Energy transition and the future(s) of the electricity sector

Utilities Policy 57 (2019) 97–105

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Energy transition and the future(s) of the electricity sector Christophe Defeuilley

T

Sciences Po Paris, France

ARTICLE INFO

ABSTRACT

Keywords: Energy transition pathways Trajectories of change Decentralization

We develop narrative futures to analyze the impact that the energy transition may have on the electricity sector's organizational model: re-arrangement, incremental change, or first steps in a paradigm shift. What trajectories might the changes in the electricity sector follow? We look back at the way the centralized and standardized model was constructed before laying out how that model is being disrupted by the changes currently underway and then exploring the different factors – political, institutional, technical – that might influence change in the electricity sector and the scale of transformation it may undergo.

1. Introduction In most countries, decarbonization of the electric system will require high shares of renewable energy sources (RES), combined with an increased recourse of various flexibility instruments (interconnections and network capacity, demand flexibility, storage, dispatchable lowcarbon generation like hydropower) in order to respond to the variability (intermittency) of generation from renewables and to guarantee system adequacy. This is a major shift. For the last century or so, the electricity sector has been built and developed around a centralized and standardized generic model, primarily designed to supply cheap electricity and to feed rising demand. Decarbonization policies and measures leading to a high-RES electricity system introduce new challenges and raise new questions. Considerable attention has been paid to the technical, economic, and regulatory aspects (“market design” issues) of these changes (see e.g. De Vries and Verzijlbergh, 2018; Newbery et al., 2018; Newbery, 2018; Pérez-Arriaga et al., 2017; Pollitt and Anaya, 2016). Less attention has been given to social, political, and institutional factors. However, trajectories of change (their pace, magnitude, and orientation) are not only the outcomes of the physical and technical characteristics of the electricity system. They are also influenced by social factors and institutional framework, which together with technical functions, needs and dynamics, will shape the future of the electricity sector. In this paper, we analyze the impact that the energy transition may have on the future of the electricity sector. How to qualify the ongoing transformation of the electricity sector? What organizational trajectories of change might it follow? Energy transition may be analyzed through the lens of socio-technical transition literature, and more specifically the multi-level perspective, which gives insights into the processes and the nature of change in different contexts (Geels, 2002; Geels and Schot, 2007; Rotmans et al., 2001). Geels and

Schot (2007) introduce a categorization to conceptualize different kinds of energy transition trajectories: substitution, transformation, reconfiguration, de-alignment, and re-alignment (see also Gees and al., 2016 for a reformulation). This typology may be helpful to discuss and embrace the disruptive nature of the energy transition for the electricity sector. We show that in order to be effective and truly fruitful, this kind of categorization ought to be embedded in a long-term perspective. History matters to qualify the process of transformation and the magnitude of change taking place in the electric system. The long-term evolution of the electricity sector shows that (1) the disruptive potential of the ongoing energy transition is essentially related to the substitution of the existing centralized and standardized model by a decentralized one; and (2) the paradigm shift associated with energy transition ought to be qualified (and measured) according to the unfolding of decentralized techniques and modes of governance. 2. Conceptual framework and review The dynamics of transformation is not limited to technology and innovation per se. Technological transformation can hardly be seen in a strictly “functionalist” way. The emergence and ascendency of a particular type of technology cannot be explained only by its supposed intrinsic superiority (Granovetter, 1985; Callon, 1998) or by the fact that profit-seeking agents will allocate resources to explore and develop yet unexploited scientific and technological opportunities in a marketdriven way (Freeman, 1974; Dosi, 1988). The orientation, pace, and trajectory of technological changes are also related to social, political, and institutional factors. In particular, institutional factors (laws, rules, and norms of conduct) create the condition of exchange, shape the frontiers of markets, stabilize competitive arrangements and have an impact on transaction costs (North, 1994; Williamson, 1996). They tend

E-mail address: [email protected]. https://doi.org/10.1016/j.jup.2019.03.002 Received 25 October 2016; Received in revised form 11 March 2019; Accepted 11 March 2019 Available online 18 March 2019 0957-1787/ © 2019 Elsevier Ltd. All rights reserved.

