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ICT, growth and productivity in the German energy sector – On the way to a smart grid?
Utilities Policy 19 (2011) 14e19
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ICT, growth and productivity in the German energy sector e On the way to a smart grid? Matthias Wissner* WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH, Rhoendorfer Str. 68, 53604 Bad Honnef, Germany
a r t i c l e i n f o
a b s t r a c t
Article history: Received 18 November 2009 Received in revised form 29 March 2010 Accepted 12 July 2010
This paper examines how the German energy industry has invested in Information and Communication Technology (ICT) capital during the years 1992e2005. Using the method of growth accounting I find that the contribution of ICT investment to the growth of value-added and average labour productivity (ALP) within the German energy industry has decreased in the years 2001e2005. The reasons for this can be many. However, policy and regulation are called to remove existing barriers to ICT investment to overcome this investment reticence and to exploit productivity potentials in all stages of the energy value chain as a necessary pre-condition for building Smart Grids. Ó 2010 Elsevier Ltd. All rights reserved.
Keywords: Information and communication technology Smart grid Growth accounting Energy Industry Germany
1. Introduction Many parts of our everyday lives are supposed to get “smarter,” meaning that information and communication technology (ICT) is enabling more activities and processes to be steered digitally, thereby making them easier and more efficient. The development towards “digitalisation” and an “always-on”-functionality takes place in nearly all parts of the economy, pushed by the tremendous distribution of the Internet and the mobile communication infrastructure. “Smart City”, “Smart Traffic” and “Smart Home” are some of the catchphrases that describe this development. For the past few years, the energy sector is operating under this new paradigm. Initiatives around the world track the idea of intelligent energy networks that is summarised under the expression “Smart Grid”.1 Specifically, in Germany there is both the need and the political will to reorganize the energy system by introducing ICT and thereby prepare it for future challenges.2 ICT will be essential in fulfilling the objectives of economic efficiency, security of supply and environmental sustainability that
* Tel.: þ49 (0) 2224 9225 37; fax: þ49 (0) 2224 9225 63. E-mail address: [email protected]. 1 Cp. for example the Grid Wise initiative in the USA or Smart Grids Austria. 2 For example, the German Federal Ministry of Economics and Technology and the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety currently support six model regions where the implementation of ICT into the energy system is tested (“E-Energy“). 0957-1787/$ e see front matter Ó 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.jup.2010.07.001
are linked with energy supply. There are different issues to be tackled in detail; the multitude of actors that entered the energy market after liberalisation must be informationally connected in such way that efficient processes are feasible among all stages of the energy value chain. In terms of generation, an increasing number of distributed sites of mainly renewable energy sources have to be integrated into the grid so that it is still controllable. The grid itself may be managed more efficiently by the ability to control loads and the generally higher information quality that results from increased data collection throughout all parts of the system. In the retail sector, the technology of smart meters will lead to a wider range of products and intensify competition. In short, substantial productivity gains in all parts of the value chain seem possible through the introduction of ICT. To solve the described challenges and implement corresponding new and innovative procedures that raise productivity, investment in ICT is necessary (Praetorius et al., 2009). The investment in ICT can be taken as an indicator for the willingness to innovate as such investment leads to new (technical) processes and operational reorganisation. Using the method of growth accounting, this article examines to what extent the German energy industry has tapped growth and productivity potentials by utilising ICT in the period between 1992 and 2005. If investment in ICT has taken a downturn in recent times, then policies should be implemented to form a framework for new incentives or regulations to promote ICT investments and pave the way towards a Smart Grid.
M. Wissner / Utilities Policy 19 (2011) 14e19
Generally there are no empirical assessments for the energy industry on a national or international basis by the method of growth accounting yet. By contrast, one main field of the growth accounting literature is ICT productivity potential in general on the basis of empirical country comparisons (Jorgenson and Stiroh, 2000; Jorgenson et al., 2005; Fukao and Miyagawa, 2007; van Ark et al., 2008). Furthermore, country-specific studies, mainly based on the EU KLEMS3 database are in the centre of research (Mas and Quesada, 2005; Biatour et al., 2007; Fouquin et al., 2008). Finally, single industries are subject of the analysis (Erber and Madlener, 2008; Smeral, 2009). As this paper analyses developments in the German energy industry it ranks among the last research field and is structured as follows: In Section 2 the methodology of growth accounting is described. Section 3 presents the outcomes of the productivity and growth analysis for the German energy sector with a special focus on ICT, while Section 4 concludes and provides an outlook for the future. 2. Methodology The main objective of this paper is to explain the contribution of ICT to the increase in growth and productivity within the energy industry and thereby analyse the investment behaviour of utilities. The method of “growth accounting” offers the opportunity to separately consider the influence of ICT and therefore seems particularly suitable for this purpose.4 In this section a short description of the theory of growth accounting is given. It builds the basis for the analysis of the German energy industry in Section 3. The purpose of using growth accounting is to explain contributions of input factors to growth and productivity. The starting point of this analysis is the common form of growth accounting with decomposing industry-level value-added growth (VA) into its input factors and TFP (Jorgenson and Stiroh, 2000)5:
Dln VAi;t ¼ vK;i;t Dln Ki;t þ vL;i;t DlnLi;t þ Dln Ai;t
(1)
Ki,t represents capital services for industry i in period t. Li,t is the factor for quality-adjusted labour of industry i at time t. A reflects Total Factor Productivity (TFP). Capital services (Ki,t) is a flowing parameter that is widely accepted as a measurement category instead of the capital stock (Roehn et al., 2007). In contrast to the capital stockdwhich is a state parameterdcapital services are not part of the national accounting system and must be derived indirectly. It can be deducted as follows (Jorgenson et al., 2005; Roehn et al., 2007):
Ki;j;t ¼ QK;i;j
1 þ Si;j;t S 2 i;j;t1
(2)
Si,j,t is the capital stock of asset j in industry i at time t. Q represents a proportionality factor, indicating the quality of asset j. This factor is often assumed to be constant over time so that all changes in quality are expressed by the price index. The marginal productivity of each input factor (e.g., a building, a computer) is deducted, which makes it possible to aggregate capital input. Li,t in equation (1) is the factor for quality-adjusted labour of industry i at time t. This factor also takes into account different marginal productivities of labour, dependent on, for example, gender, age or education level of employees. Consequently, the factor represents the aggregation of the different marginal productivities.
