Journal of Cleaner Production 126 (2016) 572e585

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Journal of Cleaner Production

journal homepage: www.elsevier.com/locate/jclepro

Business models as drivers of the low carbon power system transition:

a multi-level perspective
Martin E. Wainstein a, *, Adam G. Bumpus b, c
a
AustralianeGerman Climate & Energy College, School of Earth Sciences, The University of Melbourne, Australia
b
School of Geography, Faculty of Science, The University of Melbourne, Australia
c
Bill Lane Center for the American West, Stanford University, USA

a r t i c l e i n f o a b s t r a c t

Article history: Decarbonising the electrical power system holds a critical role in climate change mitigation. Recent
Received 14 October 2015 developments in technology are helping change the current centralized paradigm into one of integrated
Received in revised form distributed clean energy resources. In spite of these developments, radical transformation is not
19 February 2016
occurring at a speed to effectively meet environmental targets, mostly due to the incumbent carbon lock-
Accepted 21 February 2016
Available online 2 March 2016
in trajectory. We argue that business model (BM) innovation dynamics are key drivers in accelerating the
low carbon power system transition, often operating irrespective of the underlying technology. We
combine BM theory with the multi-level perspective on sociotechnical transitions to present a useful
Keywords:
Business models
framework to analyze this potential transition. This paper presents the application of this framework
Multi-level perspective characterizing relevant BM dynamics of niche and regime business actors, and supporting these with
Electricity system transition illustrative examples. Particularly, we find that new actors in the distributed energy business are
Disruptive innovations achieving market scale by offering financially innovative BMs that do not require upfront costs from
Low carbon transition theory customers. Higher penetrations of renewable energy sources in liberalized electricity markets are
destabilizing the historical BM of large centralized utilities through erosion of wholesale prices.
Furthermore, a shift towards distributed and dynamic energy resources further challenges incumbents
and might bring opportunities for BMs focused on active customer participation and social value crea-
tion. As these tendencies are expected to accelerate, we find analyses of BMs will have important rele-
vance for future power system transition research.
© 2016 Elsevier Ltd. All rights reserved.

1. Introduction shift is not occurring at the speed required: wide scale renewable
energy technologies and carbon-saving innovations have faced sig-
The electrical power system holds a central role in meeting nificant resistance when attempting system-wide diffusion (Bumpus
emission targets for climate change mitigation. In order to keep et al., 2014; Geels, 2014). Resistance comes from a complex structure
global mean temperature rise within 1.5e2
C relative to pre- of actors mostly centered around fossil fuel incumbent firms that
industrial levels, as recommended by the IPCC and restated in the have been locked into sustaining carbon intensive business models
2015 UNFCCC Paris Agreement (IPCC, 2013; UNFCCC, 2015), feasible (BMs) (Dangerman and Schellnhuber, 2013; Unruh, 2000).
energy transformation pathways e developed with Integrative Recent increases in electricity prices, reduction in renewable
Assessment Models e require significant reduction in energy in- technology manufacturing costs, and government clean energy in-
tensity (i.e. efficiency), a radical electrification of the energy system, centives, are, however, producing opportunities for cleantech en-
and a fast decarbonisation of the electricity sector (Kriegler et al., trepreneurs and new BMs (Frankel et al., 2014; Huijben and Verbong,
2014; Rogelj et al., 2015). But considering that electricity corre- 2013). The result is yielding increased incorporation of distributed
sponds to just 18% of total energy consumption, and 67% of its pri- energy resources (DER) such as photovoltaics, smart meters, sta-
mary source is fossil based (IEA, 2014), this scenario requires a tionary batteries and electric vehicles. DERs are helping change the
challenging technological and systemic revolution in this sector. This essential paradigm in the electricity sector of industrialized nations,
evolving from a traditional value chain to a more complex partici-
patory network (Klose et al., 2010). This tendency is expected to
* Corresponding author. further accelerate in coming years (Frei, 2008; Schleicher-Tappeser,
E-mail address: [email protected] (M.E. Wainstein). 2012). Furthermore, since conventional utility BMs were not

http://dx.doi.org/10.1016/j.jclepro.2016.02.095
0959-6526/© 2016 Elsevier Ltd. All rights reserved.
 M.E. Wainstein, A.G. Bumpus / Journal of Cleaner Production 126 (2016) 572e585 573

