Ict and E-Business Impact in the Energy Supply Industry Essay

ICT and e-Business Impact in the Energy Supply Industry Sectoral e-Business Watch Study Report No. 03/2009 European Commission, DG Enterprise & Industry e-Mail: [email protected] europa. eu, [email protected] org Impact Study No. 03/2009 ICT and e-Business Impact in the Energy Supply Industry A Sectoral e-Business Watch study by IDC EMEA Final Report Version 4. 0 December 2009 This report was prepared by IDC EMEA on behalf of the European Commission, Enterprise and Industry Directorate General, in the context of the “Sectoral eBusiness Watch” programme.

The Sectoral e-Business Watch is implemented by empirica GmbH in cooperation with DIW Berlin, IDC EMEA, Ipsos and GOPACartermill based on a service contract with the European Commission. e-Business impact in the energy supply industry About the Sectoral e-Business Watch and this report The European Commission, Enterprise & Industry Directorate General, launched the Sectoral eBusiness Watch (SeBW) to study and assess the impact of ICT on enterprises, industries and the economy in general across different sectors of the economy in the enlarged European Union, EEA and Accession countries.

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SeBW continues the successful work of the e-Business [email protected] which, since January 2002, has analysed e-business developments and impacts in manufacturing, construction, financial and service sectors. All results are available on the Internet and can be accessed or ordered at the SeBW website (www. ebusiness-watch. org). This is a final report of a sector impact study, focusing on electronic business in the energy supply industry. The study describes how companies use ICT for conducting business, and, above all, assesses implications thereof for firms and for the industry as a whole.

The findings are based on an international survey of enterprises on their ICT use, an econometric analysis of ICT impact on greenhouse gas emissions in the sector, case studies, expert interviews and literature evaluation. Disclaimer Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use, which might be made of the following information. The views expressed in this report are those of the authors and do not necessarily reflect those of the European Commission.

Nothing in this report implies or expresses a warranty of any kind. Results from this report should only be used as guidelines as part of an overall strategy. For detailed advice on corporate planning, business processes and management, technology integration and legal or tax issues, the services of a professional should be obtained. Acknowledgements This report was prepared by IDC EMEA, Italy, on behalf of the European Commission, Enterprise and Industry Directorate General. The main authors were Roberta Bigliani, Elena Gaboardi, Gaia Gallotti and Gabriella Cattaneo.

The study is a deliverable of the Sectoral e-Business Watch, which is implemented by empirica GmbH in cooperation with DIW Berlin, IDC EMEA, Ipsos and GOPACartermill, based on a service contract with the European Commission (principal contact and coordination: Dr. Hasan Alkas). The study team would like to thank Bernard Aebischer, Maher Chebbo, Iiro Rinta-Jouppi, Miguel Angel Sanchez Fornie, and Thomas Theisen, who are members of the Advisory Board in 2009, for their valued feedback, comments and contributions to this study. Contact

For further information about this Sector Study or the Sectoral e-Business Watch, please contact: IDC EMEA Viale Monza, 14 20127 Milan Italy [email protected] com Sectoral e-Business Watch c/o empirica GmbH Oxfordstr. 2 53111 Bonn Germany [email protected] org European Commission Enterprise & Industry Directorate-General D4 “ICT for competitiveness and innovation” [email protected] europa. eu Rights restrictions Material from this report can be freely used or reprinted but not for commercial purposes, and, if quoted, the exact source must be clearly acknowledged.

Recommended quotation: “European Commission (2009): An economic assessment of ICT-related industrial policy. Impact study No. 1/2009. A Sectoral e-Business Watch study by IDC EMEA. Principal authors: Roberta Bigliani, Elena Gaboardi, Gaia Gallotti and Gabriella Cattaneo. Milan/Brussels. ” Milan / Brussels, December 2009 2 e-Business impact in the energy supply industry Table of contents Executive summary ……………………………………………………………………………………… 5 1 1. 1 1. 2 1. 3 1. 4 2 2. 1 2. 2. 3 3 3. 1 3. 2 3. 2. 1 3. 2. 2 3. 2. 3 3. 2. 4 Introduction……………………………………………………………………………………… 9 About this report……………………………………………………………………………………………………….. 9 About the Sectoral e-Business Watch ……………………………………………………………………….. 10 ICT and e-business: key terms and concepts……………………………………………………………… 2 Study objectives and methodology ……………………………………………………………………………. 16 Context and background………………………………………………………………….. 18 Sector definition – scope of the study ………………………………………………………………………… 18 Industry background………………………………………………………………………………………………… 1 Trends and challenges…………………………………………………………………………………………….. 24 Deployment of ICT and e-business applications in the European ESI ……. 37 Overview of issues addressed ………………………………………………………………………………….. 37 Basic issues: ICT infrastructure, business process systems, data exchange and skills ……. 37 ICT infrastructure …………………………………………………………………………………………………………………. 7 Business process systems ……………………………………………………………………………………………………. 38 Automated data exchange with suppliers and customers…………………………………………………………… 41 ICT skills requirements …………………………………………………………………………………………………………. 42 3. 3 3. 3. 1 3. 3. 2 ICT in energy generation………………………………………………………………………………………….. 5 ICT in joint energy generation – virtual power plant……………………………………………………………… …… 45 ICT for renewable energy management ………………………………………………………………………………….. 50 3. 4 3. 4. 1 3. 4. 2 3. 4. 3 3. 4. 4 ICT in energy transmission and distribution………………………………………………………………… 52 Introduction to energy transmission and distribution………………………………………………………………….. 2 Plug in Electric Vehicles ……………………………………………………………………………………………………….. 55 Smart grids …………………………………………………………………………………………………………………………. 56 Usage of ICT systems for energy transmission and distribution ………………………………………………….. 58 3. 5 3. 5. 1 3. 5. 2 ICT and energy demand ………………………………………………………………………………………….. 9 Smart metering ……………………………………………………………………………………………………………………. 59 ICT for energy demand management ……………………………………………………………………………………… 68 3. 6 3. 6. 1 3. 6. 2 3. 6. 3 Overarching issues …………………………………………………………………………………………………. 74 e-Business impact, drivers and inhibitors ………………………………………………………………………………… 4 ICT and environmental impact……………………………………………………………………………………………….. 76 ICT and innovation in ESI ……………………………………………………………………………………………………… 79 3. 7 ICT for gas pipelines ……………………………………………………………………………………………….. 80 3 e-Business impact in the energy supply industry 4 4. 1 4. 2 4. 2. 1 4. 2. 2 ICT impact on greenhouse gas emissions: an econometric analysis …….. 2 Introduction to the econometric analysis…………………………………………………………………….. 82 Empirical background………………………………………………………………………………………………. 83 Data sources ………………………………………………………………………………………………………………………. 83 Data trends in the energy sector…………………………………………………………………………………………….. 84 4. 3 4. 4 5 5. 5. 2 5. 3 5. 4 5. 5 5. 6 6 6. 1 6. 2 6. 3 6. 3. 1 6. 3. 2 Approach and methodology ……………………………………………………………………………………… 85 Empirical results……………………………………………………………………………………………………… 88 Case studies…………………………………………………………………………………… 95 Selection criteria and methods………………………………………………………………………………….. 5 Virtual Power Plant at RWE, Germany ………………………………………………………………………. 96 Electric vehicles using sustainable energy and open networks: the EDISON project, Denmark………………………………………………………………………………………………………………. 101 Enel’s Work Force Management System, Italy ………………………………………………………….. 107 Smart grid journey at Austin Energy, Texas, USA……………………………………………………… 14 Automatic meter management at Gas Natural, Spain ………………………………………………… 120 Conclusions and outlook………………………………………………………………… 126 Main findings from this report………………………………………………………………………………….. 126 Outlook on ICT investments……………………………………………………………………………………. 128 Policy implications for ICT and e-business in the ESI ………………………………………………… 32 Overview……………………………………………………………………………………………………………………………. 132 Key issues to be addressed………………………………………………………………………………………………….. 134 6. 4 Implication for policies arising from this study……………………………………………………………. 136 References ………………………………………………………………………………………………. 41 Annex I: SeBW Energy Supply Survey 2009 – methodology report …………………. 145 Annex II: Energy sector statistics by country………………………………………………. 151 4 e-Business impact in the energy supply industry Executive summary Key findings Supply of energy requires complex interactions of generation, transmission and distribution facilities, which can be greatly facilitated through information and communication technology (ICT). Smart metering, smart grids, demand management, intelligent power plants are currently some of most prominent issues in the energy supply industry (ESI).