15
The input shares of capital services vK;i;t and quality-adjusted labour vL;i;t add to unity. Considering two periods they are calculated as follows (Roehn et al., 2007):
vh;i;t ¼ 0:5 vh;i;t þ vh;i;t1
with h ¼ K; L
(3)
The input shares can further be defined as (Schreyer, in press):
vK;i;t ¼
PK;i;t Ki;t PK;i;t Ki;t þ PL;i;t Li;t
(4)
PL;i;t Li;t PK;i;t Ki;t þ PL;i;t Li;t
(5)
and
vL;i;t ¼
PK,i,t and PL,i,t are the prices of labour and capital. The weights of inputs are thus defined as the share of monetary assessed factors labour and capital on total input. In addition to the question of what factors account for the growth of an industry or economy, it is also important to consider the triggers to changes in productivity. It is common to use average labour productivity (ALP) to measure these changes. ALP is defined as the ratio of output (Y) to hours worked (H):
ALP ¼
Y H
(6)
Equation (1) can thus be transformed to (Roehn et al., 2007):
Dln ALPi;t ¼ vK;i;t Dln ki;t þ vL;i;t Dln qi;t þ Dln Ai;t
(7)
The parameter Dln ki,t represents the growth of capital input per hour worked. It is referred to as capital deepening (cp. Jorgenson et al., 2005) and reflects an increase in capital, i.e., the substitution of labour by capital or the better fitting of the workforce with capital (Roehn et al., 2007). The parameter Dln qi,t represents the increasing share of hours worked by employees with a higher marginal product and thus means an increase in labour quality. The parameter Dln Ai,t is growth in TFP; it influences ALP directly. How can ICT be integrated in this growth accounting framework? ICT can influence growth and productivity in various ways (cp. Schreyer, 2000). First, the production of ICT products contributes to growth of the whole economy. This approach refers to the production process of ICT goods. Even if the share of this production is relatively small in terms of the total economy, its contribution to economic growth might be relatively high, so long as the ICT producing industry grows much faster than other industries. Secondly, the contribution of ICT as capital input can be examined. This input more or less occurs within all sectors and thus allows comparisons among different industries. The factor capital is divided into ICT capital and Non-ICT capital. The process of capital deepening can proceed through the substitution of labour and nonICT capital by ICT capital. This particularly happens when prices of ICT goods get relatively cheap in comparison with the other input factors. Equation (1) can therefore be written as: IKT NIKT Dln VAi;t ¼ vIKT;i;t Dln Ki;t þ vNIKT;i;t Dln Ki;t þ vL;i;t Dln Li;t þ Dln Ai;t
ð8Þ
The contribution of capital is divided into vIKT;i;t Dln (the input share of ICT capital multiplied by ICT capital services) and NIKT (the input share of non-ICT capital multiplied by vNIKT;i;t Dln Ki;t non-ICT capital services). Accordingly, after distinguishing between ICT capital and nonICT capital, ALP can be rewritten as: IKT Ki;t
3
See www.euklems.net for more details. For a detailed description of growth accounting and the role of ICT see for example Jorgenson et al. (2005). 5 In the following it is referred to the concept of “value-added”, i.e. intermediates that vanish during the production process are not accounted for. 4
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M. Wissner / Utilities Policy 19 (2011) 14e19
4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 1992
1993
1994
1995
1996
1997
1998
all industries
1999
2000
2001
2002
2003
2004
2005
energy industry
Fig. 1. Share of ICT capital as input factor in value-added (energy industry and unweighted average of all industries). Source: Own figure based on Ifo Industry Growth Accounting Database (2007). NIKT Dln ALPi;t ¼ vIKT;i;t Dln kIKT i;t þ vNIKT;i;t Dln ki;t þ vL;i;t Dln qi;t þ Dln Ai;t
ð9Þ
The parameter Dln represents the growth of ICT capital per hour worked and therefore relates to capital deepening with respect to ICT capital. Thirdly, ICT is supposed to influence Total Factor Productivity. This means that ICT can produce increases in productivity that are not directly measurable. This may be the case if the use of ICT brings about positive network externalities (network effects). For example, it is imaginable that a complete rollout of smart meters will cause positive network externalities that improve overall productivity through simplified network monitoring. The methodology used faces some restrictions, however. These mainly relate to the assumption of constant returns to scale (CRS) in all production processes. This assumption may be eased by using an econometric approach where this is no “a priori” requirement (Schreyer, 2001). However, this would go beyond the scope of this study and could be subject of further research. Furthermore, deviations from the assumption of constant returns to scale are reflected in TFP growth (Roehn et al., 2007). These restrictions should be borne in mind when interpreting the results of the following analysis. ki,tIKT
3. Productivity and growth analysis for the German energy sector 3.1. Database This section analyses the development of growth, productivity and, particularly, the role of ICT in the German energy industry. The analysis is based on a database provided by the German Ifo Institute containing growth accounting data at the industry-level (Ifo, 2007). Data for the energy sector refer to the whole sector, e.g., figures for the electricity and gas industry are merged. The data comprise the whole value chain (generation, transport, distribution and supply). While these combined data make an analysis for single value-added steps impossible, it allows for the idea of a smart grid in terms of an integrated penetration and interconnectedness of value-added steps by means of ICT. The database contains data of 52 industries for the period from 1992 to 2005 (Roehn et al., 2007). It differentiates between twelve investment goods, of which three are from the field of ICT: computer and office equipment, communication equipment and software. However, this categorization allows for no direct
conclusions about how far the idea of a smart grid has been realised, since it is not obvious where exactly ICT goods come into play. Moreover, the statistical series ends in 2005, so recent increased investments in smart grid technologies will not be captured. Nevertheless, an increased application of ICT hints to an automation of processes that induces a higher efficiency and productivity and, therefore, represents a first step towards a smart grid. In particular, it shows whether and when the German energy industry has used potentials to innovate. The above described definition of ICT can be applied as an indicator for progress in this field. 3.2. Results The input shares of ICT capital give a first indication towards the application of ICT (vIKT;i;t in equations (8) and (9)). The development is shown in Fig. 1. Obviously, the input share of ICT capital is below the average share over all industries (including the energy industry itself).6 Although the energy industry was able to reduce the distance to the average of all industries in the late 1990s, it fell back again from the year 2000 on. These data demonstrate that there was a certain restraint in the energy industry concerning the application of ICT. A need for catching up is visible. A comparison within the energy industry shows the development of the three input shares: ICT capital, non-ICT capital and labour (cp. Fig. 2). The decrease in the share of the labour factor through 1996 was replaced with increases in the shares of non-ICT capital and ICT capital. Thereafter, a decrease in non-ICT capital until 1999 is visible. This non-ICT reduction is primarily offset by an increase in labour share, along with an increasing share of ICT capital. It followed a short period where this trend reversed (2000e2001). From 2002 it reversed once more and the share of the factor labour increased again. The share of ICT capital during these two periods remained roughly the same. When it comes to growth accounting, the results point to a similar direction. Table 1 shows the figures for the German energy industry compared to the unweighted average of all industries. Considered are the periods 1992e1995, 1996e2000 and 2001e2005. The first two
6 Different Investment cycles and cost structures may not play a major role here. In fact, investment cycles for building a nuclear power plant or an electricity grid are long compared to other industries. In contrast, ICT investments are predominantly of short term character (e.g. computers and software).