designed to tap the most value from distributed renewable genera- theory and the multilevel perspective together (Boons and Lüdeke-
tion, they are a current locus of destabilization and thus experi- Freund, 2013; Geels, 2011). Then we undertake a qualitative anal-
mentation, innovation and emerging opportunities (eLAB, 2013; ysis of three examples of how this theoretical development is
Richter, 2012; Schoettl and Lehmann-Ortega, 2011b). played out in reality. Given the complexity of energy systems and
The dynamics in the transition between old and new power the emerging nature of DERs, these are not representative case
system BMs involves tensions between incumbent and new busi- studies, but rather illustrative examples to highlight the principles
ness actors, a centralized versus a distributed technological para- put forward in the paper (Suddaby, 2006). These examples were
digm, and a societal shift from a passive to an active user role in its chosen based on the criteria that the jurisdictions (Germany and
value chain. Some industrialized nations with an ongoing energy California) they exist in are leading examples of how energy sys-
transition are showing early signs worth noting. Large incumbent tems are evolving, and where new BMs for energy are being tested
utilities are forced to reconfigure their BM (Jeevan Vasagar, 2015; (Bumpus et al., 2014). As a result, they are not intended to elucidate
Richter, 2013a) whilst new distributed energy corporations are a general pattern but instead describe how BMs and the MLP are
achieving financial scale with competitive BMs (Biello, 2014; Hess, interconnected through three specific dynamics of energy transi-
2013). In parallel, modern markets are hosting BMs with increased tion (cf. Halinen and To €rnroos, 2005). We undertook a compre-
customer participation, both through collective value creation hensive analysis of multiple online resources (e.g. industry reports
through peer-to-peer (P2P) platforms (Andersson et al., 2013; Belk, and news platforms, company's websites, reports and press re-
2014), and through socially active initiatives such as grassroots leases) specifically related to the illustrative examples chosen. We
innovations and for-benefit firms (Hess, 2013; Seyfang et al., 2014). applied an etic1 coding system to the data, highlighted key themes
Collectively, these dynamics may present windows of opportunities for analysis based on the 9-point BM deconstruction and MLP
to destabilize the rigid foundations of the current carbon lock-in components, and evaluated the illustrative examples against our
and accelerate the inertia towards a low carbon power system. theoretical proposition.
This paper discusses the relevance of these systemic signals by
considering BMs as a critical unit of analysis, and provides specific
2.2. Actor dynamics in the energy transition lock-in: a multi level
illustrative examples for a qualitative characterization of these
perspective
emerging tendencies.
This article adopts a sociotechnical framework for its analysis. It
The MLP has been a popular framework to understand how
recognizes the transformation required in the power sector does
major sociotechnical shifts occur, and how they can be influenced
not only involve a change in technology, but also a system level shift
towards a sustainable pathway (Geels, 2012). It argues these
in elements such as user practices, regulations, industrial networks,
changes occur through dynamic and non-linear interactions be-
markets and infrastructure (Geels, 2002; Verbong and Geels, 2010).
tween: niches, sociotechnical regimes (a structure of practices and
Specifically, the multi-level perspective (MLP) on sociotechnical
rules formed by multiple actors such as industry, policy, culture and
transitions has been a useful approach to understand the changes
science), and the sociotechnical landscape (the wider context of
and tensions at different societal levels, including those between
societal changes) (Geels, 2002; Kemp et al., 1998) (See Fig. 1a).
new and incumbent actors and innovations, which give rise to new
Niches are described as protected pockets where experimenta-
technological systems (Grin et al., 2010). However, the specific role
tion occurs, yielding innovations that become the seeds for socio-
BMs have on these interactions has largely been left out of the
technical transitions. The system in to which those niche-
literature (Geels, 2011). This is surprising given BMs are ‘value
innovations are inserted e known as the sociotechnical regime e
creation engines’ (Zott et al., 2011), devices for competitive
is, however, characterized by resilience and lock-in based on spe-
advantage, both for incumbents ensuring their locked-in trajectory,
cific technological, social and cultural systems. This system, there-
and for new actors commercializing new technologies in novel
fore, poses resistance to innovations attempting to diffuse into a
ways. We highlight here how BMs, rather than commercialized
wider societal context (Geels, 2004). A technological transition,
technology per se, can become disruptive niche innovations.
then, implies a radical reconfiguration of a sociotechnical regime
We perform an analysis combining BM theory and the MLP to
through the incorporation of certain niche-innovations. These
better understand critical business dynamics in the current land-
shifts often depend on the pressure that the sociotechnical land-
scape of modern power systems. We illustrate our observations by
scape can put on the regime in order to destabilize and open it for
focusing on BM dynamics in illustrative examples of niche and
change. The sociotechnical landscape has least flexibility given its
regime business actors. With this work, we seek to address whether
material character (e.g. spatial arrangement of cities and in-
BM tensions and innovative BM initiatives are acting as disruptive
frastructures) and long established practices such as financial
forces on the barriers of the low carbon transition. We also intend
markets and geopolitics. However, it can suffer shocks that provide
to contribute to an emerging literature linking BM and socio-
windows of opportunities for reconfigurations in the niche-regime
technical transitions (Bidmon and Knab, 2014; Huijben and
dynamics. Fig. 1a shows a representation of the nested hierarchy
Verbong, 2013; Loorbach and Wijsman, 2013; Tongur and
nature of these three societal levels (Geels, 2002).
Engwall, 2014). The paper is structured as follows: Section 2 pro-
The MLP framework has been particularly useful to help un-
vides the background literature, theoretical framework and rele-
derstand energy transition dynamics (Elzen et al., 2002; Verbong
vance, Section 3 presents a characterization of tendencies in the
and Geels, 2007, 2010). Many of the alignments causing the fossil
power system transition using the BM and MLP framework, Section
fuel or carbon lock-in are the same, or similar, to those addressed in
4 provides the illustrative examples to further elaborate on these
the general concept of a sociotechnical regime. A technological
tendencies, and Section 5 concludes and discusses further research.
trajectory escalates into synergic mutual dependencies among the
technological system, the firms involved, the industrial complex,
2. Background & approach

2.1. Methodological approach 1

Etic codes can provide a fine resolution in categorizing events, and draw out the
‘dimensions’ to a given statement, allowing the meaning of each to be compared
We undertake a qualitative analysis to answer our research against apparently similar ones to pick out the more subtle differences (Crang,
questions. Firstly we review the literature to bring business model 2005).
574 M.E. Wainstein, A.G. Bumpus / Journal of Cleaner Production 126 (2016) 572e585

Fig. 1. a. Nested hierarchy of the three societal levels in the Multi Level Perspective. Adapted from Geels (2002). b. Osterwalder 9-point decomposition of the Business Model.
Adapted from Osterwalder (2005). c. Business Models in the Multi-Level Perspective. BM as critical drivers of sociotechnical transitions acting as market vehicles for niche and
regime actors. Author illustration based on sources for Fig. 1a and b.

professional associations, government and policy makers rein- adoptions (Geels, 2014). Given the importance of activities of niche
forcing the initial technological trajectory (Geels, 2005). The actors (especially companies) in disrupting the regime, we intro-
particular rigidity of the current energy regime is subsequently duce BMs as key loci of focus to further characterize these multi-
intensified due to its extensive scale and central role in today's level interactions in the context of the energy transition.
society (Urry, 2014). Unruh (2000) has described this regime as a
‘Techno-Institutional Complex’ with its growth and resilience 2.3. Business model theory
explained by perpetual returns to scale. Geels (2014) illustrates
how firms employ ‘corporate political strategies’ to influence and Although BMs have been integral to trading and economic ac-
lobby government to then collectively apply forms of power fa- tivity since the outset of business, only relatively recently have they
voring incumbent actors and resisting change. Dangerman and been considered as an emerging unit of analysis and thus object of
Schellnhuber (2013) identify the limited shareholder liability in scholarly studies (Chesbrough and Rosenbloom, 2002). The exact
energy and finance corporations as being the critical firm-level definition of a BM is still fragmented within the academic literature,
factor behind this rigid trajectory. They argue that the absence of with some theoretical framework developments from eBusiness,
shareholder liability in firms blocks feedback from the environ- strategy and innovation research (Zott et al., 2011). More recently,
mental system (i.e. affected by climate change), making the con- however, a growing body of articles incorporate BMs into sustain-
ventional system less likely to adopt an alternative path. ability studies and processes (Boons and Lüdeke-Freund, 2013;
Arguably, the MLP and carbon lock-in literature exposes the Boons et al., 2013).
central role that the private sector has in sustaining the current In spite of this fragmented state, a logical definition of the BM is
energy regime. In fact, its resilient trajectory can be interpreted as a to describe it as a “market device” that outlines the rationale of how
lock-in at the BM level, where corporations ensure shareholder an organization creates, delivers and captures value (Osterwalder
profit by maintaining economies of scale of the fossil fuel complex and Pigneur, 2010; Zott and Amit, 2010). As opposed to a busi-
and apply multiple strategies to minimize market risk (Dangerman ness strategy, which is a set of dynamic activities centered on the
and Schellnhuber, 2013). competitive environment, the BM is a static design of the config-
The incumbent energy regime is challenged by niche- uration of elements and activity characteristics tailored to maxi-
innovations, represented by clean energy technologies and en- mize an opportunity with organizational effectiveness (George and
ergy saving practices. But from a market perspective, these in- Bock, 2011). As a model with heuristic logic, its overarching ele-
novations require BMs that can effectively commercialize them, ments can be broken down into: i) the value proposition, describing
drive their objective value and compete with the incumbent sys- what is the value in the product or service offered by a firm; ii) the
tem. The sociotechnical landscape can exert pressure on the regime value creation, explaining how value is actually developed and
allowing diffusion of these innovations and the rise of new delivered by the firm; and iii) the value capture, which relates to the
corporate actors. Oil price volatility2 and an international move- financial system employed to turn that value into economic profit
ment to address climate change and energy security, are some (Baden-Fuller and Morgan, 2010; Chesbrough and Rosenbloom,
examples of such pressures shifting market conditions (Shackley 2002; Osterwalder, 2004).
and Green, 2007). As a result, niche-regime dynamics are mostly A higher resolution map of the BM is particularly useful for
analyzed around opposing technologies, business actors with empirical analysis. Osterwalder 9-point decomposition of the BM
competing interests, and rules and practices favoring certain provides greater clarity of the components involved in the value
creation process (Osterwalder et al., 2005). This framework is useful
because companies actually engage in boundary-spanning activ-
ities, and operate within complex partnership networks in both
2
We do not undertake an analysis of oil price volatility here, but follow two upstream and downstream supply-chain processes (Osterwalder
assumptions: one, that ultimately oil price will rise and/or become volatile enough
that it is economically disadvantaged as a stable source of energy, and two, that
and Pigneur, 2010). Fig. 1b shows an adaptation of the 9-point BM
policy movements to reduce emissions from fossil fuel use will be the norm (cf. components, which includes a visual clarification of how the three
Murray and King, 2012). elements of value proposition, value creation and value capture, as
 M.E. Wainstein, A.G. Bumpus / Journal of Cleaner Production 126 (2016) 572e585 575