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to orientate the efforts made by economic actors to seek new technological opportunities, to innovate and to introduce new products and production processes. In the dynamic transformation of markets, innovative efforts are therefore influenced by these institutional factors, which are themselves the by-products of political and social forces (coalition of actors, political regime, values, and beliefs, national economic and industrial interests). In such a context, it is not a surprise if technological change is frequently associated with irreversibility, pathdependency, lock-in, “accident of history”, self-reinforcing benefits or spillover effects (David, 1997). All of these phenomena, largely analyzed in the literature, can take shape because technical change may be influenced by economic actors and by the institutional context in which they make their decisions. Taking stock of these theoretical insights (among others), a new stream of literature has emerged: “socio-technical" transition refers to reconfiguration processes between technological change and evolution of science, industry structure, markets, policy instruments, governance, coalitions of actors, culture and representation that enable new, more desirable, trajectories towards sustainability (Ulli-Beer, 2013). In contrast to the literature on technological change addressing economic (growth) issues, socio-technical transition literature embraces a broader scope of analysis. Its ambition is to shed light on the interaction of various factors (technical, economic, social, institutional), at different scales, leading, in a multi-dimensional way, to a systemic change towards more a sustainable trajectory (or, in some cases, impeding it when lock-in, “system failures” or resistance from incumbent actors results in path dependencies and inertia). Four core research strands have been identified in the field of socio-technical transition studies: transition management (TM), strategic niche management (SNM), technological innovation systems (TIS) and multi-level perspective (MLP) (Markard et al., 2012; Falcone, 2014). A transition management (TM) approach focuses on the understanding of the main characteristics of socio-technical systems (or regimes). Existing socio-technical systems face various external or internal pressures. Scholars in that field classify different types of transitions, which are determined by the form and the direction of response given by existing systems to these pressures. Trajectories of change, transition pathways are defined as the results of the capacity and the ability of existing regimes to respond to pressures (by mobilizing internal resources, changing models of governance) (Smith et al., 2005; Kemp et al., 2007). The strategic niche management (SNM) approach analyses the pivotal role of niches (protected spaces) in the emergence and the development of radical innovations and novel technologies. Scholars in the field study the dynamics of niche innovations and the interactions between new technologies and existing socio-technical systems. They also stress the importance of defining the attributes of the “protective space” that enable niche technologies to become competitive and to fuel the ongoing transition process towards more sustainable socio-technical systems (Smith and Raven, 2012). The technological innovation systems (TIS) approach focuses on the importance of innovation systems in understanding the sequential development and unfolding of successful sustainable technologies. Innovation systems are at the heart of interactions among various elements (such as business activities, knowledge development and diffusion, mobilization of resources, and institutional framework) explaining their capacity to fuel technological development and the emergence of novel technologies (Hekkert et al., 2007). Finally, the multi-level perspective (MLP) analyses technological transitions by the interplay of institutional structures and actors networks’ at three levels: niches, regimes, and landscape. Existing socio-technological systems (or regimes) are supported by a stable coalition of actors (incumbents) and well-aligned rules, regulations, and institutions. A transition occurs when these systems are challenged by changes in the landscape (the general external environment), in the regime (internal pressure or modification) or by the deployment of niche technologies. Depending on the strength and the alignment of socio-technological changes of the landscape-

regime-niche interactions and dynamics, different types of transition pathways are depicted (Geels, 2002; Geels and Schot, 2007; Geels et al., 2016). Four transition pathways are distinguished: substitution, transformation, reconfiguration, de-alignment, and re-alignment. Substitution: new market entrants struggle against incumbent firms, leading to radical innovations substituting existing technologies in a context of limited institutional change. Transformation: gradual reorientation of the existing regime through adjustments by incumbent actors in a context of landscape pressure. This scenario may evolve to a substitution one if radical innovations are developed and incumbents fully reorient their activities, supported by substantial institutional change. Reconfiguration: niche innovations and the existing regime combine to transform the system's architecture, alliances between new market entrants and incumbents, new combinations of techniques are at center stage. De-alignment and re-alignment: landscape pressure, external shocks disrupt the existing regime, leaving space for new technologies and market entrants. Transition pathways exhibit substantial differences in patterns (mechanisms) of change towards more sustainable socio-technological systems. To qualify and to measure the magnitude of a paradigm shift, not only do the interplay between landscape, actors and institutions need to be taken into consideration (as in the aforementioned scenarios), but also the characteristics of the existing socio-technological system and the potential de-alignment processes the ongoing transition towards a more sustainable regime might bring. Trajectories of change should be contextualized (industry-specific features) and analyzed in a long-term perspective, first, to understand and fully embrace what the main characteristics of the existing system are (nature, strength, outcomes, irreversibility, and capacity to adapt to new contexts by incremental steps); and, second, to determine what features of the transition to a more sustainable regime are potentially disruptive and may constitute the premises of a new socio-technological system. In the case of the electricity system, contextualization and the longterm perspective bring us two major insights: (1) the main feature of the existing system is its centralized and standardized pattern; and (2) the potential of disruption of the ongoing energy transition is notably related to the expansion of renewables, as a replacement of fossil fuel generation technologies.1 Renewables might be unfolded in a decentralized and idiosyncratic manner, more closely linked to territories and to local, customer-centric, specificities. The decentralized feature of the energy transition is at center stage. Its magnitude may be the key to determining whether the energy transition will foretell a paradigm shift. 3. The centralized and standardized model The electric system can be fruitfully analyzed through the lens of socio-technical system literature. Since its inception, the electricity system has been structured and influenced, not only by “autonomous” or “market-driven” technical change, but also by a coalition of actors, representing various interests, who acted to create institutional forms (negotiated with public officials), shaping the boundaries of industry, firms and markets (Granovetter and McGuire, 1998).2 Their orientation and impulse toward technical change (i.e. the expansion of large-scale centralized plants and interconnected networks) was well adapted to 1 Even if, for the time-being, technologies which allow for a reliable, resilient and affordable electric system without the use of any flexible thermal generation units are not available at a reasonable cost. 2 “No machine is an abstract force moving through history. Rather, every new technology is a social construction and the terms of its adoption are culturally determined” (Nye, 1990, p. 381).