M. Wissner / Utilities Policy 19 (2011) 14e19
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60%
50%
40%
30%
20%
10%
0% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 ICT
Non ICT
Labour
Fig. 2. Share of input factors in the energy industry (in %). Source: Own figure based on Ifo Industry Growth Accounting Database (2007).
periods may be considered pre-liberalisation periods, while 2001e2005 liberalisation was pushed forward. The periods are chosen in the way they are for the following reasons: 1996 the first directive on the Internal Market in Electricity was issued and 2000 was the first noticeable year with many new market entrants on the German electricity market. In the German energy industry, value-added has grown in all considered periods. On the other hand, labour hours worked decreased continuously. The increase in value-added, therefore, is based solely on an increase in average labour productivity (ALP). ALP grew in all time periods, particularly between 1996 and 2000. The high contribution of capital deepening in the first period (87%) is striking. In the following periods this contribution fell to 49% for the years 1996e2000 and finally to 19% in the years 2001e2005. Table 1 Growth accounting: German energy industry compared with the average of all German industries (figures in %). 1992e1995
1996e2000
2001e2005
German energy industry Value-added Hours worked Average labour productivity (ALP) Contribution of capital deepening ICT Non-ICT Contribution of labour quality Contribution of TFP
1.59 2.99 4.59 4.00 0.40 3.60 0.27 0.32
3.35 5.50 8.85 4.35 0.60 3.75 0.03 4.47
3.95 1.06 5.00 0.95 0.10 0.84 0.09 3.96
All German industries Value-added Hours worked Average labour productivity (ALP) Contribution of capital deepening ICT Non-ICT Contribution of labour quality Contribution of TFP
1.02 3.19 2.17 2.03 0.29 1.74 0.32 0.18
2.42 0.91 3.33 1.23 0.41 0.83 0.18 1.92
0.13 1.4 1.27 0.85 0.22 0.63 0.26 0.17
0.93 4.59 5.52 3.12 0.19 2.92 0.15 2.55
4.08 0.34 3.73 0.10 0.12 0.21 0.17 3.79
DGerman energy industry All German industries Value-added Hours worked Average labour productivity (ALP) Contribution of capital deepening ICT Non-ICT Contribution of labour quality Contribution of TFP
2.61 0.20 2.42 1.97 0.11 1.86 0.05 0.50
Source: Own figure based on Ifo Industry Growth Accounting Database (2007).
This suggests a decreasing investment activity after liberalisation and may be triggered by increasing regulation of energy markets (EU directives and reforms of the German energy law). Figures from the German energy and water association (BDEW) confirm this assessment, although they only refer to electricity (Fig. 3). In both generation and networks, investments decreased in tendency from the beginning of the 1990s. What can also be learned from Table 1 is that both ICT capital deepening and Non-ICT capital deepening have decreased in the third period by nearly the same rate. It is also noteworthy in Table 1 that the contribution of total factor productivity (TFP) within the energy industry has developed nearly inversely to capital deepening. Its share in ALP rose from 7% in the years 1992e1995 to 51% in the years 1996e2000 and 79% in the years 2001e2005. The impact of ICT on TFP through network effects as described in Section 2 cannot be derived directly. Therefore, one cannot draw direct quantitative conclusions about how ICT capital deepening affects TFP. In certain fields such effects may be present, especially if one considers a time-lag. Finally, changes in labour quality in Table 1 also contribute to an increase in ALP. It plays no major role in all periods, however. Comparing the energy industry with the average over all industries allows further conclusions.7 Value-added has increased within the average of all industries only from 1996 to 2000, while it decreased in the periods 1992e1995 and 2001e2005. The reasons are: 1) the relatively lower ALP for all periods when compared to the energy industry and 2) the relatively low decrease in hours worked for the period 1996e2000. This period seems to be characterised by consolidation within the energy industry. As with the energy industry, the increase in value-added among all industries is due to an increase in ALP only. It is positive over all periods and, like the energy-industry-specific value-added, has its peak in the second period. The contribution of capital deepening to ALP in the first period is 94%. In the following period (1996e2000) this contribution decreases to 37% and rises again to 67% in the final period. This increase in the last period is not shared by the energy industry and supports the thesis that this is due to industry-specific
7 Due to the lack of data an international benchmarking is not possible. However, using the average of all other industries as a benchmark provides for an exhaustive basis of comparison and reflects general trends and developments in the German economy.
18
M. Wissner / Utilities Policy 19 (2011) 14e19
Fig. 3. Capital investment of the German electricity industry 1950 e 2006 in Mio. V (real values). Total Investments, *planned investments spring 2006; until 1991: West Germany; from 1992: Reunified Germany; Source: BDEW (2007).
Table 2 Capital deepening: shares of ICT and non-ICT. 1996e2000
2001e2005
German energy industry ICT 10% Non-ICT 90%
1992e1995
14% 86%
11% 89%
All German industries ICT 14% Non-ICT 86%
33% 67%
26% 74%
Transmission and Distribution,
Generation
energy industry than within the average of all industries. The reasons seem to be numerous. One could be that investments in ICT could trigger and automate processes that actuate competition (e.g., decentralised generation, supplier switch). The upcoming regulation may also have had a negative effect on investment behaviour during this period because the energy industry was waiting on how the regulatory framework would change. The same effect may have been caused by liberalisation and uncertainties about how markets will evolve.
Source: Own calculation based on Ifo Industry Growth Accounting Database (2007).