well as the upstream and downstream processes, encompass and to respond, create and capture value through innovation, are
connect the different 9 components. therefore an essential framework to understand the firm-level
BMs provide a vehicle for technologies and innovations to insert dynamics of the current fossil fuel lock-in, as well as the business
in the market and successfully unlock their value (Chesbrough and aspects that can lead technological innovations towards a new lock-
Rosenbloom, 2002). Yet since Christensen's original theory of in (Bumpus et al., 2014; Zerriffi, 2007). Third, the BM is an essential
disruptive innovations (1997), which focused mostly on technol- locus of meaningful innovations in relation to the low carbon
ogy, BM innovation has been increasingly recognized as a major transition (Chesbrough, 2007; Loorbach and Wijsman, 2013).
source of market disruption, irrespective of the underlying product Perhaps the two most relevant streams are those that present a
(Chesbrough, 2010; Teece, 2010). In essence, an innovative BM re- reconfiguration of social processes and those that incorporate sus-
defines the relationship between a product and the customer by tainability as essential business components. The extent and nature
fundamentally shifting the value proposition of the existing busi- of the social ties of a firm with external parties (i.e. other firms,
ness. As such, BM innovation often enlarges the market by institutions, government, customers etc.), is a critical component of
attracting new customers that find the new value proposition more the value creation process. A reformulation of this external actor
appealing (Markides, 2006). Incumbent BMs often struggle to network, can lead to paradigm shifts along with increased
incorporate this form of innovation since it involves a reconfigu- competitive advantage. Product-Service Systems, for example,
ration of the conventional value creation process (Charitou and introduce a change in the relationship of a firm with its customer,
Markides, 2012; Christensen and Raynor, 2003). from a one-time sale of a product to a continuous service provision
Larger societal processes can also influence innovative reconfi- (Ceschin, 2013). These systems also redefine needs for technology
gurations of the BM. For example, the global financial crisis in 2008 ownership as well as introduce alternative financial schemes
acted as a landscape shock affecting consumer's buying power. (Gelbmann and Hammerl, 2014; Tongur and Engwall, 2014). On the
Unintentionally, this fostered an increase of two forms of BM other hand, BMs with higher collaboration and participation of
innovation. On one hand, it shifted the conventional American actors in their value chain can be commercially beneficial whilst
consumption and ownership paradigm, accelerating the now called produce a decentralization of processes with higher resilience
“sharing,” P2P or “collaborative economy” (Belk, 2014). This societal (Miles et al., 2006). P2P Internet platforms are good examples of
process has already produced disruptive firms that, through inno- how conventional customers becomes active participants, both by
vative BMs, reimagined the value chain of stagnant businesses such introducing their own resources to the market place, as well as in
as hoteling or taxi services. P2P Internet platforms are now growing engaging in commercial activities (Belk, 2014). Processes of joint
as the stage for alternative commerce, where consumers and their value creation between a network of actors are also meaningful to
idle resources become the essential component of the value crea- accelerate the maturity of innovations, as in the case of collabora-
tion process (Andersson et al., 2013). On the other hand, along with tive entrepreneurship or open innovations, where innovative ideas
public corporate scandals, the financial crisis exposed shortcom- come from multiple sources outside the firm's boundaries
ings of the conventional for-profit BM to many consumers (Mickels, (Chesbrough and Appleyard, 2007; Ribeiro-Soriano and Urbano,
2009). Particularly in the U.S., this increased the demand for 2009).
alternative ethical BMs, leading to a growing legislation of the BM innovation can also provide improved sustainability perfor-
‘benefit corporation’ (and other similar legal variations) as legal mance to both a firm and its specific technology (Lovins et al., 1999).
corporate entities (Esposito, 2012; Murray, 2012). If sustainability is considered in the value proposition, creation and
These tendencies, by example, draw further attention to BM capture processes, then BMs can be sustainable innovations
theory as a way to understand structural disruption and its link themselves (Boons et al., 2013; Keskin et al., 2013). A critical
with larger societal processes. This paper combines Osterwalder's requirement for a sustainable BM is a clear recognition of the
9-point decomposition of the BM, as a heuristic system map, with environment and society as extended stakeholders of the firm's
the MLP on sociotechnical transitions, another heuristic map of the activities, embedding a triple bottom line (society, environment
overarching dynamic environment in which companies and in- and economy) to ensure this is met in the business mechanisms,
novations operate. We outline next why this is vital in under- which can fall in a range of archetypes, and their effective outcomes
standing the low carbon transition within the power sector. (Bocken et al., 2014). Finally a more radical approach to sustainable
BM innovation is seen in market-based approaches for social value
2.4. Business models and the low carbon transition creation addressing a specific social problem. Here, BMs become
the tool employed in social innovation to achieve a social agenda in
Given that low carbon energy solutions are generally provided the most effective way. Establishing a clear definition and typology
by private sector companies aiming to derive (and drive) value from of social businesses and how they fit within social innovation is still
the market, BMs are, therefore, an essential analytical component an outstanding issue within academic literature (Dees, 2003;
of understanding the low carbon socio-technical transition Weerawardena and Mort, 2006; Wilson and Post, 2013; Yunus
(Bidmon and Knab, 2014). et al., 2010). A general description is a business employed to
There are three main factors that make BM highly relevant in the address a social problem where the value created accrues more for
low carbon transition. First, BMs are market devices for innovations society as a whole rather than for private individual, as defined by
to have competitive advantage (Chesbrough and Rosenbloom, Phills et al. (2008). In the context of sustainability transitions, this
2002), to be widely adopted, and to become part of a socio- niche is especially significant since it challenges not only how
technical regime. In fact, two different BMs could insert a same business practices are done in the sociotechnical regime, but also
innovation into a market, targeting a same customer group, and on the fundamental value proposition for why firms exist within
have different results: one could make the innovation thrive, and society in the first place.
the other wither (Markides and Charitou, 2004; Morris et al., 2005). By considering BM theory in conjunction with the MLP, and the
Second, one of the potential sources of value creation attributed to a role of low carbon innovations, these relationships can be graphi-
BM is lock-in (Amit and Zott, 2001). Lock-in is the metaphor to cally depicted as shown in Fig. 1c. Low carbon technologies are
describe actors within a sociotechnical regime that gain from ultimately required to diffuse in mainstream markets, which are
perpetuating an existing technology at the expense of a new one, governed by the dynamics of the sociotechnical regime. But they
blocking incoming innovations (Evans, 2011). BMs, and their ability encounter a mismatch with the existing infrastructure, policy
576 M.E. Wainstein, A.G. Bumpus / Journal of Cleaner Production 126 (2016) 572e585