The level of adoption of smart metering is low but increasing. Plans for investments in smart metering represent the unique positive exception in the investment plans examined in the SeBW Energy Supply Survey 2009. Barriers related to interoperability and regulations still need to be addressed. Health, safety & environment systems and carbon management systems have not yet a widespread diffusion. The ESI is not fully exploiting the potential of ICT in contributing to the reduction of environmental impacts. An econometric analysis conducted for this report found that greater ICT capital intensity ignificantly decreased emissions per output in the energy supply sector across all sample countries. About this study This study provides insights into current trends of ICT and e-business activity in the energy supply industry (ESI). It explores to which extent companies in the ESI sector use such ICT systems for managing their processes and the potential they attribute to ICT in these areas. Most importantly it provides a detailed analysis of the most innovative and promising area that will affect ESI evolution in the upcoming years, depicting the role and the impact on ICT.

Industry background – the sector at stake The ESI as defined for the study is included in NACE Rev. 2 Group 35 (in the following short: NACE 35), “electricity, gas, steam and air conditioning supply”. Thus this study focuses on the value chain of the utility business that includes: production, transmission, distribution and trading of energy as well as its supply to final consumers (Section 2. 1). The EU-27 ESI is an economically important sector: about 31,000 firms employed nearly 1. 6 million people and generated a turnover of 932 billion euros in 2006.

Moreover, the energy industry is pivotal to any other industrial and private activity (Section 2. 2). Trends and challenges A competitive, reliable and sustainable energy sector is essential for the EU, which is presently coping with a vast array of challenges. The EU is highly dependent on imported products and is subject to volatility of prices. The national markets lack integration, as indicated by the absence of price convergence and the low level of cross-border trade. There are still large differences in market structure, competitiveness, public service and customer protection between European countries.

The EU is also mandating to fight against climate chance, and the European energy supply industry is aiming to shift towards decarbonised power. The deployment of smart grids, including the pilot and rollout of smart metering, is a key strategic element in order to meet these challenges. To stay competitive, ESI companies would benefit from increased process efficiency along the entire value chain. Integrating infrastructures and migrating systems to more cost-effective platforms, both for electricity and gas (Section 2. 3) would also be beneficial.

ICT for corporate processes Among the solutions supporting enterprise business processes, Enterprise Resource Planning (ERP) currently have the widest adoption within this industry. ERP is used by two thirds (67%) of firms in the industry’s employment, followed by computer-aided design systems (CAD, 63%) and document management (DMS, 61%). Supply Chain Management systems are less diffused (15%) (Section 3. 2. 1). It appears that ESI companies reach a fairly good degree of automation in single processes, while they have still a way 5 e-Business impact in the energy supply industry ahead before integration. reaching cross rocess to real time measurement, analysis, forecast and monitoring of operations ICT enablement of smart grids Presently, ESI companies are fairly well equipped with systems supporting management and control of their activities in energy transmission and distribution although smaller companies slightly lag behind. Companies representing 71% of the industry’s employment said they have adopted systems for energy network automation and control. Plans for further investments, however, indicate that a low percentage of companies (firms representing 3% of employment) that presently do not have these solutions plan to adopt them.

There is evidence that further enablement of smart grids, a pillar of the EU energy policy, would need to be supported by adequate ICT (Section 3. 3). Smart metering Companies representing about half the employment in the sector reported that they are either installing or testing smart meters and further 21% said they plan to do so in the next two years. These plans for investment represent the unique exception in the investment plans examined in the SeBW Energy Supply Survey 2009: no other application or technology is regarded with the same attention.