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prevailing institutional forms and, in the long-term, created self-reinforcing and irreversible effects. These forces were strong enough to sustain the development of the electric industry for more than a century. It is generally understood that the first commercial use of electricity dates back to September 1882, when Thomas Edison fired up the Pearl Street power station in New York (Hughes, 1979). In the years that followed, reflecting decisions that were, in equal parts, the outcome of entrepreneurial goals and expectations, political choices and technical innovations, the electricity sector was gradually organized around three main principles: (1) the preference for standardized and centralized means of production; (2) the development of interconnected transmission and distribution systems capable of operating across large territorial scales; and (3) the assignment of a monopoly to companies that combined production, transmission and distribution. These principles became the norm between the late 19th century and the years preceding World War I in the United States and thereafter in Europe.3 As historians, economists and sociologists have shown (Hirsh, 1989; Hughes, 1979, 1983; Hausman and Neufled, 1984, 2002; Hausman, 2004; Granovetter and McGuire, 1998; McGuire, 1989, 1990; Yakubovich et al., 2005; Nye, 1990), this trajectory was not the outcome of pure “technical determinism”, acting alone, through the impetus of a series of innovations (progress in long-distance transmission, increase in the size of power generation units, improved efficiency) that shaped the sector. Its predominance did not emerge without opposition, debate, and controversy, but arose from decisions (industrial and commercial, collective or individual) supported and encouraged by favorable regulation. It is a “social construction”. On the basis of a series of decisions (largely taken before 1930), a powerful and efficient techno-economic complex was gradually forged, closely articulated with the public policy objectives then in force. In order to understand the foundations on which the electricity sector familiar to us today was built, let us take a brief look back at its early history, during the formative years of the power industry (1890–1930). In the 1890s, the electricity sector was still in its infancy, lacking precise contours, clear demand to be met, and widely shared technical solutions. There were no clear divisions between suppliers of equipment (bulbs, then engines), producers, distributors, and even the consumers of electricity. These categories, so familiar to us, did not yet exist and would take time to emerge. A battle was raging between the adherents of direct current (headed by Thomas Edison) and of alternating current (supported by the banker J.P. Morgan). So-called “centralized” production units, developed by the first electricity companies and capable of supplying a few dozen or a few hundred customers, coexisted with more scattered methods of production, run by customers (individuals, warehouses, factories, shops, and tramway companies), in cooperatives and farms, or owned by municipalities. Some of these “isolated” plants were coordinated in larger distribution systems serving small geographic areas. Their importance should not be underestimated. “Isolated” systems chronologically appeared before “centralized” systems, and for at least three decades (1885–1915) they generated more electricity than their rivals. Even in 1915, they generated more than half of the electricity in the United States and were the

only form of electric service available in many rural areas until 1930. Under the influence of Samuel Insull (former secretary to Edison) and the coalition of interests that formed around him (the so-called “Insull circle”), the U.S. landscape would gradually clear and the scales tip towards the centralized solution, greatly helped by the “triumph” of alternating current over direct current in the early 1890s. In 1892, Insull exercised a great deal of influence over the two industry associations (Association of Edison Illuminating Companies and National Electric Light Association), both created in 1885, which gathered and promoted, sometimes conflictually, the interests of investor-owned companies (equipment firms as well as operating utilities).4 These associations were forums in which common positions were reached and negotiated with public officials. They produced the implicit or explicit standards that would subsequently spread to all the stakeholders in the electricity sector.5 The discussions held within these two associations in the years 1890–1910, among various items, culminated in one main orientation. A consensus emerged around the need to lobby the authorities in order to stabilize the competition field and to avoid destructive struggle among investor-owned utilities (IOU) and between IOU, municipal companies and “isolated” systems, which led to price wars, cutting wires and bankruptcies in the last decade of the 19th century.6 In 1898, Insull fruitfully advocated for economic regulation of the electric supply industry by state governments. This position was supported by the powerful National Civic Federation, an organization that had close links with public officials. Regulation through state public service (or public utility) commissions was first implemented in 1907 (New York and Wisconsin) and then largely spread in the decade beginning 1910, when most of the American states pursued jurisdiction in this area (Stigler and Friedland, 1962). The Wisconsin law served as a model for subsequent electric utility regulatory legislation. State economic regulation was intended to have, and did have, a very favorable impact on the investor-owned utilities. State commissions granted exclusive licenses, for an indefinite period, and territorial monopolies to the companies. They protected electric companies' capital investments and revenue flows by authorizing “reasonable” rates of return under cost-of-service regulation. Electric companies could also grow and expand their activities by connecting new customers to the grid and developing their asset bases. Investor-owned companies, by expanding their activities beyond municipal boundaries, benefited from economies of scale. This allowed them to lower costs, reinvest in bigger and more efficient generation facilities, and expand their networks. By enabling investor-owned companies to serve large territories and by giving them a monopoly status, state public commissions paved the way to their success. Within this protected institutional framework, the electric companies were then able to plan, to finance and to build a coherent and robust technical system. Interconnected networks and centralized generation units, jointly designed and operated, gave rise to economies of scale and scope, as well as strong coordination and learning effects (aggregation of diverse load-profiles and optimization of the generation capacity required to meet demand and ensure the security of supply). All of these factors helped to reinforce the position of the electricity companies, gave them prospects for development and consolidation, and accelerated their growth, in particular by facilitating their access to debt and equity capital (Hausman and Neufled, 2002; Hausman, 2004). The early growth of the regulated investor-owned

