Company Trend Analysis - Energy Internet Poses Regulatory Challenges - JAN 2018

BMI View: The transformation of the electric utility model and growing use of Artificial Intelligence, Big Data and the Internet of Things pose major challenges for policymakers and regulators in the European electricity sector. Policymakers will increasingly have to grapple with issues such as data protection, cybersecurity and regulatory obsolescence, as the electricity industry and the telecoms sectors converge and the smart grid plays a bigger role in everyday life .

The European energy industry is undergoing a transformation that will change business models and infrastructure in line with the growing penetration of distributed electricity generation, the Internet of Things (IoT), Artificial Intelligence (AI), Big Data, Fintech, Blockchain and e-mobility ( see 'Market Disruption: Big Firms Fight Back Through Services', January 26).

As a consequence, we expect the 'energy internet' to become a much bigger regulatory issue over the next decade and beyond. We emphasise, however, that regulating the large number of fast-moving and diverse technological developments across the energy sector is going to be a huge challenge. Establishing the correct protocols and putting in place cyber-security and data management processes will be difficult in a sector that has traditionally worried about infrastructure, assets and commodities. The regulatory process is also likely to be drawn-out and complicated by the convergence of the energy sector and the telecoms sector - blurring the lines with regards to jurisdiction of different regulators.

Energy Regulators Gradually Waking Up To The Benefits Of Industry 4.0

Thus far, the energy industry itself and European regulators have been slow to adapt to the impact of these technologies on commercial entities, as well as household and business consumers. At the time of writing, the actions of pan-European policymakers have been limited to a growing awareness that these technologies can help the EU cut greenhouse gas emissions, boost renewable energy penetration and achieve energy security at an acceptable cost to consumers. The European Commission has, for example, published its Third State of the Energy Union report.

The report, published in November 2017, gives an update on the EU's progress in establishing a single energy market that will allow for the free flow of electricity across the EU - in order to help all members attain secure 'sustainable, competitive and affordable energy for every European'. Notably, it focused on the idea that the European energy transition will be impossible without adapting infrastructure to the needs of the future energy system. The report acknowledged that energy, transport and telecommunications infrastructure are increasingly interlinked and European citizens will increasingly switch to electro-mobility, decentralised energy production and demand response - all areas that fall under Industry 4.0. Miguel Arias Canete, Commissioner for Climate Action and Energy, said that there must be a bigger focus on interconnections and smart grid projects.

Areas Of Focus; Challenges To Overcome

This highlights that policymakers are starting to think about Industry 4.0 and its impact on the energy sector. Below, we have identified some of the issues and subjects that the EU and national policymakers will have to take into consideration when drawing up their long-term energy roadmaps and regulations.

We highlight:

  • Regulatory Obsolescence: The current absence of regulation of IoT, AI and Blockchain in the energy sector at European level is unsurprising, as regulators are in many ways playing catch-up as rapid technological advancements change the shape of the industry at different speeds across various countries in the EU. As a consequence, some of the most prominent regulations relating to the energy industry and Industry 4.0 have occurred at a national level; although here we emphasise that there are signs that technological developments are already overtaking the regulatory process. Markets such as Italy and Germany are, for example, leading the way on basic regulations around things like smart meter rollout - with Germany signing into law the Digitisation of the Energy Turnaround Act in September 2016. There are, however, concerns that regulation of smart meters may prove to be out-of-date before they have been implemented because they have not taken into account things like Blockchain technology.

  • Cyber Security: We also highlight that issues relating to cyber-security are taking on added significance as IoT and Big Data move into the mainstream and play a bigger role in the energy sector. Many IoT functions, for example, run on interconnected sensors that are built at a low cost and do not prioritise security. In an IoT network, overall security is only as good as the weakest link in the chain. Grid networks and power plants are viewed as strategically important 'critical' infrastructure - meaning more regulation around things like IoT and sensors is likely to be needed.

  • Data Privacy: The General Data Protection Regulation (GDPR) will come into effect in May 2018 and is designed to harmonize all data privacy laws across Europe and protect the data privacy of all EU citizens. It will have a major impact on any company handling personal data within the EU - and increasingly impact energy companies as household energy services become a core component of their revenue streams. This is because of its broad definition of personal data as anything that can identify an individual, and because it is a regulation as opposed to a directive (meaning it is immediately applicable and enforceable in each member state). If private customer data is misused, fines of up to EUR20mn or 4% of an organisation's revenue can be enforced. This is something that energy services providers will have to take into account, as it will govern data usage relating to home energy services providers, metering and billing, consumers that produce their own electricity (known as prosumers), smart grids, electric vehicles and energy research initiatives that involve the use of consumer data. Regulators in the energy space will have to take this into account ( see 'GDPR: Key Challenges And Impact On Industries', January 6 2017).