However, companies representing 36% of employment that implement or test smart metering reported to face barriers related to the interoperability of the devices and systems and 37% indicated that they need to cope with regulation deficiencies. These challenges are to be met in order to fully exploit the potential for energy savings, process efficiency and new value added services (Section 3. 4. 1). Demand side management On the supply side, companies installing, controlling, managing and monitoring energy distribution grids can use ICT for purposes such as remote meter reading and advanced metering infrastructure solutions.

On the demand side, ICT may have a potential to increase energy efficiency among businesses and private households. The potential benefits of ICT for demand side management have been demonstrated in various pilot projects (see, e. g. business examples about SINTEF’s, ADDRESS 6 ICT skills requirements Survey findings indicate that out of the companies currently employing ICT practitioners, 46% had job openings for ICT practitioners in the past 12 months and about half of them experienced difficulties in finding qualified people for open positions.

Companies representing 91% of employment stated that demands on employees regarding their computer/software skills have noticeably increased. This is obviously related to the overall increased importance of ICT in this sector. Many of them also experience insufficient computer skills; this, however, for most companies affects only a minor part of their employees (Section 3. 8). Virtual Power Plant: ICT to integrate DER A virtual power plant (VPP) is the distributed and co-ordinated operation of several small generation units, acting virtually as a single power plant.

A VPP may be an effective approach to energy generation as it may significantly enhance the efficiency and reliability of production processes, bring environmentally interesting options and make it possible to deliver value added services to customers. The survey found that ICT solutions for managing distributed energy generation units (monitoring, forecasting and dispatching energy) are in place in a percentage of companies representing from 40 to 52% of total employment.

Still many companies generating energy through distributed units run these units as “islands” of activity rather than in an integrated way. Leading edge pilot projects, like the one depicted in the RWE case study (Section 5. 2), have been implemented in the EU. However, it is not yet possible to illustrate a standard architecture, nor is there consensus about costs and benefits of such implementations (Section 3. 2). ICT for transmission grids European transmission systems are ageing and massive investments will be necessary in the next years both to replace assets and to solve congestion problems.

Key ICT technologies for transmission grid management include telemeasures and tele-controls systems, aimed at supporting sector-specific functionalities related e-Business impact in the energy supply industry and GridWise in Section 3. 5. 2). These benefits are also clear to ESI companies, as about three out of four of the surveyed companies perceive the potential of ICT in increasing efficiency of business customers as high or medium. However, companies representing only 19% of the EDI industry’s employment stated to have ICT solutions to support demand response programmes.

The set up of real time communication channels with end users is, instead, becoming a more common practice (firms representing 38% of employment, for instance, use web portals to inform their customers about consumptions). Outsourcing services are offered by companies representing 41% of employment. ICT for environmental impact: untapped potential The transition towards a more climate-friendly energy sector is supported by a range of ICT solutions that respond to changing regulatory, safety, and security requirements, while enhancing value chain visibility and ensuring continuity of operations.

Overall, the SeBW Energy Supply Survey 2009 found that the diffusion of ICT solutions for monitoring and reducing environmental impact is low, if compared with the general market trends in the ESI and the regulation in place. Health, safety & environment systems that maximise compliance for electric utility industry facilities, have been adopted by companies, representing 50% of employment, and corresponding to only 32% of firms. Carbon management systems have been adopted by companies, representing 25% of employment.

It appears that a relevant share of firms still do not fully exploit the potential of ICT in contributing to the reduction of environmental impacts. For instance companies representing 41% of employment said that ICT has no or little potential for reducing greenhouse gas emissions in the ESI. ICT is an enabler of innovation The entire ESI sector is undergoing profound changes leading closer to the vision of the “intelligent utility” to which users can actively participate. Innovation in smart grids, smart metering, demand response require enhancing and upgrading of existing infrastructures and implementing new ICT.

It is therefore not surprising that within this industry ICT is perceived as a major innovation enabler. Companies representing 53% of this industry’s employment said they introduced new products or services in the past twelve months, and 76% introduced new processes. The vast majority of these innovators said that the new products or services have ICT components (Section 3. 5. 2). ICT impact on greenhouse gas emissions An econometric analysis was carried out to determine the impact of ICT on greenhouse gas emissions in the ESI (Chapter 4).

This analysis assesses the relationship between the ICT capital intensity of production and GHG emissions per output in the European energy supply sector. Key findings from the analysis are that greater ICT capital intensity is found to significantly decrease emissions per output in the energy supply sector across all sample countries, with significant differences in the magnitude and form of this impact depending on whether new EU Member States are considered in the analysis.

This suggests that there has been both a strong development of ICT innovations that reduce emissions and a sector-wide implementation of these innovations in the ESI among older EU Member States. The role of e-business: a mixed picture ESI firms largely recognise that ICT can provide a relevant contribution (for instance for reducing greenhouse gas emissions) and that its impact on energy management will increase in the future. The majority of companies, however, also indicate that presently most of their processes are only partly managed as ebusiness.

According to the opinion of the interviewees, the main constraint to a wider adoption of e-business is that business partners along the value chain are not prepared for ebusiness. Costs, the second problem, lag far behind. Larger players apparently do not act as a driving force to broaden the adoption of ICT technologies (Section 6. 2). An outlook on ICT investments The economic crisis has largely affected the decision for investments in ICT in 2009. Companies representing 52% of the industry’s employment said they decreased their ICT budgets in 2009. 2% indicated that the economic crisis has an impact on ICT investment plans and out of these 51% actually cut or cancelled their ICT projects. 7 e-Business impact in the energy supply industry One of the most striking results from the SeBW Energy Supply Survey 2009 is the very low percentage of companies that plan investments in sector specific ICT applications that they do not have currently. For instance, firms representing only 4% of employment declared that they plan to introduce renewable energy information systems.

Similarly low figures were found for systems for energy network automation and control (planned by 3%) and outage management systems (planned by 1%). Investments in more sector-specific devices and applications, such as smart handheld devices, electronic billing and integration monitoring and control systems with business systems continue to receive attention by ESI, due to their relevance for competition (Section 6. 3) Implications for technological developments Findings of this study suggest that there are technological developments that may be particularly helpful in supporting the ESI.

