The Impact of Digitalization

Abstract

Previous energy transformations have been driven by the exploitation of a new energy resource. In contrast, although the digitalization of energy is delivering cost reductions in the supply and transportation of energy; digitalization is truly transformational because it brings the demand side into play, facilitating the move to a more integrated, highly flexible and customer-centric energy system which will ultimately unlock deep decarbonization of our societies. This fertile new energy landscape will be dominated by data-rich organizations able to establish direct relationships with consumers, resulting in the provision of new services which enable the integration of energy consumption with weather-dependent renewable production. Much of the focus is on the intelligent management of demand and supply from connected buildings and electric vehicles, leading to a proliferation of new business models. This increased connectivity comes with risks: increased danger of cybersecurity attacks and disruption of existing business relationships, staffing and organizational structures and a re-positioning of the role of the customer at the heart of the system. This commercial disruption is inherent to the digital transformation of the energy sector: an essential step in the transition to a carbon-neutral global economy.

1 Introduction

The energy industry tends to undergo periods of slow and steady efficiency improvements, punctuated by periods of step-changes in productivity when new technologies make a breakthrough, such as the switch from coal to gas generation from the 1990s. Digitalization has the power to facilitate such a step-change without introducing a new energy source, improving outcomes for electricity producers, end consumers and the environment.

This chapter explores the concept of digitalization and how it will impact the energy industry. It is mapped out in Fig. 30.1 and is structured as follows:

• Section 2 defines what we mean by the term ‘digitalization’;

• Section 3 looks at how digitalization will result in business-as-usual efficiency gains impacting the provision of energy to customers;

• Section 4 explains how digitalization can create a truly transformational integrated, customer-centric power system; and

• Section 5 explores wider issues concerning the risks, costs and threats of digitalization, followed by the chapter’s conclusions.

Fig. 30.1

Structure of this chapter looking at the impact of digitalization on energy. (Source: AFRY Management Consulting)

2 Digitalization in the Context of the Energy Sector

Digitalization (defined in Box 30.1) is transforming businesses in many sectors, from banking to telecommunications, from entertainment to publishing. But digitalization is not simply the process of moving from analogue to digital, from print to electronic or wireless delivery, or even the use of improved tools to achieve efficiency gains. Digitalization only realizes its full potential when digital tools (Annex) are allowed to change the underlying business model and the end-to-end processes within the supply chain.

Take publishing, for example: the traditional business model is being eroded by new models—electronic publications are sold online, leased through subscription, or provided for free in return for exposing the reader to advertising. This is a response to two related developments catalysed by digitalization: near zero marginal-cost supply for digitally delivered content, and a proliferation of new ways that authors (supply) and readers (demand) can connect with one another.

We are starting to observe similar developments in the energy industry. In the power sector, homes and businesses are increasingly supplied by essentially zero marginal-cost renewables from distributed plants, with millions of small-scale generators feeding into the network rather than a few central power plants. In the transport sector, electrification is making the variable cost component of driving vanishingly small (when compared to conventional petrol-fuelled cars, and allowing for transitional differences in taxation), and ride-sharing apps are starting to blur the lines between private and public transport and ownership. Advances in autonomous vehicles will push this trend further, where journeys can be optimized to radically improve the efficiency of transporting people and goods. In the heat sector (currently responsible for about 50% of final energy consumption in the EU), smarter temperature control solutions are emerging, some with voice-activated home assistants such as Amazon’s Echo or Google Home, which are competing to be the single interface for domestic energy systems.

Digitalization is not new. It started before most of us were even born and has been used to incrementally capture efficiency gains within value chains, for example going from manual to electric typewriters and then word processors, from paper to calculators to spreadsheets. This process continues to deliver incremental efficiency gains in the supply of energy (Sect. 3). But from time to time something more transformational allows the value chain to shift. The transformational impact of digitalization in energy has the potential to enable the creation of an integrated, customer-centric power system using zero carbon sources (Sect. 4).

Box 30.1 What is ‘Digitalization’?