4. Conclusions and outlook
influences, particularly the upcoming regulation and liberalisation of energy markets. The contribution of TFP within the energy industry is continuously higher than within the average of all industries.8 It is also striking that capital deepening within the energy industry is higher than the average over all industries in all periods. The contribution of ICT capital deepening is also higher compared to all industries in the first two periods only. While the third-period decrease in this field may be due to the breakdown of the new economy, it goes down rather drastically in the energy industry. Hence both the general business cycle as well as industry-specific aspects may be the reason for this development. Relatively small (between 10% and 14%) is the share of ICT in capital deepening compared to non-ICT capital. This share is higher within the average of all industries over all periods (cp. Table 2). The increase in ICT capital deepening within the energy industry between the first and the second period was followed by a decrease in the third period such that ICT capital fell back to almost its previous level. This development may be due the general economic trend as described above. The relatively low level at which ICT capital deepening develops within the energy industry suggests a relatively low propensity to invest within this field. It shows that energy companies have invested more in ICT during monopolistic times. In contrast, innovation activities are lower for the time period 2001e2005. All in all the period between 2001 and 2005 has seen both a relative and an absolute lower ICT capital deepening within the
The growth accounting analysis in the previous section demonstrates the need for action within the energy industry to invest in information and communication technologies (ICT). In the years to come, this will mainly be Smart Grid investments. The analysis of the energy sector suggests that especially in the years after 2000 there is a decrease in the contribution of ICT capital services relative to average labour productivity (ALP). This holds true for the relative comparison of ICT capital deepening to non-ICT capital deepening. The contribution of ICT to ALP is low compared to the average of all industries. Additionally, from 2000 onward, the absolute contribution of ICT is lower than the corresponding average value for all other industries. The continuing liberalisation might hamper ICT-related investments also in the near future because productivity gains likely fail to fully benefit the investors, i.e. if it is unclear whether the investor or another actor profits by the investment. External effects may therefore be a reason for investment reticence. In the case of positive external effects, the private welfare of the investor is less than the social welfare. For example, if a retail company in its function as a metering company invests in smart meter technology, this may lead to a higher customer loyalty on the one hand but also eases supplier switch on the other. Furthermore, customers may find it easier to save energy through their higher level of information concerning their energy consumption, which may cause a decrease in the supplier’s turnaround. In a complex, grid-bound system like the energy supply system, there is the danger that investments in smart grid technology do not exclusively benefit the investor but also other parties and thereby even harm the investor in the long-run. This genuine possibility may inhibit investment, because often single investments in ICT (e.g., smart meters) cannot be separated accurately according to the single stages of the energy value chain.
8 This comparison should be interpreted with caution, however, because the concept of value-added does not take into account intermediates that may influence TFP, too.
M. Wissner / Utilities Policy 19 (2011) 14e19
On the other hand this is absolutely in line with the idea of a smart grid that stipulates a continuous information flow from generation to demand. Only using this holistic approach, process flows that were institutionally interrupted through unbundling policy can be re-established and facilitated. It is then possible to match generation and demand more efficiently, as it happened before the unbundling process in regional monopolies in the sense of an integrated resource planning. It is crucial to find a common data standard to guarantee a smooth data and information flow. However, one has to be cautious that politically desired informational unbundling is not violated. If a smooth flow of data and processes is provided, the positive economic effects that have vanished with the decomposition of vertically integrated companies may be achieved. Moreover, it may have the added effect of increasing the total factor productivity (TFP). If all generators and consumers in an ideal smart grid world are mutually connected, then network effects that cannot directly be credited to the use of labour or capital may be induced. The result is an increase in TFP. There are indeed huge potentials for ICT investments within the single stages of the energy value chain as the following examples show. One promising option is the implementation of virtual power plants. Small and medium decentralised power generators would virtually merge to one large power plant via an ICT infrastructure and would enjoy all the associated advantages. New possibilities also arise within the actual management of the grid itself. The higher level of information that will be achieved through increased digitalisation of the energy system leads to a better knowledge of the current grid status on the part of grid operators. This increased awareness means that critical grid situations may be predicted more precisely and that counteractions may be initiated automatically. Increasing competition in the retail market will lead to an intensified offer of ICT-bound services. One crucial element is the implementation of smart meters that can provide customers with more transparency concerning their energy consumption. Displays in the consumers’ houses that are linked to smart meters can show their current energy consumption. Additionally, smart meters allow for quarterly or monthly billing so that customers are more aware of their actual energy costs. A necessary condition to overcome the current investment reticence, however, is the implementation of a legal, regulatory and economic framework that paves the way towards smart grids. It is essential to reduce the barriers to investment within the single value-added steps while developing a holistic approach in order to solve the complex issues that hinder the realisation of a smart grid. In this context it is vital to provide for interoperability among
19
applied technologies. Only if the whole energy system speaks the same language will it be possible for ICT investments to help realise a smart grid. Thus, while it is essential to leave as much freedom as possible for the development and implementation of new technologies so that efficient solutions can prevail, it is also important to avoid proprietary solutions that do not fit within the system as a whole. For example, it is imperative to provide for the standardisation of data formats, whenever data are used by more than one actor. If policy and regulation authorities manage to overcome the described barriers and create a positive investment climate for the entire sector, the realisation of a smart grid is not far afield. So long as investments in ICT benefit the investor, huge productivity potentials can be exploited and may lead to a smart energy future.