regulations, as well as the incumbents' fossil-based BMs, which As mentioned in the introduction, significant reductions in
employ political economic resistance to sustain their technological manufacturing costs and clean energy incentives have increased the
lock-in. However, the low carbon technology can have a competi- incorporation of distributed energy resources (DERs). These include
tive advantage if it uses a more innovative BM as a market device. photovoltaic panels (PV) but also smart metering devices; demand-
Arguably, a sustainable BM could unlock further sustainability side management devices, which include stationary batteries as well
value considering society and the environment as extended as smart appliances with dynamic loads, such as heat pumps and
stakeholder, or even radically challenge the conventional business thermostats; and, more recently, electric vehicles. Among other
practice through socially innovative business model where social features, DERs are considered valuable assets to successfully deploy
value accrues more than shareholder value. These are important demand response programs. These programs employ several
potential dynamics for the current power system in the context of schemes for consumers to adapt to system conditions by altering
low carbon innovations. consumption patterns. They are meaningful for the energy transi-
tion for at least two reasons (Strbac, 2008). First, along with large-
scale electricity storage, demand response programs are proposed
3. The ongoing power system transition
solutions to overcome supply-demand mismatch from renewable
variability by adapting withdrawal profiles to generation fluctua-
This section provides a background analysis on the systemic
tions. Second, the coordination of DER in such programs is shown to
changes occurring in the power sector, and then uses the frame-
markedly reduce peak demand events that can produce local
work established in the previous section to characterize the role BM
network constraints. Overall, they also provide better tools for cus-
dynamics are having in this ongoing process.
tomers to maximize the value of their distributed assets (Siano,
2014).
3.1. Changes in the power system paradigm Fig. 2 shows a heuristic representation of two generic ten-
dencies observed in developed electrical power systems: genera-
The electricity grid was designed as a unidirectional system that tion is increasingly shifted closer to consumption, and energy
delivers energy from centralized thermal power plants to cus- resources are deployed in a distributed manner, eventually
tomers through transmission and distribution lines. The liber- changing the strict one-way flow of electrons to a two-way dy-
alization of most electricity markets introduced competition of namic nature. These developments are significantly changing the
players along the supply chain with the aim to promote efficiency BM paradigm in the electricity sector. This has produced a tension
and drive costs down (Sioshansi, 2006). These markets generally between BMs that deploy DERs and maximize their value, currently
function with a central operator that receives available generation acting as an emerging niche, and the conventional utilities BM,
capacities and dispatches them in order to meet demand in a which lack the framework to tap the most value out of them and
reliable way. The dispatch is performed according to the generator's therefore resists this change (eLAB, 2013; Ipakchi and Albuyeh,
bidding price, from lowest to highest in a uniform clearing price 2009).
auction, and where the price of the last generator dispatched sets
the market wholesale price (i.e. the “spot” price). This system is 3.2. Characterization of business models in the power sector using a
called, among other names, the “Merit Order Dispatch” since it multi-level perspective
benefits the generators with the lowest bidding price, which tends
to be its marginal cost (see Fig. 5 of Section 4.3 for a conceptual Recent reviews on utilities' BM, with specific focus on renewable
illustration of the merit order dispatch). But, given electricity de- energies, have classified them into essentially two generic
mand fluctuates from day to day, within a day, and inter-seasonally, branches: utility-side BM, and customer-side BM (Richter, 2012;
and since generation must instantaneously match consumption, a Wüstenhagen and Boehnke, 2008). Whereas the utility-side BM is
common feature of liberal electricity markets is a highly volatile the classical bulk generation of electricity fed into the grid and sold
spot price. Unless they have pre-established contracts, generators as a regular commodity, the customer-side BM is a more compre-
revenues depend on wholesale prices, and on how these influence hensive energy solution service provider, with higher level of in-
future contract prices. Utilities with retail service normally procure teractions at the distribution edge of the network. The latter can be
energy at these wholesale prices, add transmission and distribution represented as an emerging niche, and is where most BM in-
costs, regulation costs, their own profit margins, and bundle this novations occur, mostly by non-utility actors seizing the window of
into a final flat retail price for consumers. opportunity. The left side of Fig. 3 shows a visual representation of
This standard electricity system faces challenges when it in- these generic BM relative to the power system supply-chain para-
corporates a high share of variable renewable generation sources digm and within an MLP context.
such as wind and solar, as opposed to non-variable sources (i.e. The landscape influence of pressing climate change escalated in
fossil, hydro, geothermal and biomass). On one hand, it affects international policy agendas, and lead governments to develop
controllability and reliability of supply and demand dynamics, environmental regulations promoting the incorporation of low
which can further increase the volatility of wholesale prices carbon technologies throughout electricity networks. These range
(Aghaei and Alizadeh, 2013). They can often supply energy to the from feed-in-tariffs, renewable portfolio standards, to several forms
market at moments where demand is low (i.e. decreasing prices) of subsidies and tax incentives. Business actors are the main drivers
and fail to supply when demand is high (i.e. increasing prices). On of these benefits, allotted along the entire cleantech value chain. A
the other hand, these sources present the need for several struc- sociotechnical study on distributed solar energy in the U.S.A., di-
tural changes considering they often have a more decentralized and vides actors as “localism” grass-root developments and “third-
distributed nature; feeding generation into low and medium party” for-profit companies; neither being conventional utility
voltage and increasing the number of low and medium capacity firms (Hess, 2013). This distinction is also useful to characterize
generators (i.e. 0e10 MW) (O'Connell et al., 2014). Furthermore, a actor groups in emerging customer-side BMs.
high share of renewable technology, having the lowest marginal While grass-root initiatives are increasingly popular, it's the
cost in the electricity market, ultimately drive wholesale prices third-party actors that have attracted large pools of capital and
down in a process called the “Merit-Order Effect” (McConnell et al., know-how from the technology and finance industry, and are
2013; Ray et al., 2010). proving to have the most market success thanks to innovative BMs
 M.E. Wainstein, A.G. Bumpus / Journal of Cleaner Production 126 (2016) 572e585 577