Digitalization projects consist of at least two of the following three characteristics:

• 1. More accessible data, due to the collapsing cost and exponentially increasing capacity and availability of communications technologies, data storage, internet, satellite including geo-positioning, solid state electronics and so on, which leads to:

• 2. Better decision-making or optimization on the basis of the better data. This is where the first-tier efficiency benefits come from, although indirect benefits might come from other sectors, for example advertising for appliance sales on the basis of electricity meter readings); and potentially:

• 3. Automation of the results of the decisions. Analogous to self-driving cars, this could involve automation of heating or battery charging to balance renewable energy production or to deal with network faults, reducing the need for human intervention such as dispatch instructions from system operators to generation plant operators.

  Automation is not required in all cases—some digitalization benefits arise from manual decision-making, for example better forecasting underpinning investment decisions, but as consumer-owned sources of flexibility become prevalent, automation of system control becomes inevitable.

Examples of the various digitalization technologies for energy are shown in Fig. 30.2.

Fig. 30.2

Digital technologies in the energy industry. (Source: AFRY Management Consulting)

The future digitalized system will allow decisions to be taken and executed autonomously based on a wide range of uncontrolled data sources. Cybersecurity protocols must adapt to this new decentralized and autonomous reality. Digitalization also allows companies to interact directly with people through social media, assessing people’s real needs and preferences—potentially influencing their preferences, which in turn raises privacy concerns.

Collectively, digitalization of the energy sectors leads to efficiency and value gains and offers the potential for deep decarbonization through new models of customer engagement which unlock flexibility and enable renewable generation technologies to energise our economies.

3 Impact of Digitalization on the Supply of Energy

This section deals with how digitalization will result in business-as-usual efficiency gains, leading to reductions in the cost of energy extraction and the supply of electricity.

3.1 Impact of Digitalization on the Extraction of Fossil Fuels

Although many observers associate digitalization with cleantech and smart energy use, it has been used for years to increase the recovery of fossil fuels, reduce costs and improve safety. The upstream oil and gas sector, for instance, has established protocols for processing large datasets from seismic surveys to help optimize drilling strategies. Other examples include the real-time, dynamic steering of drill bits from remote operations centres, or the use of highly sophisticated sensors to optimize wellbore locations. Future developments will build on these applications, for instance to automate drilling rigs and to use robots to inspect and repair subsea infrastructure.

In the coal sector, efficiency gains in all aspects of fuel transport (shipping/trains/road) have improved dramatically over the last couple of decades due to real-time GPS trackers and instant updates on bottlenecks at ports or rail lines. Digitalization is also improving modelling of geological datasets to optimize mine design, automation and predictive maintenance. One of the main advantages of this is improved worker health and safety, which urgently needs addressing as the mortality rate dwarfs that of the oil, gas and hydro sectors. The ability of the coal sector to attract investment or digital talent is an open question as societal attitudes harden towards the traditional fossil fuel sectors.

3.2 Impact of Digitalization on the Supply of Electricity

Progress on the digitalization of the power sector to date has mostly focused on more efficient, secure and sustainable electricity systems. The resulting benefits have helped reduce operations and maintenance costs, improved efficiencies, increased reliability, and led to the extension of operational lifetimes of critical assets.

Further digitalization opportunities are spread across the value chain, as illustrated in Fig. 30.3.

Fig. 30.3

Digitalization opportunities across the power sector value chain. (Source: AFRY Management Consulting)

The most significant impacts of digitalization on the various parts of the electricity value chain are described below:

• Advances in the management of generation assets mainly focused on the optimization of plant dispatch, maintenance, fuel and spare parts. Technologies used may include remote sensing and digital monitors, new control systems with automatic predictive and remote maintenance/control—perhaps linked to projected market conditions to plan maintenance periods—augmented intelligence for decision-making, and machine learning for better short-term forecasts for balancing and trading;

• Decision-making in trading and scheduling of generation could be improved by digitalization by utilizing strategies based on big data, new risk-management models and new risk-management trading products, based on more rapid decision-making and algo-trading including optimization of short-term generation operations;