References Biatour, B., Bryon, G., Kegels, C., 2007. Capital Services and Total Factor Productivity Measurements: Impact of Various Methodologies for Belgium. EU KLEMS Working Paper Nr. 13. Erber, G., Madlener, R., 2008. Impact of ICT and Human Skills on the European Financial Intermediation Sector. EU KLEMS Working Paper No. 42. Fouquin, M., Nayman, L., Wagner, L., 2008. Vertical Production Networks: Evidence from France. EU KLEMS Working Paper No. 39. Fukao, K., Miyagawa, T., 2007. Productivity in Japan, the US, and the Major EU Economies: Is Japan Falling Behind? EU KLEMS Working Paper Nr. 18. Ifo, 2007. Industry Growth Accounting Database (2007) Available from: http:// faculty.washington.edu/te/growthaccounting. Jorgenson, D.W., Stiroh, K.J., 2000. Raising the Speed Limit: US Economic Growth in the Information Age. OECD Economics Department, Working Papers, No. 261. Jorgenson, D.W., Ho, M.S., Stiroh, K.J., 2005. Productivity e Information Technology and the American Growth Resurgence, vol. 3. MIT Press, Cambridge, Massachusetts, United States. Mas, M., Quesada, J., 2005. ICT and Economic Growth in Spain 1985e2002. EU KLEMS Working Paper Nr. 1. Praetorius, B., Bauknecht, D., Cames, M., Fischer, C., Pehnt, M., Schumacher, K., Voß, J.-P., 2009. Innovation for Sustainable Electricity Systems, Exploring the Dynamics of Energy Transitions. Roehn, O., Eicher, T.S., Strobel, T., 2007. The Ifo Industry Growth Account Database. June 2007. Schreyer, P., 2000. The Contribution of Information and Communication Technology to Output Growth: A Study of the G7 Countries. OECD Science, Technology and Industry Working Papers, 2000/2. OECD Publishing. Schreyer, P., 2001. Measuring Productivity, OECD Manual Measurement of Aggregate and Industry-Level Productivity Growth. OECD. Schreyer, P. Measuring multi-factor productivity when rates of return are exogenous. Paper Presented at the SSHRC International Conference on Index Number Theory and the Measurement of Prices and Productivity, Vancouver, 30th Juned3rd July 2004. Smeral, E., 2009. Growth accounting for hotel and restaurant industries. Journal of Travel Research 47, 413e424. van Ark, B., O’Mahony, M., Timmer, M.P., 2008. The productivity gap between Europe and the U.S.: trends and causes. Journal of Economic Perspectives 22 (1), 25e44.
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Utilities Policy journal homepage: www.elsevier.com/locate/jup
ICT, growth and productivity in the German energy sector e On the way to a smart grid? Matthias Wissner* WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH, Rhoendorfer Str. 68, 53604 Bad Honnef, Germany
a r t i c l e i n f o
a b s t r a c t
Article history: Received 18 November 2009 Received in revised form 29 March 2010 Accepted 12 July 2010
This paper examines how the German energy industry has invested in Information and Communication Technology (ICT) capital during the years 1992e2005. Using the method of growth accounting I find that the contribution of ICT investment to the growth of value-added and average labour productivity (ALP) within the German energy industry has decreased in the years 2001e2005. The reasons for this can be many. However, policy and regulation are called to remove existing barriers to ICT investment to overcome this investment reticence and to exploit productivity potentials in all stages of the energy value chain as a necessary pre-condition for building Smart Grids. Ó 2010 Elsevier Ltd. All rights reserved.
Keywords: Information and communication technology Smart grid Growth accounting Energy Industry Germany
1. Introduction Many parts of our everyday lives are supposed to get “smarter,” meaning that information and communication technology (ICT) is enabling more activities and processes to be steered digitally, thereby making them easier and more efficient. The development towards “digitalisation” and an “always-on”-functionality takes place in nearly all parts of the economy, pushed by the tremendous distribution of the Internet and the mobile communication infrastructure. “Smart City”, “Smart Traffic” and “Smart Home” are some of the catchphrases that describe this development. For the past few years, the energy sector is operating under this new paradigm. Initiatives around the world track the idea of intelligent energy networks that is summarised under the expression “Smart Grid”.1 Specifically, in Germany there is both the need and the political will to reorganize the energy system by introducing ICT and thereby prepare it for future challenges.2 ICT will be essential in fulfilling the objectives of economic efficiency, security of supply and environmental sustainability that
* Tel.: þ49 (0) 2224 9225 37; fax: þ49 (0) 2224 9225 63. E-mail address: [email protected]. 1 Cp. for example the Grid Wise initiative in the USA or Smart Grids Austria. 2 For example, the German Federal Ministry of Economics and Technology and the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety currently support six model regions where the implementation of ICT into the energy system is tested (“E-Energy“). 0957-1787/$ e see front matter Ó 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.jup.2010.07.001
are linked with energy supply. There are different issues to be tackled in detail; the multitude of actors that entered the energy market after liberalisation must be informationally connected in such way that efficient processes are feasible among all stages of the energy value chain. In terms of generation, an increasing number of distributed sites of mainly renewable energy sources have to be integrated into the grid so that it is still controllable. The grid itself may be managed more efficiently by the ability to control loads and the generally higher information quality that results from increased data collection throughout all parts of the system. In the retail sector, the technology of smart meters will lead to a wider range of products and intensify competition. In short, substantial productivity gains in all parts of the value chain seem possible through the introduction of ICT. To solve the described challenges and implement corresponding new and innovative procedures that raise productivity, investment in ICT is necessary (Praetorius et al., 2009). The investment in ICT can be taken as an indicator for the willingness to innovate as such investment leads to new (technical) processes and operational reorganisation. Using the method of growth accounting, this article examines to what extent the German energy industry has tapped growth and productivity potentials by utilising ICT in the period between 1992 and 2005. If investment in ICT has taken a downturn in recent times, then policies should be implemented to form a framework for new incentives or regulations to promote ICT investments and pave the way towards a Smart Grid.
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Generally there are no empirical assessments for the energy industry on a national or international basis by the method of growth accounting yet. By contrast, one main field of the growth accounting literature is ICT productivity potential in general on the basis of empirical country comparisons (Jorgenson and Stiroh, 2000; Jorgenson et al., 2005; Fukao and Miyagawa, 2007; van Ark et al., 2008). Furthermore, country-specific studies, mainly based on the EU KLEMS3 database are in the centre of research (Mas and Quesada, 2005; Biatour et al., 2007; Fouquin et al., 2008). Finally, single industries are subject of the analysis (Erber and Madlener, 2008; Smeral, 2009). As this paper analyses developments in the German energy industry it ranks among the last research field and is structured as follows: In Section 2 the methodology of growth accounting is described. Section 3 presents the outcomes of the productivity and growth analysis for the German energy sector with a special focus on ICT, while Section 4 concludes and provides an outlook for the future. 2. Methodology The main objective of this paper is to explain the contribution of ICT to the increase in growth and productivity within the energy industry and thereby analyse the investment behaviour of utilities. The method of “growth accounting” offers the opportunity to separately consider the influence of ICT and therefore seems particularly suitable for this purpose.4 In this section a short description of the theory of growth accounting is given. It builds the basis for the analysis of the German energy industry in Section 3. The purpose of using growth accounting is to explain contributions of input factors to growth and productivity. The starting point of this analysis is the common form of growth accounting with decomposing industry-level value-added growth (VA) into its input factors and TFP (Jorgenson and Stiroh, 2000)5:
Dln VAi;t ¼ vK;i;t Dln Ki;t þ vL;i;t DlnLi;t þ Dln Ai;t
(1)
Ki,t represents capital services for industry i in period t. Li,t is the factor for quality-adjusted labour of industry i at time t. A reflects Total Factor Productivity (TFP). Capital services (Ki,t) is a flowing parameter that is widely accepted as a measurement category instead of the capital stock (Roehn et al., 2007). In contrast to the capital stockdwhich is a state parameterdcapital services are not part of the national accounting system and must be derived indirectly. It can be deducted as follows (Jorgenson et al., 2005; Roehn et al., 2007):
Ki;j;t ¼ QK;i;j
1 þ Si;j;t S 2 i;j;t1
(2)
Si,j,t is the capital stock of asset j in industry i at time t. Q represents a proportionality factor, indicating the quality of asset j. This factor is often assumed to be constant over time so that all changes in quality are expressed by the price index. The marginal productivity of each input factor (e.g., a building, a computer) is deducted, which makes it possible to aggregate capital input. Li,t in equation (1) is the factor for quality-adjusted labour of industry i at time t. This factor also takes into account different marginal productivities of labour, dependent on, for example, gender, age or education level of employees. Consequently, the factor represents the aggregation of the different marginal productivities.