Fig. 2. Tendencies shifting the power system paradigm. Heuristic representation of two generic tendencies observed in developed electrical power systems. Own illustration based
on findings cited in Section 3.1.

(Hess, 2013). A prime example of this BM innovation is that of through product-service systems, such as with energy service
distributed solar Power Purchase Agreements (PPA) with third companies (ESCOs) that fund energy saving technology and
party financing. In a PPA, a household or commercial owner signs receive a percentage of the monetary savings (Ceschin, 2013).
a long term agreement to purchase solar energy at an agreed These are particularly useful to empower customers with valuable
competitive rate from a private firm, which subsequently installs assets for demand response programs (i.e. smart DERs) without
the PV systems at the customer's premise and maintains owner- making them face upfront capital costs (Geelen et al., 2013). Other
ship of the equipment throughout the term. Since customers are examples include the rapid reduction in the cost of stationary
not required to incur any upfront costs, this model has successfully batteries, and roll out of demand response schemes, which are
targeted the large U.S. middle-income customer segment previ- also producing a suite of innovative customer-side BMs (He et al.,
ously untapped (Salkin, 2012). These BM developments do not 2011). A prime example includes California-based Sunverge, which
only encompass the solar industry. Other innovative BM applied installs stationary batteries and aggregates them, along with other
by third party actors relate to financing DERs for households DER, into a Virtual Power Plants in order to more effectively trade

Fig. 3. Summary of Business Model (BM) dynamics in the electricity sector. “Niche-regime” developments between incumbent utilities and new actors, emerging mostly due to
opportunities in the distribution side of electricity. This combined figure shows, on the left, a description of the two main generic types of power system BM and, aligned to them on
the right, an MLP arrangement of the three ongoing BM dynamics discussed in the paper, where customer-centric ones have the highest potential for innovation but still form a
niche. Own heuristic illustration using references cited in Section 3 and adapting MLP graphical language.
578 M.E. Wainstein, A.G. Bumpus / Journal of Cleaner Production 126 (2016) 572e585

electricity on the grid and reduce peak demand events (John, In essence, these studies suggest that BM innovation in distri-
2014; Schneider, 2015). bution networks, which involve distributed generation among
On the other hand, an emerging body of literature analyzing the other services (with PV as its most iconic technology), are effec-
role of community energy as grassroots innovations, in the context tively driving an emerging niche in modern power systems irre-
of the sociotechnical energy transition, is not finding similar spective of the underlying technology. This is largely due to the
encouraging results for this specific niche (Hargreaves et al., 2013; prowess of new commercial actors seizing the most market value
Hess, 2013; Ornetzeder and Rohracher, 2013; Seyfang and from regulatory conditions and a change in value proposition,
Haxeltine, 2012; Seyfang et al., 2014). A common finding relates associated also with participation in grassroots and social-
to the internal and external challenges that grassroots de- networked BMs. Although still not a disruptive niche, given a lack
velopments have when trying to survive in the conventional mar- of commercial and financial power, these grassroots and social-
ket, with growth and replication towards wider adoption networked BMs might be critical to shifts in customer participa-
remaining as an even harder challenge. A recent study of commu- tion. The incumbent utility-side BM, an element of the socio-
nity energy projects in the UK applies ‘Strategic Niche Manage- technical regime level, is already showing signs of destabilization
ment’ theory to evaluate their extent as a truly potential niche with some actors undergoing initial reconfigurations. The right side
(Seyfang et al., 2014). Their findings observe that these initiatives of Fig. 3 summarizes these main findings.
lack commercial power. Although normally equipped with signifi- Based on these assumptions, we perform qualitative analyses of
cant human capital, consolidating financial capital in order to scale selected examples of BM and particular firms that best represent
and successfully compete against other corporate players is hardly a these three observations. We apply both BM and MLP framework to
trait of grassroots developments. Nevertheless, grassroots initia- understand the main components that are factors of disruption and
tives are relevant since they are influential when introducing destabilization of these actors, or lack thereof. Namely, we examine
innovative BMs with increased customer participation. the BM of third party financing of distributed solar in the U.S.A.; the
Irrespective of the differences between both of these groups, BM with active customer participation in its value chain, with focus
their collective introduction of DERs is already making incumbent on P2P platforms and community projects; and finally the incum-
utilities face challenges in several fronts. Increasing ownership of bent large utility BM.
renewable sources by these non-utility actors is leading to losses
in market share (Klose et al., 2010; Schoettl and Lehmann-Ortega, 4. Power system business models and the multilevel
2011a). In Germany alone, utilities lost almost 90% of the market perspective: illustrative examples
in renewable generation to third parties, representing around
24% of the total electricity generation market (AGEE-Stat, 2015; This section presents and discusses three illustrative examples
RAP, 2015). Denmark, one of the world's leaders in wind en- of transition-relevant BM using the MLP and the 9-point BM
ergy, has over 80% of wind farms that are either individually or decomposition. The main BM-elements are summarized in Table 1.
cooperatively owned (Bolinger, 2001; Toke et al., 2008). These
incoming renewable generation sources, due to merit order 4.1. Financial innovation for niche scale: SolarCity U.S
dispatch and a higher amount of excess capacity, produce profit
erosions to utilities by reducing wholesale prices and volumes Power Purchase Agreements (PPA) are common tools used to
sold by higher marginal cost generators (Cludius et al., 2014; manage risk and ensure financial stability in many energy project
McConnell et al., 2013). Examples of such disrupted utilities developments, including large-scale renewables. But while con-
include Alinta Energy from Australia, which recently announced ventional forms involve a project developer selling energy to an
an early shutdown of its South Australia power stations due to intermediate actor, in distributed solar the PPA is done directly with
uneconomic performance resulting, primarily, from the state's the residential or commercial end-user, as explained in the previ-
high renewable penetration in recent years (AlintaEnergy, 2015). ous section. The main driver of this model could be attributed to its
Incorporation of higher energy efficiency levels further erodes value proposition, which can be phrased as: “Pay for the electricity
utility profits due to demand contraction, while reduction in peak you consume, at a competitive rate, with no upfront cost.” This
demand events from demand response programs affects profit- value proposition is, in fact, the same as any conventional utility,
ability of gas fired peak plants (eLAB, 2013). In turn, development where customers have a ‘passive’ role, and pay only what they
and deployment of new DER technologies places pressure on consume. The value added difference is that this model involves a
utilities to find BMs that can integrate them and maximize their low carbon energy transaction, a fixed cost of electricity, often for
value. This is particularly challenging for established companies 20 years with only inflationary adjustments, and the creation of a
whose BM and current technology are still profitable, whilst new direct contact between the customer and the generation source.
developments challenge existing practices (Christensen, 2013; Historically, the main roadblock of the conventional BM for
Sosna et al., 2010). Based on these challenging factors, several installing distributed PV systems has been attributed to the fact
large German utility firms announced that they will begin a that customers face the full upfront cost, effectively becoming fi-
process to reconfigure their conventional BM (Schlandt, 2015). nanciers of DERs (Frantzis et al., 2008). However, in a distributed
This is also the case in Australia where large utilities have solar PPA, the developer bears the upfront costs of the installation
announced similar developments. For example AGL, the oldest and retains ownership. This becomes a more capital intensive BM
Australian utility, underwent a corporate restructuring that in- for the developer, but with virtually zero capital cost for customers,
cludes investing in BM innovation for new renewable technology much like in centralized energy projects. Fig. 4 shows a schematic
as part of their strategic roadmap (AGL, 2015a). Within a span of diagram of the main dynamics and benefits involved in this model,
two years, it became one of the first large regime actors to pro- which essentially turn the PV system from a product into a service.
vide the solar PPA BM for residential customers (Parkinson, 2015), The model was originally pioneered by SunEdison in 2003 and
began offering distributed battery storage solutions (AGL, 2015b), has been primarily implemented in the U.S.A.; receiving greater
invested in Sunverge's battery aggregation BM (Kaye, 2016), and stimulus with regulatory benefits. Aiming to increase renewable
announced it will cease to pursue exploration and production capacity in the U.S.A., the government introduced or extended
of natural gas assets as a core business (AGL, 2016; Parkinson, several financial incentives and regulations by 2008 that acted as
2016). catalysts for the development of distributed solar (Haley and
Business model characterization of the illustrative examples presented. Note: the relevant niche of grassroots BMs are included here due to their future potential for disruption from the niche level as highlighted in Section 4.2. M.E. Wainstein, A.G. Bumpus / Journal of Cleaner Production 126 (2016) 572e585 579