There is a need for need to better and further conceptualise, design and demonstrate technical architecture and commercial implications of Distributed Energy Resources (DER) and VPP. Further research would be needed for ICT for planning monitoring and control of the decentralised units. Further efforts are needed for the standardisation of the interfaces. Improving energy efficiency on the demand side calls for actions in the areas of: standardisation, i. e. pen and agreed standards for integration of devices, harmonisation of regulatory framework and the development of business models demonstrating the benefits for the various stakeholders involved. The enablement of smart grids, a pillar of the EU energy policy requires the widespread adoption of ICT for monitoring, and control. There is a need for open and agreed standards for integration of different tools and devices in place. It is also necessary to improve architectures for integrating the data communications networks and the intelligent equipment in place.

Besides mere technology, there is also a need for methods and tools that can assure interoperability, flexibility, effective security and expandability of the systems. Decision support systems to increase predictive reliability would also be needed. As smart grids involve various players along the value chain, this calls for coordination and harmonisation both at technical and at regulatory level. The picture of smart metering in the EU leads to recommendations for actions addressing technical standards that may support interoperability between different systems and devices, and the definition of the required functionalities.

Overall, the analysis leads to the conclusion that efforts for ICT developments should address the areas of monitoring and control, system integration, interoperability standards and standardisation of interfaces. Well-defined policy measures may help to support the development and widespread adoption of ICT in this industry, as well as the related business and organisation changes that are necessary for achieving the goals of a competitive, reliable and sustainable energy sector. The Edison Consortium case study and PHEVs technologies and standardisation (see Sections 3. . 2 and 5. 3) suggest that there is a need for multidisciplinary and cross-sectoral cooperation including industry, scientists, academia, public administrations and the consumers (both business and final consumers). Increased visibility and awareness of the benefits that can be achieved through the usage of ICT could be an important pillar of energy policies. This should lead to a deeper engagement of the demand side. Various actions could be recommended, including the development and dissemination of ICT-based platforms and users’ tools.

The availability of user-friendly and easily accessible tools of this kind may significantly impact on behaviour changes and, ultimately, on the level of consumptions. Another implication arising from this report is that more research may be helpful for establishing and disseminating knowledge and good practices for the most innovative technologies, such as VPP and smart metering for which a clear business case has not been established yet. Finally there is a need for continuing support of education and training activities especially in the areas where ICT can enable energy efficiency. e-Business impact in the energy supply industry 1 1. 1 Introduction About this report Objectives, sources and addressees This study focuses on the adoption and implications of ICT and e-business in the energy supply industry. It describes how companies in this industry use information and communications technology (ICT) for conducting business, assesses the impact of ICT for firm performance in a context of global competition, and points at possible implications for policy.

The analysis is based on findings from a telephone survey among decisionmakers in European energy enterprises, on an econometric analysis of the relationship between ICT investment and greenhouse gas emissions as well as on literature, interviews with industry representatives and experts, and company case studies. In contrast to many other recent studies in the field of ICT and energy, this study does not focus on a narrow selection of issues for energy specialists but it provides a birds-eye view for a broader audience of decision makers and experts in policy, business, industry associations, consultancy and academia.

A key objective of this study is to provide concrete data and inputs to the stakeholders for discussing issues related to ICT and energy supply. Study structure The study is structured into six main sections. Chapter 1 explains the background and context why this study has been conducted: it introduces the Sectoral e-Business Watch (SeBW) programme of the European Commission, a conceptual framework for the analysis of e-business, and the specific methodology used for this study. Chapter 2 provides general information and key figures about the energy supply industry (ESI) in Europe.

Chapter 3 describes relevance and trends of ICT and e-business use in this industry, focusing on specific ICT-related issues that were found to be particularly relevant to this sector. It includes results from the SeBW Energy Supply Survey 2009. Chapter 4 assesses the impact of ICT on greenhouse gas emissions based on an econometric analysis. Chapter 5 presents company case studies. These have been selected as practical examples and evidence for the issues discussed in Chapter 3. Chapter 6, finally, presents conclusions and n outlook of possible developments and policy implications related to ICT and e-business that could arise from the observed developments. Combining descriptive and analytical approaches The study approach is exploratory, descriptive and explanatory, applying a broad methodological basis: A qualitative case study approach (Chapter 5) is combined with a descriptive presentation of quantitative survey data (Chapter 3) and an economic analysis of ICT adoption and its impacts (Chapter 4).

This threefold approach is meant to produce an in-depth understanding of current ICT and e-business application in the industry, while also assessing the economic effects of this application, for instance on firm productivity, innovation and greenhouse gas emissions. While the results from these different approaches are presented like self-sustained pieces of research in separate chapters, they are intertwined and cross-referenced. 9 e-Business impact in the energy supply industry 1. 2 About the Sectoral e-Business Watch

Mission and objectives The “Sectoral e-Business Watch” (SeBW) studies the adoption and impact of ICT and electronic business practices in different sectors of the economy. It continues activities of the preceding “e-Business [email protected]” which was launched by the European Commission, DG Enterprise and Industry, in late 2001, to support policy in the fields of ICT and ebusiness. The SeBW is based on a Framework Contract and Specific Contract between DG Enterprise and Industry and empirica GmbH.

Within the European Commission, DG Enterprise and Industry has the mission to help improve Europe’s economic standing by ensuring that businesses are competitive and that they can compete openly and fairly. In ICT-related fields, DG Enterprise and Industry targets six policy fields: competitiveness of the ICT producing sector, ICT uptake in ICT using sectors, legal issues related to ICT uptake, ICT standardisation, e-skills and disruptive ICT. 1 The services of the SeBW are expected to contribute to policies in these fields.

The SeBW’s mission can be broken down into the following main objectives: to assess the impact of ICT on enterprises, industries and the economy in general, including the impacts on productivity and growth, and the role of ICT for innovation and organisational changes; to highlight barriers for ICT uptake, i. e. issues that are hindering a faster and/or more effective use of ICT by enterprises in Europe; to identify and discuss policy challenges stemming from the observed developments, notably at the European level; to engage in dialogue with stakeholders from industry and policy institutions, providing a forum for debating relevant issues.

