Due to the energy transition, we can expect that German utilities have a locational advantage when it comes to cleantech investments compared to companies from regions where renewable electricity supply (RES) has less relevance. Lets take a brief look at the situation in Germany and what has changed here.
Three reasons why Germany might become the #1 incubator for cleantech startups
1. Cannibalism Problem of RES solved
Till 2015, German utilities were quite reluctant to invest in RES and in companies whose business case was solely focuses on these technologies. This was mainly due to the fact that an investment in RES would have resulted in the cannibalism of the conventional power generation businesses. In this paper we discuss how the utilities in Germany were challenged by RES and how they tried to adapt to this situation starting in 2015. In a nutshell, the analysis in this paper comes down to this: RES in Germany reduces the average price (-50% between 2008 and 2014) for electricity generation sold via the spot market, which reduces the revenue for conventional power plants. Since 2010, these price reductions reached a level where it becomes difficult for conventional power plants to operate at least on a cost-covering basis. Therefore, an investment by a utility into RES or RES-related businesses would result in a further reduction of revenue from the conventional business, which is why we talk about cannibalism in this context.
In consequence, uutilities therefore focused on their conventional business and hesitated to invest in RES-related businesses. Starting in 2015, the two largest utilities in Germany changed their strategy. E.on as well as RWE split their companies into two independent branches: One company focusing on the conventional generation business (uniper in the case of E.on and RWE) and one company for RES, retail and network operation (E.on and innogy in the case of RWE). With these splits, the cannibalism problem became obsolete: innogy and E.on now don’t have any conventional power plants in their portfolio giving them the freedom to invest in RES and RES-related businesses.
2. Utilities establish new innovation processes
In addition to the change of the organizational structure, both innogy and E.on have applied new innovation processes. While startups and startup-investments did not use to play a huge role in the German utility sector, this has changed to some extent since 2015. Many German utilities have established accelerator programs for energy startups, among them E.on and innogy. While these developments are still in the early beginning, they are one milestone towards a more innovation-oriented energy business.
3. Digitization reduces development time and upfront investments
Parallel to these developments on the investor side, another very fundamental character of cleantech is changing right now: Due to the increasing digitization innovations take less time and money. For details about the digitization, in the German energy sector take a look at our post here.
So far, cleantech has been limited to production or in some cases consumption assets like power generators. Now, with smart metering and other intelligent network assets data becomes available on energy consumption, production and the network infrastructure. Startups can make use of this data to develop new business models. Thereby, innovation moves from technologies with high investments towards less expensive digital applications. We know from the telecommunication sector that a switch from capital-intensive innovation process towards data-driven business models can accelerate the innovation process. Maybe we will see a similar dynamic market development within a digital energy economy as well. For now, we can at least conclude that the on-going digitalization of the energy sector helps to address two key challenges for cleantech startups in the past and two main reasons for the valley of death for cleantech startups: long development time and high upfront investments into production facilities.
Whether these increasing investment activities by utilities together with the first attempts to digitize the energy sector will already be enough to overcome the “valley of death” for cleantech startups cannot be answered from today’s perspective. But at least there is some light on the horizon for the cleantech- & RES-related startup branch.
What are your expectations? Will we see a significant change in the energy related cleantech startup scene in Germany soon? What are the main obstacles from your point of view? Do you have examples that show the changing innovation approach of the German utilities?
Originally posted here
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