• Lower labour costs and electricity losses and predictive maintenance in networks (both transmission and distribution) through real-time remote monitoring, real-time sensor data to aid forecasting, at data hubs compiling smart meter data, and augmented intelligence for network management. In addition, digitalization and smart switching at lower voltage networks can facilitate deferred/avoided network investment and the transition to active distribution network management. Novel regulatory approaches could emerge based on shared data, which could narrow the information asymmetry between companies and regulators;

• Finally, digitalization of the retail sector, where the truly transformative aspects of digitalization are enabled, as described in the next section. Establishing direct relationships with customers and even their appliances will lead to provision of new products and services, lower prices, more customer differentiation through digital marketing, electronic billing/settlement, charging for access to the grid, bundling of other services with energy and/or its delivery, peer-to-peer trading and so on. By unlocking flexibility—potentially of individual appliances—the challenges of fuelling our grids with weather-dependent renewable energy will be mitigated.

In addition to impacting the linear value chain as described above, digitalization will also facilitate the move to a more integrated, highly flexible, customer-centric energy system, as described in the next section.

4 Towards an Integrated Customer-Centric Energy System

This section deals with how digitalization can transform the energy system, firstly by breaking down barriers across energy sectors to create an interconnected energy system, and secondly by establishing direct relationships with consumers, resulting in the provision of new services with new revenue streams, which will allow energy needs to be met from weather-variable renewable production sources.

4.1 An Interconnected and Responsive Energy System

Our current energy system is evolving from being ‘very dumb’ to ‘quite dumb’. The traditional power, heat and transport sectors largely operated independently from one another and energy flowed in one direction only, from distributors of fossil fuel to end customers. The guiding philosophy has been to centrally predict and provide for all of customers’ needs and preferences. Many European markets have now progressed to a stage where new technologies are enabling electricity to be generated and stored close to demand. Meanwhile, smart meter technology allows domestic customers to have access to time-of-use pricing. In today’s electricity system, although energy does flow both ways, fully integrating distributed generation into a system coordinated by top-down centralized system operators is proving difficult.

Digitalization is enabling a third phase of development where these distributed sources of demand, generation and storage can be utilized to benefit the system as a whole rather than running entirely autonomously. In this integrated system, information and energy will flow in both directions and across energy sectors, controlled by multiple operators, for example the coordinated charging of electric vehicle (EV) batteries at times of high renewable output or platforms that optimize thousands of domestic battery systems to manage network congestion.

We envisage a future where these trends accelerate, creating an integrated energy system with renewable power generation at its core (Fig. 30.4). Part of this shift will also see power demand responding to supply, rather than the other way around. The International Energy Agency (IEA, 2017) characterizes three inter-related elements that digitalization can make possible, notably smart demand response, the integration of variable renewables and smart charging for electric vehicles (EVs). These key developments are described elsewhere in this book.

Fig. 30.4

Digitalization will facilitate the transition from a linear energy system to an interconnected one. (Source: AFRY Management Consulting)

With today’s expectations that zero-carbon generation comes predominantly from weather-dependent renewables, electrification is only compatible with decarbonization if we embed flexibility in the newly electrified demand; that is, through sector integration. Existing demand is less important, as much of the existing load is relatively inflexible: true flexibility needs to be baked in at the design stage. Aside from vehicle charging, space heating and cooling and water heating offer the largest achievable potential demand response opportunities without compromising customers’ needs in the commercial and domestic sector.

4.2 A Customer-Focused Power Sector

Transformative benefits of digitalization can be achieved by organizations who will manage to establish direct digital relationships with customers, leading to new service offerings and revenues while capturing the inherent flexibility of the customers’ energy needs (Brown et al. 2019). Most electricity retailers are currently ignorant about their customers’ deeper preferences, but digitalization is now making it possible to offer more bespoke services and establish direct relationships. Conversely, customers are used to ‘on-demand’ provision of all of their energy needs without compromise. Unlocking a renewable electricity system means separating different needs for continuous supply: for example, most heating and cooling loads are inherently flexible, if the right monitoring and controls can be put in place. Over time, through interaction with the customers, energy companies could, for example, know which rooms and appliances customers use the most and detect when the customer is not home or on holiday.