By delivering evidence on ICT uptake and impact, the SeBW is to support informed policy decision-making in policy domains also beyond ICT, including innovation, competition and industrial policy. Policy context The initial e-Business [email protected] programme was rooted in the eEurope Action Plans of 2002 and 2005. The eEurope 2005 Action Plan had defined the goal “to promote take-up of e-business with the aim of increasing the competitiveness of European enterprises and raising productivity and growth”. The i2010 policy 3 , a follow-up to eEurope launched in 2005, also stresses the critical role of ICT for productivity and innovation, stating that “the adoption and skilful application of ICT is one of the largest contributors to productivity and growth throughout the economy, leading to business innovations in key sectors” (p. 6). This policy rationale for the Sectoral e-Business Watch is still valid. 1 2 See http://ec. europa. eu/enterprise/ict/index_en. htm#policy for more details. “eEurope 2005: An information society for all”.

Communication from the Commission, COM(2002) 263 final, 28 May 2002, chapter 3. 1. 2. “i2010 – A European Information Society for growth and employment. ” Communication from the Commission, COM(2005) 229 final. 10 3 e-Business impact in the energy supply industry Also in 2005, in consideration of globalisation and intense international competition, the European Commission launched a new industrial policy 4 to create better framework conditions for manufacturing industries in the coming years.

Some of the policy strands described have direct links to ICT usage, recognising the importance of ICT for innovation, competitiveness and growth. In a mid-term review of the new industrial policy in 2007, the EC identified three particular challenges: intensified globalisation and technical change as well as climate change. In 2009, the EC will issue a Communication related to the role of high technology and industrial policy in the economic crisis. The SeBW is one of several policy instruments used by DG Enterprise and Industry in this context.

Other key instruments include the following: the e-Business Support Network (eBSN), a European network of e-business policy makers and business support organisations, the eSkills Forum, a task force established in 2003 to assess the demand and supply of ICT and e-business skills and to develop policy recommendations, activities in the areas of ICT standardisation, as part of the general standardisation activities of the Commission. 5 In parallel to the work of the SeBW, the “Sectoral Innovation Watch” (see www. europeinnova. rg) analyses sectoral innovation performance and challenges across the EU from an economic perspective. Scope of the programme Since 2001, the SeBW and its predecessor “e-Business [email protected]” have published ebusiness studies on about 30 sectors of the European economy, annual comprehensive synthesis reports about the state-of-play in e-business in the European Union, statistical pocketbooks and studies on specific cross-industry ICT issues. All publications can be downloaded from the programme’s website at www. ebusiness-watch. org. In 2009, the main studies of the SeBW focus on the following five sectors and specific topics: No. 2 3 4 5 Type of study and leader Sector study (NACE Rev. 2 Division 35) Sector study (NACE Rev. 2 Division 23. 1-6) Thematic study (cross-sector) Thematic study (cross-sector) Thematic study (cross-sector) Sector / topic ICT and e-business impacts in the energy supply industry ICT and e-business impacts in the glass, cement and ceramic industry ICT impacts on greenhouse gas emissions in energyintensive industries An economic assessment of ICT-related industrial policy e-Skills demand developments and challenges in manufacturing industries

ICT and e-business use in companies as well as related policy approaches have become increasingly sophisticated in recent years. For the SeBW this implies that there is also a need for increasingly specific analyses, conclusions and policy implications. 4 5 See European Commission (2005a). Larger recent activities include a workshop on “IPR in ICT standardisation” in November 2008, and a conference on “European ICT standardisation policy at a crossroads” in February 2008. See http://ec. europa. eu/enterprise/ict/policy/standards/ict_index_en. htm for details. 1 e-Business impact in the energy supply industry 1. 3 ICT and e-business: key terms and concepts A definition of ICT Information and communication technology (ICT) is an umbrella term that encompasses a wide array of hardware, software and services used for data processing (the information part of ICT) as well as telecommunications (the communication part). The European Information Technology Observatory (2009) structures the ICT market into three broad segments with an estimated total market value of about € 718 billion in 2009 (Exhibit 1-1).

Compared to 2008, the European ICT market has experienced a decrease of minus 2. 2%. For 2010, EITO expects the ICT market to stabilise and to decrease by only 0. 5% to 714 billion €. Exhibit 1-1: European ICT market (sales volume) in 2009 Market segment Information Technology (IT) Telecommunicati ons (TC) Consumer electronics Total ICT market Source: EITO 2009 Products / services included IT hardware, software, services TC end-user equipment, carrier services, network equipment Examples: flat-screen TVs, digital cameras and navigation systems EU market value estimates (2009) € 299 billion € 361 billion € 58. € 718 billion Development to 2008 -2. 6% -0. 7% -8% -2. 2% ICT is a technology with special and far-reaching properties. As a so-called general purpose technology (GPT), it has three basic characteristics: 6 First, it is pervasive, i. e. it spreads to all sectors. Second, it improves over time and hence keeps lowering the costs for users. Third, it spawns innovation, i. e. it facilitates research, development and market introduction of new products, services or processes.

One may argue that only electricity has been of similar importance as a GPT in modern economic development. Companies in all sectors use ICT, but they do so in different ways. This calls for a sectoral approach in studies of ICT usage and impact. The following section introduces a framework for the discussion of ICT that has been applied in most studies of the Sectoral e-Business Watch. A definition of e-business In a maturing process over the past 15 years, electronic business has progressed from a specific to a broad topic.

A central element is the use of ICT to accomplish business transactions. This means exchanges of goods – or, in economic terms: property rights – between a company and its suppliers or customers. Transactions can be broken down into three phases, and related business processes (see Exhibit A3-2). First, the pre-sale (or pre-purchase) phase includes the presentation of (or request for) information on the offer, and price negotiations. Second, the sale or purchase phase covers ordering, invoicing, payment and delivery processes.

