expected that EnergyTech startups will face a substantial growth in the next years.
1.3 Trend of construction of residential renewable energy plants to continue, REA 2021 introduces tenant power concept
Since the introduction of the REA in 2000, startups anticipated that owners of residential buildings or industrial players who wished to add a green footprint to their production line would need assistance in the planning, the construction, the grid connection and the handling of all required formalities vis-à-vis the authorities and the grid connection operator, as well as the later maintenance of the renewable energy power plant. This one-stop-shop concept made it very easy in particular for private house owners to build solar power plants on the roofs of their buildings.
The REA 2021 is designed to expand this trend to tenants by implementing the so-called tenant power concept. The concept seeks to facilitate the possibility to build solar plants on the roofs of residential building in order to supply the tenants with solar power. Incentives for the tenant power concept were first introduced in 2017, but have not yet led to wide-spread adoption. The REA 2021 increases the funding of tenant power and remove legal hurdles that have so far prevented landowners from outsourcing its technical implementation to third-party providers.
In this context, so-called citizen power communities are also becoming increasingly important. Under this concept, a community of private persons, not necessarily tenants, jointly fund a renewable plant such as solar plants or wind turbines and jointly use the produced power and jointly sell the unused power to the market. The first startups are already providing framework conditions for such funding models and offering to organize such communities certainly with the aim to offer one-stop-shop solutions for this model that may also be required to bring this concept to a success.
2. EnergyTech is driven by digitalization
The success of today's EnergyTech startups is very much driven by innovative tech solutions. Virtual power plants, for example, depends on the use of (self-developed) technical equipment connecting the various renewable energy plants to one IT cloud, enabling the start-ups to start or lower the energy production or to shut it down. The marketing of renewable energy is often also challenging as it requires smart algorithms to determine what amount of solar or wind energy will be produced at a determined point in time in the future so that the startups do not sell more or less energy than the virtual power plants actually produce.
EnergyTech startups also adopt other technologies, such as blockchain, to record and handle peer-to-peer power transactions. This can enable citizen power communities to monitor the power production and consumptions of the community members without the need to purchase expensive IT cloud infrastructure. At the same time, blockchain technology is open for the implementation of further developments in the future, e.g., the trading of power between two or more citizen communities.
It is expected that EnergyTech solutions will become even more important in the future. With the increasing dependency on renewable energy sources, it is not only necessary to have smart energy production technology in place but also to achieve smart energy consumption on the consumer and industrial side so that high-energy consumption tasks are performed when the sun shines and the wind blows.
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