3 These principles have been variously applied and implemented, depending on national institutional settings and historical events, and provide the context for the creation of large public monopolies after the World War II in many European countries and the evolution of federal and state economic regulation of private monopolies in the United States. The national specifics matter and explain how (and to what extent) this centralized and standardized model has been carried out. They are also of primary importance to understanding how the future of the electric industry will be reconfigured by the energy transition. Each country may have institutional or historical features that let to translate the generic model into specific structures and to organize its electric industry idiosyncratically, optimising (or not) based on economies of scope and scale. In this section, the U.S. experience is taken as an example.

4

The Association of Edison Illuminating Companies (AIEC) was founded by Samuel Insull in reaction to the creation of the National Electric Light Association (NELA). The “Insull circle” took a dominant position in NELA only in 1897 and kept it for the next thirty years (Granovetter and McGuire, 1998, p. 158). 5 “Insull became a spokesman for the utility industry, and his company was a pacesetter both in technological and business policy” (Hughes, 1979, p. 141). 6 In Chicago, at the end of the 19th century, there were 29 competing, nonexclusive, electrical franchises (including three covering the entire city) (McGuire, 1989, p. 186). 99

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industry in the United States coincided with a sharp decline of municipal ownership (Bureau of the Census, 1915; Kitchens and Jarowski, 2015). Although some municipal systems remained, providing service within their boundaries.7 The centralized and interconnected electricity system emerged at the end of the 19th century (Insull, 1915, p.31), and flourished after World War I in the United States (slightly later in European countries). The resulting industrial model can be summed up as follows: structured around investor-owned companies equipped with standardized and centralized production units, linked together by interconnected grids, the electricity sector (through economies of scale and scope along with coordination and learning effects) realized diminishing unit costs that benefited customers, thereby driving the development and widening of demand for electrical power (sometimes to the detriment of other, competing energy sources) (Christensen and Greene, 1976). A very impressive virtuous circle of falling real prices and increasing demand began, which enabled the electricity sector to pursue large-scale development (see Fig. 1, Fig. 2 and Ross, 1973). In this context, the policies of restructuring started in the United States and in Europe in the 1990s induced relatively limited change. While they have affected the power companies' monopoly by introducing competition into electricity generation and customer supply, they have not actually brought systemic transformation in either organizational models or technological choices. Obviously, much of the organizational environment of the electric companies has changed. Decentralized market mechanisms have replaced centralized administrative instruments (market prices instead of regulated rates), incumbent generators must compete with new entrants on the wholesale markets, the operating principles of transmission operators (TSOs and DSOs) have been completely revised, retail markets have been fullyopened in Europe and in some U.S. States, market places have emerged, and better price signals are supposed to lead to optimal consumption and investment decisions (Joskow, 1996; Green, 2005; Borenstein and Bushnell, 2015). Despite these structural changes, the dynamics of the electric industry have remained basically the same, even as deregulated electric utilities face more uncertainty and bear more risk. They tend to manage their (price and quantity) risks by exploiting a diversified portfolio of large-scale/low-cost generation assets and by serving large and diversified portfolios of loads through national of regional interconnected networks (Chao et al., 2008). The only major technological change during this period was the massive adoption of combined cycle gas turbines (CCGT), whose unit size (and capital cost) was slightly lower than the other centralized generation technologies and well suited to the new institutional environment (Watson, 2004). Centralization, interconnection, and scale are still the main pillars of the electric industry, even following deregulation.