financing costs, vertical

network, lower cost on

generation, retail costs

Maintenance of social
consolidation for cost

capital, low marginal

Upfront system and

Operating costs of
Cost structure

cost online
reduction

service fee for admin

not-for-profit. P2P:
Social:Cover costs,

Wholesale prices,
PV system sales

contracts, retail
pre-established
Revenue flows

PPA at fix rate
Value capture

for 20 years,

of platform

prices
customer, economic

history, unwilling
Passive customer,

Passive customer,
or environmental

recognize brand
Client segments

middle-income

mission-driven
Socially active

to swap

Fig. 4. Distributed Solar PPA. Comparison of the PPA with the conventional scenario
where customers must invest in the upfront cost of the PV system. Representation of
the economic value proposition for customers with a PPA. Own illustration based on
system, electricity
regulations, home

information cited in Section 4.1.

platforms, local
17 states with

Transmission/
improvement
Client relationships Distribution

Distribution
Online P2P
favorable

assembly
channels

market
sector

Schuler, 2011). One of the most important incentives is the In-

vestment Tax Credits (ITC), which offers a 30% tax credit for the
total amount of capital invested in a PV project. Other federal in-
online monitoring

Historical fidelity
Dynamic, closed-
Product-Service
System with 20

centives include a system for accelerated depreciation of the

year contract,

invested assets,3 as well as specific cash grants for solar projects.

Additionally, each state and local government may provide their
own incentive in the form of grants, loans and rebates in order to
loop

achieve their own renewable portfolio goals4 (Hughes and

Podolefsky, 2015). Finally, many states introduced laws for ‘net
metering,’ which unlike a Feed-In Tariff, allows a customer with PV
(centralized), lignite

infrastructure, retail
social network built
Customer's assets,

deposits, network

to exchange the surplus energy fed into the grid for a credit or offset
Own distributed
PV systems on
Key resources

of the energy purchased from the utility provider within the same
Power plants
customer's

customers

billing period. Overall, these policy provisions help alleviate the

premise

upfront PV costs for home or commercial owners. But more

importantly, they have been essential for solar developers to sus-
tain the capital intensive PPA model, required to target home-
chain, raise capital

owners for which even a subsidized upfront cost of PV is high or

Consolidate value

Generation, grid
aggressive sales

coordination of
for PV systems,

retail, lobbying
social network

inconvenient. In fact, on top of the low-cost passive value propo-

management,
Key activities

organization/
interactions,

sition, the second driver of the solar PPA has been the financial
Peer2peers

innovation that solar developers used to maximize the benefits of

these regulations (Mendelsohn et al., 2012).
Arguably a good example of a successful BM driving distributed
financial investors,

solar projects with PPA is that of SolarCity Corporation, currently

Customers as part

integration), fuel
Internal (vertical
intergrated with

representatives

providers, local

the largest U.S. solar company by 2014 revenue and market share
Value creation

of partnership
network, local
governments

government

(GTM, 2014). The three essential pillars for SolarCity's success and
Partnership

Vertically
network

locus of BM innovation can be attributed to its: i) creative use of

financial partnership structures to access large-scale capital; ii)
sales

aggressive sales and downstream partnerships to achieve scale in

installation demand; and iii) a complete vertical integration of its
Bulk, affordable and

high-performance

value chain in order to minimize costs. Because of the nature of

upfront cost and

Germany (e.g. trustworthy and

Relevant Niche: Local ownership
Clean energy at

reliable supply,
environmental
fixed price, no

and control of
on customer's

third-party PPA, financial innovation can be considered the most

green energy,

important factor since it's a prerequisite that drives the other two.
premise

benefits

Founded in 2006 with $10M in venture capital, SolarCity ac-

quired two local solar companies its first year of operation and
began offering PPA and leasing as financial products, promoting its
Value proposition

PPA, USA (eg.