New relationships could reveal different degrees of ‘willingness-to-pay’ for what are perceived as premium value services or combinations of services. Customization could enable retailers to offer a wider range of quality and brand differentiators. For instance, customers could choose their own level of service reliability (for different types of appliance), engage in peer-to-peer trading, manage the operation of their ‘virtual battery’ and possibly select other, non-energy products to be bundled with their energy supply. This requires the customers to change their perceptions and attitudes on how they buy energy and how they interact with their energy supplier.

There is evidence of product differentiation in the prosumer market, resulting in a proliferation of behind-the-meter gadgets. As the cost of solar photovoltaics and distributed batteries continues to decrease (Green 2019), more consumers can produce and manage their own energy supply independently from the electricity retailers. The underlying motivation for consumers to go ‘off-grid’ is largely driven by a desire to be independent, and the relative affordability of off-grid solutions is improving. These customers may be willing to invest in assets at low or even negative rates of return for reasons that may be hard to justify economically.¹

This line of reasoning also applies to branded electricity, if it can be been as suitably differentiated from competitors. For instance, market stakeholder research conducted by AFRY in 2017 revealed that about 40% of participants said they would be willing to pay a small (10%) premium for electricity that was from a local and/or renewable source.

Those that doubt the ability of firms to create brands around a homogeneous, undifferentiated, commodity product like electricity should note the success of bottled water brands where sales have now surpassed carbonated soft drinks to become the largest beverage category by volume in the US. Rather than relying on a standard commodity that comes down a pipe or wire, consumers are apparently willing to pay more for something they believe is superior. Digitalization already provides the means to track renewable or locally generated electricity at a much more granular level than was possible before, to allow real product differentiation. As an example, Vattenfall and Microsoft are trialling a 24/7 renewable energy matching service, making it possible to go from year-based data to hour-based data on source of origin. Furthermore, through peer-to-peer trading, digitalization will allow communities of prosumers to manage the supply and demand of their own electricity. Some companies are now basing their consumption decisions on calculations of ‘locational marginal emissions’ which calculate the exact emission impact of demand at a time and place.

Traditionally, energy utilities have made money primarily, if not exclusively, by investing in assets, which in turn achieve a reasonable rate of return by the regulator or the marketplace. If energy sales flatten or decrease due to the rise of prosumers and prosumagers,² and utilities no longer own many (or any) generation or network assets, then how will they survive, or what new forms and organizations will they evolve into? How fast will ‘customer focus’ translate into increased willingness-to-pay by customers, and will they ever be willing to pay more to traditional energy companies (as opposed to other companies who bundle energy services with more appealing products)? These are open questions that companies are desperately trying to resolve.

5 Wider Issues Concerning the Risks, Costs and Threats of Digitalization

Most of this chapter has dealt with the potential positive impacts of the digitalization of the energy sector. In contrast, this section examines the threats that digitalization brings, including issues around cybersecurity, privacy and data ownership, direct energy use arising from digitalization, and potential changes to the workforce. These digitalization issues stretch beyond energy and shape society at large.

5.1 Cybersecurity

To date, the impact of cyberattacks affecting energy infrastructure has been small compared to other sources of disruption such as mechanical equipment failures or geopolitical disruptions to oil and gas supply. But the frequency and severity of cyber incidents in the power sector are increasing (World Energy Council 2019), and there is a concern that industry may be unprepared to deal with novel threats. As the entire system becomes increasingly reliant on digital control, cyber-risks have increased significance.

As a concept, cybersecurity risks are not unique to energy; however, the challenge is exacerbated by several factors:

• strong growth in integration of ICT within the power system;

• strong reliance on digital systems for system-critical tasks;

• increased use of public networks and internet-based technologies;

• connection of many different types of Internet of Things (IoT) devices, with reliance on a wider set of data sources;

• increased number of parties connected to the digital grid (i.e. consumers, market agents); and

• greater requirements for transparency of system design and so on, to enable collaboration.

This increased connectivity has resulted in an increase in the ‘cyberattack surface’, making the risk of potential attacks more likely, and increasing the severity of attack when they do. This is in the context of an interconnected grid which is designed to operate as a whole, with common system frequency shared by all users.