transition implies a complete re-examination of the organization and the designs of electricity markets and institutions. With the energy transition, public authorities regain a central role in the design and the orientation of the electricity sector. They set new instruments and define new long-term goals and trajectories, and have a direct or indirect impact on the competitive field as well as on the current and future revenues of the electric companies and their technological and investment choices. This policy shift also has an impact on the expectations and the strategic orientations taken by the equipment manufacturers. Light-handed and “market-oriented" regulation are combined with more stringent public policies to promote new goals and dynamics (Grubb and Newbery, 2018). Public policies may be designed and deployed at various geographical scales, depending on each national institutional framework and on pre-existing industrial structure and organization. Decentralized features of renewable technologies and energy efficiency policies may imply the development of public policies by local public authorities. Varying in form from one country to another, various policy instruments regarding renewables and consumption seek to strengthen and accelerate tendencies that are already underway. The renewable energy sectors (essentially onshore wind and photovoltaic) were born, in their modern form, in the 1970s, and began to take shape in the 1980s, even if they remained for a long-time only “niche” technologies. In the same decade, consumption trends began to change. In developed countries, development rates slowed significantly, affected by a fall in average rates of economic growth, a shift in the relative strength of the different business sectors (with services up and industrial production down), and a degree of saturation in traditional electric uses. In Europe and in the United States, measures to support renewable energy began to take full effect between 2005 and 2010. Many U.S. states have been active in adopting legislation and policy measures aiming to foster the development of renewable energy resources (State Renewable Portfolio Standards, voluntary renewable energy standards or targets, and net metering for solar PV systems). In Europe, feed-in tariffs allowed economic agents that invested in wind or solar equipment to rely on guaranteed prices throughout the lifespan of facilities.8 The purchase price was set at a level and for a term that guaranteed the absorption of costs and a positive return on investment. These proved to be highly effective measures, first in incentivizing investment, and second in stimulating upstream development and innovation by equipment manufacturers. The result has been a sharp and rapid reduction in costs (Nemet, 2006). The learning curve shows that in the last 37 years (1980–2017) the PV module price decreased by 24% with each doubling of the cumulated module installed capacity (Fraunhofer Institute, 2018). The cost of photovoltaic (PV) crystalline silicon modules fell by a factor of 100 between the early 1970s and 2015, from $50/W to around 0,5$/W (Mayer, 2015). Globally, a PV installation is starting to become viable without any support mechanism in countries or regions with high irradiation levels (southern Spain, southern Italy, Greece, and southern U.S. states (such as New Mexico, California, Arizona, Nevada, and Texas). Using the Levelised Cost of Electricity (LCOE) as a benchmark, a number of studies show that PV installations (residential or commercial, rooftop or ground-mounted) will be competitive in the near future with traditional thermal generation units, though this does not mean that the two types of technologies are entirely interchangeable (EIA, 2015). In the wind power sector, the cost trend is similar, although the downward slope is less steep, with onshore wind power costs falling fivefold between 1980 and 2010 (NREL, 2012). At present, in windy areas, onshore wind farms can compete (at full cost) with centralized electricity generation units. Onshore wind

4. Energy transition: public policies, technical change and selection environment Conditions have changed. Since the late 1990s, reflecting a fast developing trend, many countries have been introducing strategies (of varying ambition) to combat climate change and to lower GHG emissions. In the electricity sector, these strategies have been embodied in two main types of mechanisms: first, incentive mechanisms for renewable energy; second, instruments (incentives, norms, legislation) to promote energy efficiency and manage consumption trends, with the aim of slowing or even permanently reversing them. These initiatives form the basis of the so-called “energy transition” laws and strategic plans adopted in England (2009), Germany (2011), France (2015), Italy (2017) and Spain (2018) and are behind different regional or local efforts in the United States (such as in California and New York). Energy

8 They are now replaced by other types of mechanisms that favor the integration of renewables in electricity markets (market premium, contracts for difference, auctions) and allow for better control of their growth dynamics, and therefore their impact on wholesale prices.

7 “State regulation represents a triumph of the unified operation idea as opposed to the geographical sub-division idea"(Wilcox, 1914, p. 82).

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Fig. 1. Development of electricity consumption in the USA (1887–2014). In TWh. Consumption for final users (residential, commercial, and industrial). Sources: Electrical World, vol. 80, n°11, 1923, p. 546 (for 1887–1921); US Bureau of the Census (1960), Historical statistics of the United States, colonial times to 1957, Washington (for 1922–1948); US Energy Information Administration (www.eia.gov/electricity/data.cfm) (for 1949–2014).

Fig. 2. Average residential electricity prices in USA (1924–2014). In cents/kWh (all taxes included). All values are expressed in $2014, using the Consumer Price Index (CPI) as an inflation index. Sources: Federal Power Commission (1940, 1959), Typical electric bills (for 1924–1959); US Energy Information Administration http://www.eia.gov/electricity/data. cfm (for 1960–2014). Historical Consumer Price Index for All Urban Consumers (CPIeU): U. S. city average, all items. Source: Bureau of Labor Statistics, US Department of Labor (http://www.bls.gov/cpi/# tables).

renewables (excluding hydro) in the electricity generation mix).9 It is apparent that a set of technological systems, involving innovation, development, and diffusion of renewables technologies, sustained by a variety of networks of players (manufacturers, utilities, suppliers, academics), is taking shape (Nelson, 1993). These systems are supported by various mechanisms (RPS, feed-in-tariffs, contracts for difference, market premiums, auctions) and by public policy orientations (share of renewables to be attained). They also benefit from an evolution of the perceptions of the actors who define what is desirable and possible (Jacobsson and Bergek, 2004). Renewables also benefit from a favorable selection environment. Uncertainty in the electricity sector, including the difficulties faced by electric companies in covering their fixed costs with market prices, is prompting investment in renewable energy technologies. Another major component of the energy transition is the interest in