Finally, the after-sale or purchase phase covers all processes after the product or service has been delivered to the buyer, such as repairs and updates. Practically each step in a transaction 6 Cf. Bresnahan/Traijtenberg (1996) and Jovanovic/Rousseau (2005). 12 e-Business impact in the energy supply industry can be pursued either electronically (“online”) or non-electronically (“offline”), and all combinations of electronic and non-electronic implementation are possible. Therefore it has to be decided which components must be conducted online for a transaction (as a whole) to be termed “electronic”.

Exhibit 1-2: Process components of transactions Pre-sale / pre-purchase phase • • • • Request for offer/proposal Offer delivery Information about offer Negotiations • • • • Sale / purchase phase Placing an order Invoicing Payment Delivery • • • • After sale / after-purchase phase Customer service Guarantee management Credit administration Handling returns Source: Sectoral e-Business Watch Electronic transactions, i. e. electronic procurement or sales, constitute e-commerce.

The suppliers or customers can be other companies (“B2B” – business-to-business), consumers (“B2C” – business-to-consumers), or governments and their public administration (“B2G” – business-to-government). The OECD proposed two definitions of e-commerce – one narrow and one broad. While the narrow definition focuses on “internet transactions” alone, the broad definition defines e-commerce as “the sale or purchase of goods or services, whether between businesses, households, individuals, governments, and other public or private organisations, conducted over computer-mediated networks.

The goods and services are ordered over those networks, but the payment and the ultimate delivery of the goods or service may be conducted on- or offline” (OECD, 2001). 7 The addendum regarding payment and delivery illustrates the difficulty in specifying which of the processes along the transaction phases constitute e-commerce. The OECD definition excludes the pre-sale or prepurchase phase and focuses instead on the ordering process. The SeBW follows the OECD position on this issue, while fully recognising the importance of the internet during the pre-purchase phase for the initiation of business.

The OECD Working Party on Indicators for the Information Society proposes a definition of e-business as “automated business processes (both intra- and inter-firm) over computer-mediated networks”, with the imperative conditions that “the process integrates tasks (i. e. a value chain) and extends beyond a stand alone / individual application” and that “the processes should describe functionality provided by a technology, not a specific technology per se” (OECD, 2003, p. 6). Using this definition, e-commerce is a key component of e-business, but not the only one.

This wider focus on business processes has been widely recognised: e-business also covers the digitisation of internal and external business processes that are not necessarily transaction-focused. Internal business processes include functions such as research and development, finance, controlling, logistics and human resources management. An example of external cooperative or collaborative processes between companies would be industrial engineers collaborating on a design in an online environment. In addition, the OECD proposed that e-business processes should integrate tasks and extend beyond a stand-alone application.

Thus, simply using a computer in a company 7 These definitions remain useful today. For recent developments in definitions related to ecommerce and e-business see OECD (2009), pp. 41-48. 13 e-Business impact in the energy supply industry does not constitute e-business. The most rudimentary form of e-business may thus be to connect two computers in a local area network. The term “automation” in the OECD definition refers to the substitution of formerly manual processes. This can be achieved by replacing the paper-based processing of documents by electronic exchanges (machine-to-machine).

Advanced automatic machine-tomachine exchanges are just unfolding their technical and economic potential and may lead to new applications and services with profound impact on business and society. Such developments are related to what is called the “Future Internet”, comprising the “Internet of Things” and the “Internet of Services”. 8 Electronic exchanges require interoperability, i. e. the agreement between the participants on electronic standards and processes for data exchange. In a wide sense, standards are defined here as “technical specifications”.

Standards and standardisation remain a key issue in further sophistication of e-business. Definition of key terms for this study e-Commerce: the sale or purchase of goods or services, whether between businesses, households, individuals, governments, and other public or private organisations, conducted over computer-mediated networks. (OECD) Participants can be other companies (‘B2B’ – business-to-business), consumers (‘B2C’), or governments (‘B2G’). This includes processes during the pre-sale or pre-purchase phase, the sale or purchase phase, and the after-sale or purchase phase. -Business: automated business processes (both intra- and inter-firm) over computer mediated networks. (OECD). e-Business covers the full range of e-transactions as well as collaborative processes such as joint online design processes which are not directly transaction focused. e-Business and a company’s value chain Despite dating back 20 years to the pre-e-business era, Michael Porter’s framework of the company value chain and value system between companies remains useful when describing the opportunities of e-business. A value chain represents the main functional areas (“value activities”) of a company and differentiates between primary and support activities. These are “not a collection of independent activities but a system of interdependent activities” which are “related by linkages within the value chain”. 10 These linkages can lead to increased process efficiency and competitive advantage through optimisation and co-ordination. This is where ICT can have a major impact. The term value system expands this concept beyond the single company. The firm’s value chain is linked to the value chains of (upstream) suppliers and (downstream) buyers.

The resulting set of processes is referred to as the value system. All e-business processes occur within this value system. Key dimensions of the value system approach are reflected in the Supply Chain Management (SCM) concept. 11 This focuses on 8 See European Commission: Internet of Things – An action plan for Europe. COM(2009) 278 final. Brussels, 18. 6. 2009; and European Commission: Communication on future networks and the internet. COM(2008) 594 final, Brussels, 29. 09. 2008. See Porter, Michael E. (2004); original published in 1985. See Porter (2004), p. 48.

See SCOR Supply-Chain Council: Supply-Chain Operations Reference-model. 14 9 10 11 e-Business impact in the energy supply industry optimising the procurement-production-delivery processes, not only between a company and its direct suppliers and customers, but also in terms of a full vertical integration of the entire supply chain. Analysing the digital integration of supply chains in various industries has been an important theme in most sector studies by the SeBW. The importance of e-skills and company organisation The optimisation of value systems with ICT requires employees with particular skills.

ICT skills or “e-skills” comprise ICT practitioner skills, ICT user skills and e-business management skills. Furthermore, the successful use of ICT is not only a matter of implementing technology but also of adapting the company’s organisation to the specific needs of an electronic value chain. Organisational changes may for example relate to a rearrangement of strategies, functions, and departments. e-Business in times of economic crisis While e-business had regained momentum as a topic for enterprise strategy in recent years, the situation and outlook of ICT investment has become much less favourable with the economic crisis since mid-2008.