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The input shares of capital services vK;i;t and quality-adjusted labour vL;i;t add to unity. Considering two periods they are calculated as follows (Roehn et al., 2007):
vh;i;t ¼ 0:5 vh;i;t þ vh;i;t1
with h ¼ K; L
(3)
The input shares can further be defined as (Schreyer, in press):
vK;i;t ¼
PK;i;t Ki;t PK;i;t Ki;t þ PL;i;t Li;t
(4)
PL;i;t Li;t PK;i;t Ki;t þ PL;i;t Li;t
(5)
and
vL;i;t ¼
PK,i,t and PL,i,t are the prices of labour and capital. The weights of inputs are thus defined as the share of monetary assessed factors labour and capital on total input. In addition to the question of what factors account for the growth of an industry or economy, it is also important to consider the triggers to changes in productivity. It is common to use average labour productivity (ALP) to measure these changes. ALP is defined as the ratio of output (Y) to hours worked (H):
ALP ¼
Y H
(6)
Equation (1) can thus be transformed to (Roehn et al., 2007):
Dln ALPi;t ¼ vK;i;t Dln ki;t þ vL;i;t Dln qi;t þ Dln Ai;t
(7)
The parameter Dln ki,t represents the growth of capital input per hour worked. It is referred to as capital deepening (cp. Jorgenson et al., 2005) and reflects an increase in capital, i.e., the substitution of labour by capital or the better fitting of the workforce with capital (Roehn et al., 2007). The parameter Dln qi,t represents the increasing share of hours worked by employees with a higher marginal product and thus means an increase in labour quality. The parameter Dln Ai,t is growth in TFP; it influences ALP directly. How can ICT be integrated in this growth accounting framework? ICT can influence growth and productivity in various ways (cp. Schreyer, 2000). First, the production of ICT products contributes to growth of the whole economy. This approach refers to the production process of ICT goods. Even if the share of this production is relatively small in terms of the total economy, its contribution to economic growth might be relatively high, so long as the ICT producing industry grows much faster than other industries. Secondly, the contribution of ICT as capital input can be examined. This input more or less occurs within all sectors and thus allows comparisons among different industries. The factor capital is divided into ICT capital and Non-ICT capital. The process of capital deepening can proceed through the substitution of labour and nonICT capital by ICT capital. This particularly happens when prices of ICT goods get relatively cheap in comparison with the other input factors. Equation (1) can therefore be written as: IKT NIKT Dln VAi;t ¼ vIKT;i;t Dln Ki;t þ vNIKT;i;t Dln Ki;t þ vL;i;t Dln Li;t þ Dln Ai;t
ð8Þ
The contribution of capital is divided into vIKT;i;t Dln (the input share of ICT capital multiplied by ICT capital services) and NIKT (the input share of non-ICT capital multiplied by vNIKT;i;t Dln Ki;t non-ICT capital services). Accordingly, after distinguishing between ICT capital and nonICT capital, ALP can be rewritten as: IKT Ki;t
3
See www.euklems.net for more details. For a detailed description of growth accounting and the role of ICT see for example Jorgenson et al. (2005). 5 In the following it is referred to the concept of “value-added”, i.e. intermediates that vanish during the production process are not accounted for. 4
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4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 1992
1993
1994
1995
1996
1997
1998
all industries
1999
2000
2001
2002
2003
2004
2005
energy industry
Fig. 1. Share of ICT capital as input factor in value-added (energy industry and unweighted average of all industries). Source: Own figure based on Ifo Industry Growth Accounting Database (2007). NIKT Dln ALPi;t ¼ vIKT;i;t Dln kIKT i;t þ vNIKT;i;t Dln ki;t þ vL;i;t Dln qi;t þ Dln Ai;t
ð9Þ
The parameter Dln represents the growth of ICT capital per hour worked and therefore relates to capital deepening with respect to ICT capital. Thirdly, ICT is supposed to influence Total Factor Productivity. This means that ICT can produce increases in productivity that are not directly measurable. This may be the case if the use of ICT brings about positive network externalities (network effects). For example, it is imaginable that a complete rollout of smart meters will cause positive network externalities that improve overall productivity through simplified network monitoring. The methodology used faces some restrictions, however. These mainly relate to the assumption of constant returns to scale (CRS) in all production processes. This assumption may be eased by using an econometric approach where this is no “a priori” requirement (Schreyer, 2001). However, this would go beyond the scope of this study and could be subject of further research. Furthermore, deviations from the assumption of constant returns to scale are reflected in TFP growth (Roehn et al., 2007). These restrictions should be borne in mind when interpreting the results of the following analysis. ki,tIKT
3. Productivity and growth analysis for the German energy sector 3.1. Database This section analyses the development of growth, productivity and, particularly, the role of ICT in the German energy industry. The analysis is based on a database provided by the German Ifo Institute containing growth accounting data at the industry-level (Ifo, 2007). Data for the energy sector refer to the whole sector, e.g., figures for the electricity and gas industry are merged. The data comprise the whole value chain (generation, transport, distribution and supply). While these combined data make an analysis for single value-added steps impossible, it allows for the idea of a smart grid in terms of an integrated penetration and interconnectedness of value-added steps by means of ICT. The database contains data of 52 industries for the period from 1992 to 2005 (Roehn et al., 2007). It differentiates between twelve investment goods, of which three are from the field of ICT: computer and office equipment, communication equipment and software. However, this categorization allows for no direct