Large utility,
Niche: Solar

Regime Actor:

low capital cost value proposition (Newswire, 2006). By 2012, being

(Grassroots
active BM
SolarCity)

Customer

and P2P)
Disruptive
Illustrative
examples

RWE)
Table 1

3
See, for example, the MACRS programs applicable for solar assets: www.irs.gov/.
4
See, for example, California Solar Initiative and other states at www.dsireusa.org/.
580 M.E. Wainstein, A.G. Bumpus / Journal of Cleaner Production 126 (2016) 572e585

already a frontrunner in national solar installations, it launched its company, which sells and installs systems, and a power company,
Initial Public Offering (i.e. IPO) raising $92M from the stock market which manages the generation assets selling electricity to
(SolarCity, 2012). However, the most important source of capital customers.
used to finance PV projects has been with tax equity investments. At the time of this writing, SolarCity, has absorbed over 35% of
This form of financing, previously used in some wind projects, has the solar market share in the U.S., installed a cumulative PV port-
now become a standard practice of the largest solar developers in folio of over 1.4 GW, and holds over $7.7B contracted remaining
the U.S (Mendelsohn et al., 2012). Since solar companies have very payments, ranging among its quarter of a million clients (GTM,
little ‘tax liability,’ in that they are not faced with large tax costs 2014; SolarCity, 2015c). Alongside its strong competitors like Viv-
from profits, they cannot make full use of the 30% tax credit offered int and FirstSolar, this customer-side solar sector has already been
by the federal ITC. Therefore, solar companies began partnering recognized as a disruptive niche (GTM/SEIA, 2014). Regime actors,
with even larger, normally financial institutions, which are tax which include U.S. largest utility companies, are already reacting to
liable and can make full use of the solar tax credits (Lutton, 2013). this threat. Although somehow harnessed from losses in electricity
The most common form of tax equity capital received by SolarCity markets from state regulatory systems that decouple prices in order
involve what are called ‘partnership flips.’ SolarCity and a tax equity to protect customers and utilities (Kushler et al., 2006), the rapid
investor form a joint venture partnership to finance residential or loss in market share has made them lobby against the regulations
commercial solar installations under a PPA. Investors provide most largely responsible for catalyzing the rise of the solar niche,
of the capital to the fund, pre-establish a desired return on their particularly the ITC and the net metering regulations (Farkas, 2012).
investment and, for at least the first 5 years retain most, if not all of In response, major solar developers have united through consoli-
the tax benefits by using them in their own balance sheets. Once dated Industry associations to lobby in favor of regulations that
the investor obtains its desired financial goal, SolarCity has the right allow PPA models to thrive.
to buy the investor's position in the fund (i.e. the “flip”) and retain While in the third-party solar PPA BM, the end-user can be
the cash benefits that the remaining PPA contracts provide. By considered a passive customer since it does not finance, own, nor is
2015, SolarCity has manage to capture an accumulated $3B in tax required to bear maintenance cost of the system, other BMs have
equity financing via partnerships with large corporations such as developed in parallel where customers are not only active but an
Google, Bank Of America, and GoldmanSachs (GTM, 2015; SolarCity, essential actor of the value chain.
2015b).
Tax equity structures produce returns-to-scale dynamics worth 4.2. A socially active niche: rise of the P2P and community energy
noticing. Due to the scale and complexity required, most tax eq-
uity investors will only join these partnerships if they can finance Sociotechnical landscape shocks can introduce social discomfort
at least $75e100 million worth of solar projects within one year that encourages some citizens to unite with a specific social agenda.
(Lutton, 2013). For the residential sector, in order to make full use Grassroots innovations can emerge under these circumstances,
of the funds, this requires ensuring that several thousand financed often helping introduce innovative BMs and political pressure to-
PV systems will be installed consistently in a relative short period wards sustainability (Ornetzeder and Rohracher, 2013). Modern
of time. Only solar companies that have enough sale and instal- wind energy in Denmark, for example, can be traced back to the
lation capacity can therefore access such large-scale financing. As OPEC oil embargo of 1974 (Danielsen and Halkier, 1995). With high
such, SolarCity's BM focused on maximizing tax equity in- oil prices, early discussions of developing nuclear energy for the
vestments by having an aggressive sales strategy through multiple country triggered the organization of local wind advocates that
channels. For example, besides conventional forms of sales began experimenting with wind turbines to prove an alternative
through online marketing and customer referrals, it partnered and safer form of energy. Climate change and the notion of ‘peak oil’
with homebuilders, large home developers like Pulte homes, and encouraged the beginning of several community energy projects in
home improvement businesses such as HomeDepot, BestBuy and Europe (Bailey et al., 2010), whilst the global financial crisis influ-
DirectTV which had already established access to homeowners enced the acceleration of ‘sharing economy’ P2P Internet platforms
(SolarCity, 2015a). This large networked sales strategy also (Botsman and Rogers, 2011). An underlying factor in these de-
increased the company's sales costs by 20% since its initial public velopments is active customer participation at a local level in
offering (IPO), but was the only cost factor per installed solar Watt response to a social need. From a BM perspective, this translates
to have increased. In order to keep costs down, SolarCity, as well into customer co-participation in the value creation process, and a
as other major developers, have recently become fully vertically value proposition with a specific social agenda.
integrated solar businesses. Socially active BMs are particularly relevant for the low carbon
Prior to the liberalization of electricity markets, most utilities power system transition for at least two reasons. First, they form
had a vertically integrated BM controlling generation, trans- the backbone of community energy projects, which have proven to
mission and distribution. These were kept as regulated monop- be successful in introducing decentralized clean energy supply in
olies since they ensured lower costs, maintaining the value power networks of selected countries. Over 50% of Germany's
proposition of reliable and affordable electricity. Similarly, renewable energy projects are community or locally-owned by
SolarCity is now responsible for its entire solar value chain, having citizens or cooperatives (ObservER, 2014). Depending on the nature
no transmission and distribution. In 2013, it acquired Silevo, a PV of the project, these show commercial advantages over conven-
module manufacturer, in order to finalize its full integration tional private projects, such as in providing lower costs of capital,
covering module production, sales, finance, installation and full- improving social acceptance of technology and accelerated
lifespan maintenance, given it retains ownership of the solar as- municipal approval of energy developments (Bolinger, 2001;
sets. By being involved in all steps of the process, the company has Maruyama et al., 2007). Second, customer-side BMs with user
been able to incorporate innovations in steps like PV mounting participation are essential in the value chain of a smarter and
hardware (e.g. acquiring Zep Solar in 2013), alternative forms of responsive power network hosting demand response programs.
leasing (Arfin, 2011), and software development in order to in- Just like the Web 2.0 introduced a two-way flow of information and
crease operation yields and reduce costs. Furthermore, this vertical user participation compared to its 1.0 counterpart (Carroll and
integration has allowed SolarCity to further innovate in its BM by Romano, 2010), a 2.0 power network with a resilient two-way
essentially dividing the company into two: a development flow of electrons will also require degrees of end-user interaction
 M.E. Wainstein, A.G. Bumpus / Journal of Cleaner Production 126 (2016) 572e585 581