In its Information Technology Outlook, the OECD stated that in 2009 “ICT growth is likely to be below zero for the OECD, with considerable turbulence as the financial services sector restructures and the real economy experiences a deep economic downturn. ” (OECD, 2008, p. 15) However, the economic crisis does not affect all ICT in the same way. The OECD expects that “IT services and software will generally grow, along with new internet and communications-related products and infrastructure, as they are an essential part of spending, and partly recession-proof” (OECD, 2008, p. 5). The OECD also expects that growth of the ICT industry is unlikely to suffer the collapse that accompanied the bursting of the “new economy” bubble in 2001 (p. 23). Furthermore, the development of ICT investment differs by industry. Industries exposed to deep demand cuts, such as the automotive industry, may have to reduce their ICT investment, while industries with more stable demand, such as energy suppliers, may sustain their ICT investment. In any case, the evolutionary development of e-business has certainly not come to an end with the economic crisis. E”-elements have become an essential component of modern business, and trends such as “cloud computing” and “Web 2. 0” are likely to intensify this process. Increasing competitive pressure on companies, many of which operate in a global economy, has been a strong driver for ICT adoption. Companies use e-business mainly for three purposes: to reduce costs, to increase revenues and to improve customer service. In essence, all e-business projects in companies explicitly or implicitly address one or several of these objectives.

Recently, the use of ICT to save energy and reduce greenhouse gas emissions emerged as a specific issue of cost reduction, one with wide impacts for the economy and society as a whole. While cutting costs continues to be a key motivation for e-business activity, particularly in the current economic crisis, anticipatory firms exploit the innovation potential of ICT for key business objectives. They have integrated ICT in their production processes, quality management, marketing, logistics and customer services. These functions are considered crucial to improving the competitiveness of European economies.

Competing in mature markets requires not only optimised cost and excellent quality of products or services; it also requires effective communication and cooperation with business partners. Companies that exploit the innovative potential of ICT even in times of economic crisis could emerge from the crisis stronger and more competitive. 15 e-Business impact in the energy supply industry 1. 4 Study objectives and methodology Research objectives The study focuses on topics related to ICT and e-business along the energy supply chain. The focus is on the issue how ICT and e-business can contribute to an efficient supply and consumption of energy.

For each topic the study provides a problem-oriented analysis with a certain scheme including ICT use, drivers and barriers, impacts, and policy implications: ICT use: What types of ICT are available for supplying and consuming energy more effectively, and what is their development stage? What is their level of use between energy supplying and consuming companies? Drivers and barriers: What are the drivers and barriers of ICT use in energy supply? Major drivers may typically include cost savings and regulation, and barriers may typically be investment costs and dominant market positions of some players.

Impacts: What are the impacts of ICT on energy market effectiveness, structure, business models, competitiveness and sustainability? What are the impacts on the economy at large, e. g. in terms of energy supply and saving? Policy implications: What implications arise from the analysis of ICT in energy supply for decision makers in the European Commission, national governments and industry associations? The study investigates the extent to which ICT allows to better meet the three key objectives of modern energy policy: efficiency, environmental protection and security of supply. 12 The study deals with energy consumers, i. . with the demand side, which may be businesses or private households, from a supply side perspective. This means that consumers’ activities have only been examined to the extent that energy suppliers and consumers conclude specific agreements about energy provision and use. The study does not investigate the consumers’ side independently. The SeBW’s methodological framework builds upon the one established for the preceding e-Business [email protected] It has been adapted to the new focus of activity, progressing from monitoring “e-readiness” and “e-activity” to the evidence-based analysis of “e-impact”.

Data collection and analysis The study is based on a selected set of data sources and methodologies, including primary data collection, desk research and case studies. More specifically, information were collected from the following sources: Sectoral e-Business Watch Survey (2009): The energy supply sector is one of two sectors besides glass, cement and ceramic covered by the SeBW Survey. The SeBW Survey is the main source for analysing the state of play in ICT adoption, B2B process integration and automation in this Final Report.

Case studies: Five case studies describing the e-business strategy of companies from the sector have been conducted. They were selected to match the topics in focus, and 12 See for instance the third legislative package of the EU commission on energy markets (http://ec. europa. eu/energy/electricity/package_2007/index_en. htm). 16 e-Business impact in the energy supply industry with a view to achieve a balanced coverage of countries, business activities (sub-sectors) and company size-bands. Interviews: interviews have been conducted with firm representatives as part of the case study work.

In addition, further in-depth interviews with company representatives and industry experts, including the Advisory Board members, were held. Analytical statistical methods: Econometric methods were used to gain better evidence on the impact of ICT in reducing greenhouse gas emissions. This analysis, which is mainly presented in Chapter 4, focuses on links between ICT capital and GHG emissions. It is a macro-data analysis using the EU-KLEMS Growth and Productivity Accounts as well as Eurostat data. Sources of industry association: Annual reports and position papers of industry ssociations were used, notably from the following federations: The Union of the Electricity Industry, Eurelectric, (http://www. eurelectric. org); European Smart Metering Industry Group, Eurogas (www. eurogas. org), International Gas Union (www. igu. org), World Energy Council (www. worldenergy. org). Validation of results – the advisory board The study is being conducted in close consultation with an Advisory Board, consisting of the following experts (in alphabetical order): Mr. Bernard Aebischer, Centre for Energy Policy and Economics (CEPE), ETH Zurich.

Mr Maher Chebbo, SAP AG, Vice President of Utilities Industry for Europe, Chairman of the EU SmartGrids Demand and Metering. Mr. Iiro Rinta-Jouppi, Head of Development of Vattenfall Distribution Nordic Mr. Miguel Angel Sanchez Fornie, Chairman of the European utilities Telecommunications Council and Director of Control Systems and Telecommunications of Iberdrola. Mr. Thomas Theisen, Head R, RWE Energy. Two on-site meetings of the Advisory Board were held, in addition to informal exchanges with the members and to their contributions on specific sections of the study.