conclusions about how far the idea of a smart grid has been realised, since it is not obvious where exactly ICT goods come into play. Moreover, the statistical series ends in 2005, so recent increased investments in smart grid technologies will not be captured. Nevertheless, an increased application of ICT hints to an automation of processes that induces a higher efficiency and productivity and, therefore, represents a first step towards a smart grid. In particular, it shows whether and when the German energy industry has used potentials to innovate. The above described definition of ICT can be applied as an indicator for progress in this field. 3.2. Results The input shares of ICT capital give a first indication towards the application of ICT (vIKT;i;t in equations (8) and (9)). The development is shown in Fig. 1. Obviously, the input share of ICT capital is below the average share over all industries (including the energy industry itself).6 Although the energy industry was able to reduce the distance to the average of all industries in the late 1990s, it fell back again from the year 2000 on. These data demonstrate that there was a certain restraint in the energy industry concerning the application of ICT. A need for catching up is visible. A comparison within the energy industry shows the development of the three input shares: ICT capital, non-ICT capital and labour (cp. Fig. 2). The decrease in the share of the labour factor through 1996 was replaced with increases in the shares of non-ICT capital and ICT capital. Thereafter, a decrease in non-ICT capital until 1999 is visible. This non-ICT reduction is primarily offset by an increase in labour share, along with an increasing share of ICT capital. It followed a short period where this trend reversed (2000e2001). From 2002 it reversed once more and the share of the factor labour increased again. The share of ICT capital during these two periods remained roughly the same. When it comes to growth accounting, the results point to a similar direction. Table 1 shows the figures for the German energy industry compared to the unweighted average of all industries. Considered are the periods 1992e1995, 1996e2000 and 2001e2005. The first two
6 Different Investment cycles and cost structures may not play a major role here. In fact, investment cycles for building a nuclear power plant or an electricity grid are long compared to other industries. In contrast, ICT investments are predominantly of short term character (e.g. computers and software).
M. Wissner / Utilities Policy 19 (2011) 14e19
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60%
50%
40%
30%
20%
10%
0% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 ICT
Non ICT
Labour
Fig. 2. Share of input factors in the energy industry (in %). Source: Own figure based on Ifo Industry Growth Accounting Database (2007).
periods may be considered pre-liberalisation periods, while 2001e2005 liberalisation was pushed forward. The periods are chosen in the way they are for the following reasons: 1996 the first directive on the Internal Market in Electricity was issued and 2000 was the first noticeable year with many new market entrants on the German electricity market. In the German energy industry, value-added has grown in all considered periods. On the other hand, labour hours worked decreased continuously. The increase in value-added, therefore, is based solely on an increase in average labour productivity (ALP). ALP grew in all time periods, particularly between 1996 and 2000. The high contribution of capital deepening in the first period (87%) is striking. In the following periods this contribution fell to 49% for the years 1996e2000 and finally to 19% in the years 2001e2005. Table 1 Growth accounting: German energy industry compared with the average of all German industries (figures in %). 1992e1995
1996e2000
2001e2005
German energy industry Value-added Hours worked Average labour productivity (ALP) Contribution of capital deepening ICT Non-ICT Contribution of labour quality Contribution of TFP
1.59 2.99 4.59 4.00 0.40 3.60 0.27 0.32
3.35 5.50 8.85 4.35 0.60 3.75 0.03 4.47
3.95 1.06 5.00 0.95 0.10 0.84 0.09 3.96
All German industries Value-added Hours worked Average labour productivity (ALP) Contribution of capital deepening ICT Non-ICT Contribution of labour quality Contribution of TFP
1.02 3.19 2.17 2.03 0.29 1.74 0.32 0.18
2.42 0.91 3.33 1.23 0.41 0.83 0.18 1.92
0.13 1.4 1.27 0.85 0.22 0.63 0.26 0.17
0.93 4.59 5.52 3.12 0.19 2.92 0.15 2.55
4.08 0.34 3.73 0.10 0.12 0.21 0.17 3.79
DGerman energy industry All German industries Value-added Hours worked Average labour productivity (ALP) Contribution of capital deepening ICT Non-ICT Contribution of labour quality Contribution of TFP
2.61 0.20 2.42 1.97 0.11 1.86 0.05 0.50
Source: Own figure based on Ifo Industry Growth Accounting Database (2007).
This suggests a decreasing investment activity after liberalisation and may be triggered by increasing regulation of energy markets (EU directives and reforms of the German energy law). Figures from the German energy and water association (BDEW) confirm this assessment, although they only refer to electricity (Fig. 3). In both generation and networks, investments decreased in tendency from the beginning of the 1990s. What can also be learned from Table 1 is that both ICT capital deepening and Non-ICT capital deepening have decreased in the third period by nearly the same rate. It is also noteworthy in Table 1 that the contribution of total factor productivity (TFP) within the energy industry has developed nearly inversely to capital deepening. Its share in ALP rose from 7% in the years 1992e1995 to 51% in the years 1996e2000 and 79% in the years 2001e2005. The impact of ICT on TFP through network effects as described in Section 2 cannot be derived directly. Therefore, one cannot draw direct quantitative conclusions about how ICT capital deepening affects TFP. In certain fields such effects may be present, especially if one considers a time-lag. Finally, changes in labour quality in Table 1 also contribute to an increase in ALP. It plays no major role in all periods, however. Comparing the energy industry with the average over all industries allows further conclusions.7 Value-added has increased within the average of all industries only from 1996 to 2000, while it decreased in the periods 1992e1995 and 2001e2005. The reasons are: 1) the relatively lower ALP for all periods when compared to the energy industry and 2) the relatively low decrease in hours worked for the period 1996e2000. This period seems to be characterised by consolidation within the energy industry. As with the energy industry, the increase in value-added among all industries is due to an increase in ALP only. It is positive over all periods and, like the energy-industry-specific value-added, has its peak in the second period. The contribution of capital deepening to ALP in the first period is 94%. In the following period (1996e2000) this contribution decreases to 37% and rises again to 67% in the final period. This increase in the last period is not shared by the energy industry and supports the thesis that this is due to industry-specific
7 Due to the lack of data an international benchmarking is not possible. However, using the average of all other industries as a benchmark provides for an exhaustive basis of comparison and reflects general trends and developments in the German economy.