To help minimize the risk and impact of cyberattacks, companies and countries are encouraged to adopt security around three concepts: resilience, basic cyber hygiene (adhering to good practices and so on), and incorporation of security objectives and standards as a core part of the research and design process. Ultimately cyber-risk is a war, not something that can be solved by adhering to standards, and there will be trade-offs between security, cost and inclusivity. The distributed and digitalized energy system offers the prospect of microgrids which could operate independently, increasing resilience and reducing the impact of cyber-threats, but the current grid design of common system frequency and a single system remains pervasive for now.

5.2 Privacy and Data Ownership

The interconnected energy system described in Sect. 4.1 relies on a willingness and ability to share customer data with third parties. This creates a tension for policy makers with consumers’ privacy concerns on the one hand, and the promise of innovation and operational efficiencies on the other. Where this balance lies will be different for different regulators, but they will need to continue to refine interoperability standards, protocols to protect (and possibly anonymize) customer information, and provisions for consumers to give informed consent prior to any release of usage data. This is new territory for everyone concerned and opens up new questions. For instance, if energy becomes a bundled service offered by appliance manufacturers or tech companies, what is the basis for regulation of the industry?

5.3 Energy Use from Digitalization

As of 2019, Bitcoin consumes 66.7TWh per year (comparable to the total energy consumption of the Czech Republic, a country of 10.6 million people). Clearly, emerging technologies driving forward digitalization also require power.

Whilst Bitcoin’s electricity consumption is large and growing, the major ICT electricity consumers are data centres (~200 TWh globally in 2014), data transmission networks (~185 TWh globally in 2015, of which mobile networks make up two thirds) and the rapid proliferation of connected devices.

How this electricity use will evolve is highly uncertain. Large data demand growth is a given; the key uncertainty is whether efficiency gains will continue, or whether they will slow or stall. As much of this new load is for cooling, it has the potential to be partnered with synergistic loads such as district heating systems or to offer flexibility to the power system. The tech companies themselves are very conscious of this growing environmental footprint and are among the most pro-active buyers of renewable energy through long-term PPAs, and are behind as more ambitious initiatives including 24/7 renewable energy matching and locational marginal emissions.

5.4 Changes in the Workforce

Jobs which are composed of a high degree of automatable tasks (e.g. repetitive physical activities and/or the collection and processing of data) are at higher risk from replacement by automation than those involving less routine or more creative activities. This looming ‘great crew change’ is creating a considerable source of anxiety for companies and workers alike, and it is becoming more difficult than ever for companies to retain critical knowledge and experience within their organizational memory.

But these are not the only changes afoot. Jobs created by digitalization tend to require a degree of analytical reasoning and are typically served by highly educated workers. These workers, particularly the younger generation, are increasingly blurring the borders between work and life. Work styles are transforming to include teleworking, flexible work schedules and more agile organizational structures, and the energy business needs to attract talent which has opportunities in many other sectors.

6 Conclusions

Digitalization will have far-reaching consequences for the energy system. It will cut costs of energy extraction and electricity supply, but this alone will not be a game changer. The step-change from digitalization will come from:

• the development of an integrated energy system where energy and data can flow in multiple directions across heat, transport and electricity sectors; enabling flexibility to match demand to renewable production; and

• the ability of companies to forge direct customer relationships to create new products/services and reap new revenues.

This brave interdependent new world does not come without its risks, of which cybersecurity presents the greatest threat, and changes to the workforce are likely to be the most wide-reaching.

The digitalization of energy will not occur in isolation. Yes, gains made in the digitalization of energy described in this chapter will be critical to have any hope of reaching net-zero emissions. But it may be the wider set of digitalization initiatives affecting how we organize ourselves as a global society, from cryptocurrencies to social media, that dictates the time it takes to get us there.

Annex: Glossary of Digital Technologies

Below we give a short description of the key digital tools and technologies that are impacting energy.

1.1 Existing and New Data Sources

5G:

This is the fifth generation of wireless networking technology. The promise is that 5G will bring speeds of around 10 gigabits per second to mobile devices (600× faster than the typical 4G speeds today), enabling access to a far greater volume of real-time operational data.