LCOE is highly sensitive to the average annual wind speed (NREL, 2017). Current PV and (onshore and offshore) wind energy forecasts report that the downward trend in prices is not going to slow significantly until at least 2030 (Kost, 2013; PV Technology Platform, 2015; JRC, 2018). Learning rates for the 2010–2020 period, based on projects and auction data, are estimated at 14% for offshore wind and 21% for onshore wind (IRENA, 2018). There is real momentum, reflected an ever-growing presence of renewables in the energy mix, both in Europe and elsewhere in the world, driven by falling costs. From a very low starting point (3.8% in 2004), renewables (excluding hydro) are progressing rapidly: they accounted for 18.8% of Europe's gross electricity production in 2016 (EU28), though with wide variations from one country to another. In the United States, progress has been slower, but remains significant: renewables (excluding hydro) accounted for around 8% of annual production in 2016, as compared with 2.3% in 2006 (with also significant variations amongst the States, some of them, like Maine, Vermont, California, Iowa, Kansas, California, had between 20% and 40% of

9 Sources: Eurostat for Europe and the US Energy Information Administration for the USA.

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controlling consumption. The highly ambitious target for cuts in greenhouse gas emissions cannot be achieved exclusively through the development of renewables. Total levels of energy production must also be reduced, which demands action on consumption levels and patterns. Different measures have been implemented, together or separately: energy-saving certificates, the application of standards to electrical consumer goods, labeling, and information, subsidies for improving the heat efficiency of existing buildings, and thermal efficiency regulations for new constructions. Their impact is difficult to isolate from other, more macroeconomic factors (Sorrell, 2015). Nevertheless, these energy efficiency measures may have structural and long-term effects. As for renewables, energy efficiency programs and standards may contribute to structure a stream of activities and to guide innovation efforts around new buildings, new materials, advanced-energy saving technologies, IT devices and smart-home applications. Innovation may also lead to the development and adoption of new solutions related to demand flexibility (based on dynamic pricing, curtailment, behind-themeter services, and devices management). Although the global energy transition is only in its early stages, it is already beginning to have a significant impact on the electricity sector. First, it is stimulating the expansion of new electricity generation companies, organized and structured around renewables. This trend is accompanied by the development of new activities focusing on demand and consumption management, driven by actors from different horizons, including equipment manufacturers, companies in the digital sphere, and start-ups. This array of new activities (in both generation and demand-side management) is introducing both diversity and decentralization into the electric power industry. It is thus a new avenue of development that resonates in certain national and local political circles; national authorities may see it as a lever for achieving public policy goals related to climate change and are receptive to the creation of new business sectors with the potential to generate jobs and new streams of economic activities. Local authorities (and in particular municipalities) are backing initiatives that favor a re-territorialisation of energy responsibilities (planning and management, of future local energy systems). Renewables, demand-side management solutions, use of local energy resources (e.g. by combining heat and power, by using biomass, waste-to-energy solutions, and geothermal energy); delivering local energy solutions is gaining impetus and is sometimes considered as a prime way to move towards a low-carbon electricity sector. If they overcome some serious technical and economic limitations that still impede their expansion, local energy systems could once again become viable alternatives to large-scale, centralized, and interconnected systems. The energy transition thus has the potential to disrupt the fundamentals of the electricity system as we know it, including an immediate impact on its functioning. The emergence of subsidized renewables, produced at a marginal cost that is close to zero, the long-term break in the upward trend in demand, associated with more cyclical events as depressed gas and oil prices (and CO2 prices in Europe) and over-investment in power generation capacities, have lead to lower electricity market prices. Wholesale prices, in rapid decline over the last few years, are not enough to achieve returns on investment for thermal generation. This situation, which can be described as “de-optimization", cannot be endogenously corrected solely by the producers themselves (for example, by deciding to close certain non-viable power plants and to delay investment in the hope of reducing the production stock to an appropriate level), because it depends on a set of exogenous factors, partially public policy decisions related to the adoption of renewables and the implementation of capacity mechanisms. As a consequence, doubting the viability of their involvement in centralized fossil-fuel generation, some electricity companies are taking measures to disengage, either totally or partially, which could throw the entire sector into disarray (Keay, 2016) and may call for a re-design of the sector's institutional and regulatory framework in the perspective of energy transition (IEA, 2016). This re-design could be extended to network