18
M. Wissner / Utilities Policy 19 (2011) 14e19
Fig. 3. Capital investment of the German electricity industry 1950 e 2006 in Mio. V (real values). Total Investments, *planned investments spring 2006; until 1991: West Germany; from 1992: Reunified Germany; Source: BDEW (2007).
Table 2 Capital deepening: shares of ICT and non-ICT. 1996e2000
2001e2005
German energy industry ICT 10% Non-ICT 90%
1992e1995
14% 86%
11% 89%
All German industries ICT 14% Non-ICT 86%
33% 67%
26% 74%
Transmission and Distribution,
Generation
energy industry than within the average of all industries. The reasons seem to be numerous. One could be that investments in ICT could trigger and automate processes that actuate competition (e.g., decentralised generation, supplier switch). The upcoming regulation may also have had a negative effect on investment behaviour during this period because the energy industry was waiting on how the regulatory framework would change. The same effect may have been caused by liberalisation and uncertainties about how markets will evolve.
Source: Own calculation based on Ifo Industry Growth Accounting Database (2007).
4. Conclusions and outlook
influences, particularly the upcoming regulation and liberalisation of energy markets. The contribution of TFP within the energy industry is continuously higher than within the average of all industries.8 It is also striking that capital deepening within the energy industry is higher than the average over all industries in all periods. The contribution of ICT capital deepening is also higher compared to all industries in the first two periods only. While the third-period decrease in this field may be due to the breakdown of the new economy, it goes down rather drastically in the energy industry. Hence both the general business cycle as well as industry-specific aspects may be the reason for this development. Relatively small (between 10% and 14%) is the share of ICT in capital deepening compared to non-ICT capital. This share is higher within the average of all industries over all periods (cp. Table 2). The increase in ICT capital deepening within the energy industry between the first and the second period was followed by a decrease in the third period such that ICT capital fell back to almost its previous level. This development may be due the general economic trend as described above. The relatively low level at which ICT capital deepening develops within the energy industry suggests a relatively low propensity to invest within this field. It shows that energy companies have invested more in ICT during monopolistic times. In contrast, innovation activities are lower for the time period 2001e2005. All in all the period between 2001 and 2005 has seen both a relative and an absolute lower ICT capital deepening within the
The growth accounting analysis in the previous section demonstrates the need for action within the energy industry to invest in information and communication technologies (ICT). In the years to come, this will mainly be Smart Grid investments. The analysis of the energy sector suggests that especially in the years after 2000 there is a decrease in the contribution of ICT capital services relative to average labour productivity (ALP). This holds true for the relative comparison of ICT capital deepening to non-ICT capital deepening. The contribution of ICT to ALP is low compared to the average of all industries. Additionally, from 2000 onward, the absolute contribution of ICT is lower than the corresponding average value for all other industries. The continuing liberalisation might hamper ICT-related investments also in the near future because productivity gains likely fail to fully benefit the investors, i.e. if it is unclear whether the investor or another actor profits by the investment. External effects may therefore be a reason for investment reticence. In the case of positive external effects, the private welfare of the investor is less than the social welfare. For example, if a retail company in its function as a metering company invests in smart meter technology, this may lead to a higher customer loyalty on the one hand but also eases supplier switch on the other. Furthermore, customers may find it easier to save energy through their higher level of information concerning their energy consumption, which may cause a decrease in the supplier’s turnaround. In a complex, grid-bound system like the energy supply system, there is the danger that investments in smart grid technology do not exclusively benefit the investor but also other parties and thereby even harm the investor in the long-run. This genuine possibility may inhibit investment, because often single investments in ICT (e.g., smart meters) cannot be separated accurately according to the single stages of the energy value chain.
8 This comparison should be interpreted with caution, however, because the concept of value-added does not take into account intermediates that may influence TFP, too.
M. Wissner / Utilities Policy 19 (2011) 14e19
On the other hand this is absolutely in line with the idea of a smart grid that stipulates a continuous information flow from generation to demand. Only using this holistic approach, process flows that were institutionally interrupted through unbundling policy can be re-established and facilitated. It is then possible to match generation and demand more efficiently, as it happened before the unbundling process in regional monopolies in the sense of an integrated resource planning. It is crucial to find a common data standard to guarantee a smooth data and information flow. However, one has to be cautious that politically desired informational unbundling is not violated. If a smooth flow of data and processes is provided, the positive economic effects that have vanished with the decomposition of vertically integrated companies may be achieved. Moreover, it may have the added effect of increasing the total factor productivity (TFP). If all generators and consumers in an ideal smart grid world are mutually connected, then network effects that cannot directly be credited to the use of labour or capital may be induced. The result is an increase in TFP. There are indeed huge potentials for ICT investments within the single stages of the energy value chain as the following examples show. One promising option is the implementation of virtual power plants. Small and medium decentralised power generators would virtually merge to one large power plant via an ICT infrastructure and would enjoy all the associated advantages. New possibilities also arise within the actual management of the grid itself. The higher level of information that will be achieved through increased digitalisation of the energy system leads to a better knowledge of the current grid status on the part of grid operators. This increased awareness means that critical grid situations may be predicted more precisely and that counteractions may be initiated automatically. Increasing competition in the retail market will lead to an intensified offer of ICT-bound services. One crucial element is the implementation of smart meters that can provide customers with more transparency concerning their energy consumption. Displays in the consumers’ houses that are linked to smart meters can show their current energy consumption. Additionally, smart meters allow for quarterly or monthly billing so that customers are more aware of their actual energy costs. A necessary condition to overcome the current investment reticence, however, is the implementation of a legal, regulatory and economic framework that paves the way towards smart grids. It is essential to reduce the barriers to investment within the single value-added steps while developing a holistic approach in order to solve the complex issues that hinder the realisation of a smart grid. In this context it is vital to provide for interoperability among
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applied technologies. Only if the whole energy system speaks the same language will it be possible for ICT investments to help realise a smart grid. Thus, while it is essential to leave as much freedom as possible for the development and implementation of new technologies so that efficient solutions can prevail, it is also important to avoid proprietary solutions that do not fit within the system as a whole. For example, it is imperative to provide for the standardisation of data formats, whenever data are used by more than one actor. If policy and regulation authorities manage to overcome the described barriers and create a positive investment climate for the entire sector, the realisation of a smart grid is not far afield. So long as investments in ICT benefit the investor, huge productivity potentials can be exploited and may lead to a smart energy future.
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