Sensor data:

The volume of sensor data may soon dwarf the amount of data that social media is currently producing. Gathered from cell phones, vehicles, appliances, buildings, meters, machinery, medical equipment and many other machines, sensor data will likely completely transform the way organizations collect information and process business intelligence.

Social media:

Interactive technologies accessed by smartphone or computer that facilitate the creation and/or sharing of information, ideas, stories and so on via virtual communities and networks.

Smart meters:

Meters that record electricity consumption in intervals of an hour or less, and communicate that information at least daily back to the utility for monitoring and billing purposes. Smart meter functionality includes remote reading, two-way communication, support for advanced tariff and payment systems, and remote disablement and enablement of supply.

GIS:

A Geographic Information System (GIS) is an ensemble of hardware, software and geographic data for capturing, managing, analysing and displaying forms of geographically referenced information.

Drone:

Also referred to as an Unmanned Aerial Vehicle, a drone can either be piloted remotely by a human or else can be a fully autonomous vehicle, allowing visual and sensor data to be gathered rapidly from remote or dangerous locations.

GPS:

The Global Positioning System (GPS) was developed by the US in the mid-1990s. It permits the position of a mobile device to be determined. The GPS uses from two to six of its 24 satellites to a high level of accuracy.

Mobile apps:

A mobile application, often referred to as an app, is a type of application software designed to run on a mobile device, such as a smartphone or tablet computer. It is an enabler of new ways of interacting with customers (and their appliances).

IT system data:

This refers to databases and data warehouses that contains information that an organization needs to function.

ERP:

Enterprise Resource Planning refers to business process management software that allows organizations to use a system of integrated applications to manage the business and automate many back-office functions related to technology, services and human resources.

Blockchain:

One of several distributed ledger technologies that allow data to be stored and validated in a decentralized way. Digital records of events (such as a transaction) are collected and linked by cryptography into a time-stamped ‘block’ together with other events. It can enable decentralized business models: information can be validated and updated without relying on a central authority.

Cloud apps:

A cloud application, or cloud app, is a program where cloud-based and local components work together, relying on remote servers for processing logic that is accessed through a web browser with a continual internet connection.

Critical infra data:

Historically, the concept of critical infrastructure (to describe assets that are essential for the functioning of a society and economy) has been confined to physical assets, but now data is also included.

1.2 Data Visualization, Analysis and Evaluation

Virtual reality:

Provides a computer-generated 3D environment that surrounds a user and responds to an individual’s actions in a natural way, usually through immersive head-mounted displays.

Augmented reality:

The real-time use of information (such as text, graphics, audio and other virtual enhancements) integrated with real-world objects. Augmented reality enhances the user’s interaction with the real world (rather than being a simulation).

Digital twin:

A replica of a physical asset that can be used to simulate and optimize the functioning of the asset.

Artificial intelligence:

Refers to advanced analysis and logic-based techniques, including machine learning, to interpret events, support and automate decisions, and take actions.

Cognitive intelligence:

At present, there is no widely agreed upon definition, but in general this refers to software that mimics the function of the human brain.

Cloud computing:

Provision of computing services (such as servers, storage, databases, networking, software, analytics and intelligence) over the internet. It allows scalable data processing by companies without needing to buy or manage their own hardware.

Edge computing:

Computing that is done at or near the source of the data. Edge computing operates on ‘instant data’ that is real-time data generated by sensors or users.

1.3 Control and Automation

Algo-trading:

Automated buying and selling of products like crude oil, gas, electricity and wind power in an electronic trading environment.

Remote switching:

An electrical switch that can be controlled remotely. Networks of these switches form the bedrock of remotely operated assets, and this simple technology is a critical enabler of balancing a renewable fuelled electricity using decentralized resources.

Automated operation:

Technology by which a process or procedure is performed without human input.

Automated schedulingof maintenance rosters:

Automation capabilities applied to workforce management software.

Inventory management:

The supervision of non-capitalized assets (inventory) and stock items to ensure the smooth flow of goods from production to point of sale.