activities, and more specifically to distribution networks, which might be strongly impacted by the development of renewables (MIT, 2016). Distribution facilities pave the way for a massive and cost-effective penetration of renewables in the electricity system (at least in the absence of competitive storage technologies). The energy transition may be analyzed as a process of socio-technical reconfiguration involving displacement of mainstream technologies and transformation of associated aligned public policies, social practices, industrial organizations, and networks of actors (Geels, 2002, 2007). This process will take time because the pre-existing socio-technical configuration, organized around a generic centralized and standardized model, is characterized by its stability and its strong internal consistency (alignment of activities). This model has been implemented and supported by large incumbent utilities, delivering products and services through a body of complementary and highly capital-intensive infrastructure assets and networks. The system has substantial externalities and inertia, and long-lasting lock-in effects. These characteristics, the effects of which vary from one country to another, will play a role in the reconfiguration process. Therefore, the trajectory and timing of each national energy transition may largely rely on two types of factors. The first is related to the pre-existing industrial structure, organizational and technological choices. Large socio-technological system, driven by a centralized national decision-making process, generating more inertia and resistance, may be slower to evolve (Grubler, 2012). The second is related to institutional frameworks and public policies, namely ambitious decarbonization targets, appropriate measures, and regulatory instruments, stability, and persistence of public policies, introduction or reinforcement of decentralized levels of decision-making. All of these elements will impact the dynamics of energy transition in each country (Sovacool, 2016). Public policy instruments, the design of renewables support mechanisms at the national or sub-national levels (European), the articulation between these instruments and the market-based regulation of the electricity sector are relevant in the setting of a stable and articulated regulatory framework. Internal tensions, conflicting goals (for instance the impact of renewable support mechanisms on the level of taxes paid by the final consumers), and local opposition and protests may impede or slow down the dynamics of energy transition and undermine the political coalitions supporting it (Mitchell, 2008; Gailing and Moss, 2016). 5. The future of the electricity system: trajectories of change Driven by the ferment of favorable expectations on the one hand and a weakening of the existing system on the other, a new landscape is emerging. The energy transition will have an impact on the structure of the electricity sector. But what form will it take and what will be its scale and magnitude? Among others, three possible trajectories of change can be envisaged, depending on the pre-existing (industrial and organizational) structure and on public policy. In the following, we consider that there are technical, economic, and institutional constraints that structure long-term scenarios and reduce the scope of possibilities in the general evolution of the electricity sector. We assume that the costs of zero-emissions (renewable) generation continue to decrease and that strong constraints apply to fossil-fuel generation (high CO2 prices, high requirements for reducing GHG emissions or even a ban of certain generation technologies such as coal). The trajectories of change for electricity systems discussed here are not comprehensive models or projections built on estimates of costs, demand variability, and the rate of technological deployment. These are narrative futures that aim to identify the main drivers, obstacles, and risks that may lead to a more decentralized electricity sector. 1/Re-arrangement. In this future, the transition will have few structural impacts, as governments decide to readjust the support mechanisms for renewable energy (drastic reduction or even withdrawal), to reward capacity and not to pursue public policies of demand-side management. The centralized model would recover its relevance and 102

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regulatory mechanisms (market-based or not) would lead to a re-arrangement of the production mix and to an appropriate framework for supporting network development. This means that public authorities would entirely or partially abandon the policy objectives they have set, perhaps because of their inability to choose between conflicting or even contradictory goals. In this case, Carbon Capture and Storage (CCS) and in some part of the world, nuclear power, would gain impetus in replacement of base-load coal or gas powered central stations. Alternatively, public officials might re-orient policy objectives, support instruments and regulatory framework, to encourage the development of centralized renewable units over decentralized solutions and schemes considered too expensive (Green and Staffell, 2018). At the same time, it would require the industrial and institutional actors backing the development of new decentralized solutions to abandon their efforts, either through lack of resources, or because of their inability to develop technical objects, system architectures and standards capable of meeting needs and providing a credible alternatives, both technical and economic, to the centralized system. Finally, it would require the incumbent electricity companies to “re-enchant" the centralized model by embarking on a cycle of efficiency improvements and cost reductions sufficient to give existing solutions a new start and/or to ensure that new solutions (renewables) will have the features of centralized generation units. In this scenario, the development of centralized renewables will be associated with “centralized flexibility options” to maintain system adequacy mainly derived from improved network interconnections and dispatchable centralized large generation units (hydropower stations, fossil-fuel facilities with CCS, power-to-gas, or the like). For the time being, renewables are developed either in a decentralized way (PV roof installation, isolated wind turbines, selfconsumption schemes) by final customers (households, businesses, offices and other commercial buildings, and municipalities) to cover a part of their electricity consumption; or in more centralized way (ground-mounted PV, large-scale onshore or offshore wind facilities) by investor-owned utilities like any “centralized” generation units. The pace of expansion of those different renewables systems, the scale at which renewables will be deployed, the degree of standardization of renewable solutions: all these topics will probably be at center stage and will have a structural impact of the future of the power industry. This scenario can be viewed as a “transformation pathway” (in the Geels and al., 2016 terminology) in which incumbent firms incorporate new technologies (renewables, centralized flexibility options) and reorient their activities and business models. New entrants (citizens, communities, or firms) promoting “niche” technologies and solutions are absorbed or assimilated by incumbent firms. Facing new challenges and problems, incumbent firms will have to create the conditions for further innovations, notably to lower the costs of “centralized flexibility technologies”. In this transformation scenario, institutions and organizational structures do not experience major or radical changes, but “market design” still needs to be reformed. 2/Incremental change. In this second future, the new decentralized renewables generation facilities, combined with demand-side management solutions, driven by ambitious and decentralized public policy objectives, develop extensively and give rise to genuine local energy systems, which prove effective and meet the needs of customers. These systems find their place while the centralized model is maintained in a coherent hybridization of local and national systems. This scenario assumes that the costs of the decentralized systems continue to fall and a significant part of renewables are generated locally (by individual customers, commercial enterprises or municipalities) and not in the frame of large and centralized projects supported and financed by electric incumbent companies. The share of centralized vs. decentralized renewables will depend highly on the kind of support mechanisms that will be implemented and the level of subsidies associated with them. It will also depend on the rules, restrictions, and standards applied on self-consumption/self-generation, including the charges selfconsumers will have to pay for covering the network costs and the