The first meeting was held on 20 May 2009 in Milan, to discuss the draft interim report and preliminary results of the survey. The second meeting took place on 24 September 2009 in Brussels. In this second meeting, the final survey results and a first draft of the final report, including the main findings and the implications for policy were discussed. 17 e-Business impact in the energy supply industry 2 2. 1 Context and background Sector definition – scope of the study Business activities covered The energy supply industry (ESI) as defined for this study is included in NACE Rev. Group 35 (in the following short: NACE 35), “electricity, gas, steam and air conditioning supply” (see Exhibit 2-1). Thus the study focuses on the value chain of the utility business, which includes production, transmission, distribution, and trading of energy as well as its supply to final consumers: Production of electricity and steam from any type of primary source – i. e. gas, coal, oil, wind, ocean and biomass as well as nuclear, hydro, solar and geothermal power – and any type of energy technology, including distributed generation. Transmission and distribution (T) of energy, i. e. he physical delivery of electricity and steam from the generation plant to the users, and in case of gas from extraction or storage fields and re-gasification terminals to the users. Trading, i. e. the wholesale of energy both on physical and future markets. The power or gas exchange operators (market operators) will not be included in the analysis. Energy supply to final consumers, which may be industrial, commercial, agricultural or residential. Exhibit 2-1: Business activities of the energy supply industry (NACE Rev. 2 and 1. 1) NACE Rev. 2 35 35. 1 35. 11 35. 12 35. 13 35. 14 35. 2 35. 21 35. 22 35. 23 35. 3 40. 3 NACE Rev. 1. 1 40 40. 40. 11 40. 12 40. 13 40. 13 40. 2 40. 21 40. 22 40. 22 Business activities Electricity, gas, steam and air conditioning supply Electric power generation, transmission and distribution Production of electricity Transmission of electricity Distribution of electricity Trade of electricity Manufacture of gas; distribution of gaseous fuels through mains Manufacture of gas Distribution of gaseous fuels through mains Trade of gas through mains Steam and air conditioning supply The study excludes the activities concerning extraction and processing of materials used for energy generation that are included in other NACE Divisions and Groups. 3 The energy supply industry has not yet been included in previous e-Business Watch studies. In 2007/8 SeBW conducted a study about ICT and energy consumption, i. e. about the other side, the demand side of the energy market. Study 3 of the SeBW 2008/9 deals with energy intensive industries and will thus be partly complementary to the study about the energy supply industry. 13 Extraction and processing includes the mining and quarrying of energy producing materials and the manufacture of coke, refined petroleum products and nuclear fuel. 18 e-Business impact in the energy supply industry

The supply chain of the energy supply industry The ESI value chain is illustrated in the following figure, which also highlights the scope of the present Study Report. Although delivery of gas through pipelines is not part of this study and it is not extensively analysed, a brief description of the relevance of ICT for pipelines is provided in Section 3. 7. Exhibit 2-2: ESI supply chain and scope of the study Upstream Wholesale Delivery Power Transmission Retail Electricity Power Generation Energy Trading and Wholesale Marketing Power Distribution Customer Service and Billing Gas Distribution Utilities Natural Gas

Gas Processing Oil & Gas Exploration and Production Oil Refining Gas Pipelines Oil Oil & Refined Products Pipelines NOTE: In the scope of the project out of scope Oil Source: IDC Energy Insights 2009 Power generation and wholesale Power generation include activities to produce electric energy from sources such as fossil fuels (coal, gas and oil), nuclear, hydroelectric, geothermal energy, wind energy, solar, ocean. This segment also includes the selling of energy at the wholesale level. Players may operate on a regional, national or global level to match the geographic scope of their processing facilities.

Business strategies rely on economies of scale, high volumes, cost/quality leadership, operations efficiency, R investments. Delivery: transmission and distribution Electricity networks comprise both transmission and distribution infrastructure. Transmission is focused on transporting and transforming electricity on the interconnected high- and extra-high-voltage grids, the distribution segment is focused on the local network of pipers and wires delivering electricity and natural gas from the transmission system to the end users, and includes electric and gas distribution companies.

Transmission and distribution are to be considered as distinct businesses. Critical success factors in transmission and distribution are operational excellence, asset management and business process efficiency. A more and more important technical challenge for the distribution operators is the emerging of “distributed generation” technologies and renewable energy sources. The increase of small and distributed generation units has a significant impact on the distribution networks both in technical and economical terms. 19 e-Business impact in the energy supply industry

It should be pointed out that in the market for electricity, transmission and distribution remain regulated activities, as the European Electricity Market Directive currently in force clearly states operational and legal separation (unbundling) of network activities from the competitive segments of the industry This means that businesses which generate power and supply gas are not allowed to control the electricity grid or pipeline networks and are forced to either sell transmission networks or lease them to new operators.

Exhibit 2-3: Electricity market in EU: liberalised and regulated activities Liberalised activities Regulated activities Source: Elaborated from Acta Polytechnica N. 3/ 2008, Czech Technical University Retail Retail activities focus on the marketing and selling of energy commodities and related services to customers. These may be energy intensive industrial users for whom energy is a significant percentage of the cost of goods sold. They are typically sophisticated energy users that not only need commodity energy but also have requirements for high power quality or other premium energy services.

Other large user’s market segments are large commercial and institutional end-users. The remaining market segment is the massmarket, consisting of small industrial and commercial and residential customers. In all segments, critical success factors include building customer loyalty and satisfaction, as well as and product leadership (for instance, green power). A broad range of ICT systems is available for supporting ESI companies in their supply chain activities. A synopsis of these systems and the link with the various supply chain activities is provided in Exhibit 3-2. 0 e-Business impact in the energy supply industry 2. 2 Industry background Overview of industry background The EU-27 ESI is an economically important sector, providing employment to over 1. 2 million people and generating a turnover of approximately 885 billion Euros in 2006. This industry comprises over 31 thousands firms representing 0. 1% of the total number of enterprises in the non-financial business economy. Exhibit 2-4: Profile of ESI in EU27, 2006 Number of firms ESI EU-27 31,378 Employment 1,227,400 Value added (billion Euros) 180 Turnover (billion Euros) 885

Source: Eurostat, Energy sector in Europe (SBS) 2009 Number of firms and employment Historically, ESI has been a restricted sector operated by state monopolies in

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