Drivers behind the growth of on-site power solutions
The rationale and incentives for the use of on-site power solutions vary between different large consumers across Europe. Broadly speaking some combination of the following drivers are normally relevant:
- A desire to clearly demonstrate “green” electricity consumption through the use of renewable generation technologies such as wind and solar PV.
- Commercial benefits, including the ability to:
- sell surplus electricity generated on-site via export to the grid;
- avoid network charges and other levies added to the cost of electricity imported from the grid;
- where there is flexibility at the site on the timing of use of electricity from the grid, achieve cost savings (e.g. by reducing consumption from the grid at times of high demand) and access revenue streams associated with flexible generation/demand reduction;
- achieve independence from fluctuating market prices of energy; and/or
- make commercial use of otherwise unproductive space.
- An increase in the likelihood of obtaining planning permission for new developments by demonstrating net-zero ambitions, which can sometimes be achieved by committing to the use of e.g. on-site “energy centres” - often combined heat and power (CHP) for example.
- Increased resilience of electricity supply during times of system outage/constraint.
Key Business Models
On-site generation is a significant and growing sub-sector of the wider electricity sector.
In recent years there has been a concerted (and continuing) focus on how most efficiently to maintain reliable and cost effective electricity systems alongside a move to a more decentralised energy system. This has manifested itself in a widening range of revenue streams available for those who can provide electricity to the grid or reduce demand from the grid during times of need – with these revenue streams increasingly being accessible by a widening range of types and scales of providers.
As a result, new opportunities continue to emerge for those with sites suitable for on-site power solutions, and for third parties wishing to develop such projects.
Examples of these third-party businesses include:
- Companies with portfolios of small scale generation/storage in different places (variously described, among other things, as “virtual power stations”, “distributed energy platforms” and “energy portfolios”) offering turn-key solutions for suitable sites;
- Companies with systems and expertise suitable for remotely operating and aggregating on-site generation/storage such that they can better access the revenue streams available through carefully managing or “optimising” the use of such assets on an aggregated basis. Depending on the extent to which a large consumer can be flexible with when they consume from the relevant asset, this can be a suitable and attractive product/service;
- Companies that own/operate large scale “private wire” (i.e. unlicensed) electricity distribution networks (often with connected generation/storage assets) with multiple consuming sites connected. Often such large-scale private wire networks are owned and/or operated by group companies of licensed network owners (given the expertise required to run large private wire networks is similar to that required for a licensed network). However, as these networks operate in an unlicensed context, the commercial terms of connection to such networks (or the flexibility of approach they can offer) can be attractive;
- For sites with very large demand, many of the same developers who build independent power projects (such as onshore wind farms and ground-mounted solar PV) for connection to the grid can also build medium-scale generation close to or on the same site as the relevant consumer, for the purpose of providing all or a significant portion of the relevant output to that consumer. Particularly in the absence of widespread renewable subsidy for new projects, a long-term power purchase arrangement with a consumer with good covenant strength can offer an approach with value to both the developer and the large consumer;
- In Spain, companies that own/operate small scale domestic on-site generation provide mechanisms where customers have access to solar energy by making monthly payments without a large upfront investment. These options could take the form of an operating lease, financial lease or forward sale payable in instalments;
- A similar model, so-called energy as a service, is used in Poland. Companies owning small scale on-site generation (often developers or contractors of renewable energy sources or CHP installations) can allow the consumers to use the generation assets in exchange for regular payments (e.g. rent or lease fees). The agreement can include sale of the asset to the consumer at the end of the term. Since there is no actual sale of electricity (the consumer is self-consuming the power), the energy as a service is not subject to energy regulatory obligations and requirements, such as the generation, distribution licence requirements or obligation to redeem the energy certificates or pay the electricity surcharges and levies.