structure of network tariffs (Solano et al., 2018). Changes are made to the sector's organizational rules to ensure that the two systems can coexist. In this scenario, it is probable that the imprint of existing national institutional frameworks will remain strong. Local energy systems could find support and opportunities for deployment in countries where there already exists a “strong local public” sector, organized around local authorities that possess extensive scope for action and decision-making powers on energy matters, as is the case, for example, in a number of northern European countries (Lorrain, 2005). In these countries, hybridization could lead to local solutions, as it might in a number of emerging countries where the centralized system has so far only been partially deployed. This scenario may be considered as a “substitution pathway”, in which centralized solutions are replaced by more decentralized ones, new entrants from various horizons superseding incumbent firms. In this transition pathway, organizational rules and institutions change to meet the requirements of new decentralized, idiosyncratic solutions (such as microgrids, peer-to-peer platforms, and local or community energy systems). Breakthrough innovations are empowered by new, “niche-derived" institutional changes (Smith and Raven, 2012). In other contexts, where institutional systems are more centralized, or where regulatory rules are less encouraging, local solutions could find less scope for development. 3/Paradigm shift. In this third scenario, the centralized model is marginalized, as local systems undergo massive and widespread development. The adoption of decentralized technological solutions is hastened by very ambitious decarbonization goals and by policy mechanisms and decision-making that favor local systems, local actors and new entrants. Centralized solutions will be maintained to guarantee the security of supply and grid reliability, and for some of them, to contribute to handling the intermittent nature of renewable energy, with its use largely attenuated by the growing sophistication of demand management mechanisms and by backup from other local energy sources. In this scenario, the development of sound and efficient storage technological solutions (at various scales of time, from intraday to seasonal storing) is a key condition. Storage is more important in a decentralized scenario, where the overall beneficial effects of interconnected networks (in terms of reliability, energy security, power balancing, and optimal dimensioning of power units) are questioned and challenged by the local dimension of energy systems. This scenario would require a very sharp acceleration in the pace and scale of the technical improvements still needed in numerous domains to make local energy solutions viable, robust, and economically attractive, particularly in the field of energy storage, but also in decentralized flexibility options as demand response and behind-the-meter solutions (Gallo et al., 2016; Castagneto Gissey et al., 2018). This would first require strong commitments from the actors concerned, and then the capacity to organize in order to create standards and norms that would make it possible to rationalize and industrialize what can be seen as a disparate set of architectures and systems that are not always complementary. Finally, this scenario would need to be accompanied by the development of new market design and profoundly remodeled forms of regulation, including support mechanisms favoring decentralized renewables and self-consumption and self-generation solutions. This scenario could be considered as an example of “de-alignment and re-alignment pathway” (Geels and al., 2016). The existing, centralized and standardized, system is disrupted. The incumbent technologies decline and are replaced by radical niche-innovations. Decentralized solutions emerged, encourage by enhanced customer engagement and by growing concerns about social acceptance of large and centralized renewable energy projects and associated flexibility solutions. This disruptive scenario is associated with major institutional changes, including a shift of power from central to local administration. 6. Concluding remarks The current energy transition has reopened debates about the 103

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organization of the sector which was considered closed for good (centralization versus decentralization, standardization versus differentiation), and placed the actors in a situation of uncertainty about the future comparable to that experienced by the pioneers of electricity. This indeterminacy, coupled with the now widespread consensus that the current situation of the market is unsustainable, spotlights the idea that the electricity sector, its organization and its modes of regulation, is in a “reconfiguration process”. Far from any “technological determinism”, past experience shows that it is institutional and political factors, entrepreneurial decision-making, and coalitions of interest that largely shaped the sector's trajectory. These forces created the conditions for the centralized and standardized model to succeed and spread. Although the context, stakeholders, and forms of and forums for interaction with public officials have changed, the logic at work remains the same. The trajectory of change in the electricity sector (scale, temporal dynamics) will probably be linked with the capacity of a coalition of actors to propose a stable model (or its lineaments) for tomorrow's electricity sector with a vision of the future founded on a coherent set of elements (technologies, services, policies and regulations, and pricing methods) that are capable of meeting both public policy objectives and the preferences of consumers. There are competing narrative futures, but our assessment leads us to believe that, as happened for the centralized model, the result will above all be a “social construction”. This “social construction” may be very different from one country to another, depending on preexisting (industrial, organizational, and technological) choices and on stability, coherency, and ambitiousness of national and local public policies.

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