Digital adoption has triggered qualitative changes for a green economy and renewable energy transition. However, for a transformation to happen, policymakers need to strategically address new business models that embrace the development and deployment of digital technologies for data generation, storage, transmission and analysis.
The COVID-19 crisis and planned recovery measures to “build back better” have highlighted the important role that digital technologies can play in increasing the resilience of our economies and societies. Digital technologies also have the potential to help address many of the root causes of current interconnected global crises, including climate change, pollution and biodiversity loss.
One of the most common ways that digital technology can help increase sustainability in different sectors is by introducing traceability, flexibility and predictability through a “smartening” process. An example is the use of “smart” demand systems to address the intermittency of renewable energy generation and the associated complexity of matching supply and demand in the grid, with storage technologies as the fundamental solution. Further discussion is needed as to how those quantitative changes could lead to a qualitative change in the broad market context for reshaping the economy structure from “grey to green”.
New market mechanisms for an economy powered by renewable energy
The development of renewable energy technologies has been driving transitions away from fossil fuels in sectors such as transport, buildings, telecommunications and manufacturing. Initial government support has incentivized the deployment of renewable energy equipment and created a market for renewables sheltered from the competition of fossil fuels. Over time, however, in order to achieve structural change in the energy sector – the key to decarbonizing the whole economy – the market needs new business models that do not rely on subsidies.
The new business models hinge on a new system of power generation, storage and utilization of freely available renewable fuel inputs that are decentralized and intermittent. In the fossil fuel era, electricity is provided by a small number of large utilities in a centralized manner, in which power flows from the center to the grid edge. In contrast, the production and consumption of electricity generated from solar and wind have a distributed and bottom-up structure. This is characterized by energy production facilities’ proximity to the site of energy consumption and a multi-actor set-up in which large utilities interact with mini-utilities and self-producing consumers, known as “prosumers”.
This contrast reveals the difference between a vertical market (fossil fuels) and an emerging two-sided market with zero marginal cost (renewables). As a result, market players can move from old competition hierarchies to new dynamic partnerships.
Digital technology as enabler for new market mechanisms
Behind this rising new business model is the development and deployment of digital technologies for data generation, storage, transmission and analysis. In this emerging two-sided market, “servicification” and “platformization” are the main components of the market mechanism for adopting renewable energy in economic sectors and for creating values to providers and users. For instance, instead of relying on increasing energy consumption, utilities and governments are exploring how to maximize participation of all players, new modes of revenue through energy efficiency management and users gain from energy saving. In this context, one-off transaction gets replaced by a continuous flow of services, and one-way distribution is replaced by the coordinated participation of producers and users who effectively form a sharing network.
Through sensors and IoTs, electricity production and consumption data can be recorded in real time. Through data transmission and on-the-edge processing such as cloud computing, multi-actor set-up of renewable energy utilities and prosumers are connected to each other and integrated to form a virtual power factory. Through data storage, computing power of data centres and artificial intelligence, electricity production, storage and consumption are smartened for an efficient and resilient energy grid, producing stable supply for users. This data flow serves as infrastructure for successful performance of a two-sided renewable energy market that automates the transactions of goods and services through platforms. Large and small users connected to the transmission and distribution networks are encouraged to buy and sell the energy at their connection points in response to price and their own preferences.
Similar trends can be found in other key climate sectors – transport (mobility as a service), real estate (smart buildings) and manufacturing (sharing factories), for example, with a growing horizontal convergence across sectors, not only for renewable energy adoption but also for efficient use of resources and energy, prevention of waste generation and effective waste management.
An inclusive digital green economy
The digital economy is booming. Does this automatically lead to an inclusive digital green economy? The answer is no. There are many concerns that must be addressed, including the carbon footprint of the ICT sector, e-waste, the role that e-commerce plays in driving increased consumption, privacy, cyberattacks, the unequal access to digital infrastructure, and the danger of developing countries being locked into the role of a raw data provider at the lower end of the data value chain.
Part of the problem stems from the fact that the digital economy did not develop out of sustainability concerns. Its origins are in the business-as-usual way of thinking and the cyber world reflects the physical world from which it grew. In its initial business application, the internet was primarily considered as an efficiency tool to speed up transactions, by overcoming barriers of time and distance.
In hindsight, there are at least two systematic issues to address from an inclusive digital green economy perspective:
1. A DIGITAL ECOSYSTEM HAS A SELF-ENHANCING FUNCTION THROUGH A DATA FEEDBACK LOOP.
The “recommendation algorithms”, or tailored services supported by machine learning, are based on data collected on users’ behaviour and they get improved through continuous data feedback via user interactions, thus enhancing what has already existed in the physical world. This means our fossil fuel-based economic framework can also get enhanced through the digital economy. Packaging waste and carbon emissions associated with delivery platforms correspond to a typical problem in the physical world – efficiency and cost reduction served as primary incentives without counting the environmental impact.
To break this reinforcing loop, it needs to start with a strategy of integrated networks of sustainable infrastructure to change the fossil fuel root of the social economy. Data network built on a sustainable ICT sector is one category of the infrastructure, serving as an input for the networking strategy of other infrastructure. On top of those networks, the future needs to move towards cross-sectoral scenarios such as renewable energy platforms with energy generation, use and storage by smart building and electric vehicles as additional dimensions. This integration approach as underpinned by servicification and platformization could create new job opportunities and revenue models, effectively connecting multiple market players through a dynamic partnership. The policy challenge is that there is no ready-made or one-fits-all formula for the integrated networks of sustainable infrastructure and thus have to be shaped up in a tailored and iterative manner.
2. DATA AS AN INFRASTRUCTURE HAS BEEN COLLECTED AND MONETIZED ONLY BY A HANDFUL PLATFORM COMPANIES.
Digital economy features “monetization” of exponential growth of data in the globe by only a few platform companies and countries – through transforming data into intelligence, for instance, for advertisement, producing tailed goods or services, or making up transactions, platform owners profit. This is often followed by continuous investment into infrastructure such as sensors, data centres, computing powers, artificial intelligence and other strategic measures to increase market concentration over time and to make it more difficult for newcomers to enter. On the other hand, many other countries and participants of the digital economy being data suppliers risk being locked into lower levels of the data value chains. Policymakers have called for alternatives to break this circle of the “data trap”.
To make a change, national investment into digital infrastructure is a necessity. This includes sustainable ICT technologies to improve connectiveness and facilitating data flow as an infrastructure for other infrastructure. Investment into data processing and analysis education and capacity of the population is also heavily needed for the green transition.
More importantly, the integration of data network and the network of renewable energy can provide some enlightenment to address the conflicting nature of data as private property and as public good, and to break the data trap of the current digital economy. One feature of distributed and bottom-up renewable energy network requires a good level of local energy management in order to handle the interaction between large utilities and local mini-utilities in a flexible and resilient way. The local community, therefore, needs to be empowered in order to be able to take control over the associated energy data or to claim rights over the local energy data as collective data.
A renewable energy network can provide a data monetization method by connecting the value of data with energy saving through data-driven smart energy management, thus allowing the value of data to be captured by the raw data provider.
By Yaxuan Chen, Senior Consultant, Economic and Trade Policy Unit Economy Division, United Nationls Environment Programme (UNEP)