(Geelen et al., 2013; Goulden et al., 2014). BMs for demand response but can't afford, a PV system (Chernova, 2013). Clean Energy Col-
and smart grids are increasing source of research and entrepre- lective also uses crowdfunding but for regional members that wish
neurial interest (Rodríguez-Molina et al., 2014). Understanding to finance, own and operate a larger community-based solar sys-
customer participation in BMs will be increasingly important as tems and have their individual utility bills directly benefit from the
electricity networks continue to incorporate DERs (Verbong et al., production of this collective system (Coughlin et al., 2012; Sweet,
2013). 2015). Yeloha, on the other hand, uses a P2P platform to connect
By applying the BM framework, specific traits can be found in solar hosts, that can provide their rooftop for a PV system instal-
customer-side BM with active user participation. Table 1 summa- lation, with solar ‘partners’ that wish to finance and benefit from
rizes them in comparison to the other reviewed BM. A common solar but have no physical rooftop access (Whitford, 2015). Euro-
trait among variations of their value proposition is increasing the pean examples tend to be less confined to solar PV systems, largely
level of local ownership (Hess, 2009). Therefore key resources in given a historic presence of community wind and biogas projects.
the BM are in fact the customer's assets, such as its product, Qurrent from the Netherlands, for example, enables local electricity
financial power or even its knowhow, and the underlying social exchange between participants, allows them to crowdfund com-
network that brings these together. The key activities become the munity windfarms and empowers them to manage their own en-
actual P2P interactions, which organize around finding mutual ergy. In turn, the company is a good example of a hybrid
opportunities. Whereas the conventional distribution channel to corporation since its a wholly owned subsidiary of a non-profit
deliver these valued activities and interactions between customers foundation, and are explicit about not having a shareholder maxi-
was historically done through local assemblies and physical in- mization paradigm (Ceschin, 2013; DOEN, 2016).
teractions, most of these have now evolved into P2P internet Grassroots energy projects are extremely influential, but
platforms that can host multiple interactions at virtually no extra currently fail to achieve significant commercial scale in order to be
cost (Bauwens, 2005a). Because of this, the most important BM classified as a disruptive niche (Seyfang et al., 2014). Although P2P-
partnerships are mostly internal, among customers and members, based energy is nascent, they are a potential source of future
rather than with external parties. However, local governments are disruptive innovation in the socio-technical regime. As a result,
frequently sought, and even required, as strategic partners. The further research is required in order to understand how to overcome
customer segment of these BMs is one of the most specific traits the major roadblocks faced by these developments that, as pointed
since it involves users that are willing to be active and participate. out, are central to a demand responsive low carbon power network.
This is a stark contrast with the solar PPA, shown previously, where
customers are virtually passive. 4.3. Initial utility BM destabilization: RWE, Germany
When analyzing revenue and cost structures, as well as varia-
tion of the value proposition, two generic BMs with active customer Germany is the largest power generator in Europe (ObservER,
participation can be distinguished. On one hand, those that are 2014). Its Energiewende5 is considered one of the most mature
driven by an economic value proposition, such as optimization of energy transition policy projects in the world. Renewables
resources for a product or service at a lower cost. These tend to currently represent over 50% of the installed capacity (Fraunhofer,
provide improved commercial activity through joint value crea- 2015). Although it is well-regarded for its ambitious environ-
tions. On the other hand, there are those driven by addressing a mental targets and green policy interventions, almost 90% of the
specific social agenda. Nevertheless, both can be initially fostered electricity market is controlled by what are known as the “Big 4,” an
by grassroots innovations. Modern car sharing BMs, for example, oligopoly of vertically integrated multinational corporations: RWE,
have evolved from initial grassroots developments in Switzerland, E.On, EnBW and Vattenfall (Sühlsen and Hisschemo €ller, 2014). This
with first documented cases dating back to 1948 (Shaheen et al., concentration is mostly due to the liberalization of its electricity
1998). The emerging and disruptive P2P economy is lead by market in 1998 with the Energy Industry Act (i.e. EnWG). It pro-
profit-driven corporations, such as Airbnb and Uber, but they owe duced favorable conditions and opportunities for firms to focus on
their innovative BM to initial local civil organizations seeking to large-scale supply, expand activities beyond borders, and undergo
maximize the value of their resources (e.g. reducing idle time) mergers and acquisitions leading to these dominant actors forming
(Bauwens, 2005b). In fact, a main difference of the professional P2P the backbone of the energy regime (Kungl, 2014; Ratinen and Lund,
corporation with the grassroots organization, is in its BM (Bauwens, 2014). When the Renewable Energy Sources Act (i.e. EEG), the main
2009). In the former, the organization is a third-party that provides, regulatory structure behind the Energiewende, was established in
organizes, administers and improves the P2P Internet platform in 2000, it hardly encouraged these actors to shift strategies or BM
exchange for a service fee. Maximizing profit from an opportunity is towards cleaner alternative. Instead, they maintained their focus on
the underlying purpose of a P2P corporation. Grassroots P2P net- a fossil-nuclear supply portfolio, and lobbied against environ-
works, on the contrary, organize and administer themselves mental regulations (Sühlsen and Hisschemo €ller, 2014). Since then,
covering operating costs in order to maximize the value for their with the progression of the energy transition, several multi-level
members. Furthermore, its purpose is measured based on how well factors are making this regime lose resilience, destabilizing the
it can address a specific social or environmental issue. firm's underlying BM (Strunz, 2014).
This niche is important since it's a source for radical BM inno- RWE is a useful example to study these incumbent utilities.
vation and can be an agent of influence in larger societal systems Established in 1898, the firm is the leader and oldest actor of the
(Ornetzeder and Rohracher, 2013). However they are yet to be German electricity market. Its vertical integration covers activities
disruptive in the transition of the power networks. P2P-based firms and resources in lignite production, power generation, trading,
have been disruptive in other sociotechnical systems, but de- distribution network operation, and retail (RWE, 2014b). Its value
velopments in distributed energy have not achieved significant proposition is based on the conventional utility-side BM of bulk
‘viral’ effect. This can be attributed to the heavily regulated nature and reliable supply, but also on its trustworthiness and high-
and lock-in of the electricity system, resisting incorporation of performance from its long history. Because of its high level of
more participative BM. Nevertheless some promising examples are vertical integration, the degree of partnerships with external
worth noting. The U.S. is seeing the birth of different solar based
P2P BM. Mosaic, for example, uses a crowdfunding system to
5
connect individual investors with homeowners that wish to have, The German term for ‘energy transition.’
582 M.E. Wainstein, A.G. Bumpus / Journal of Cleaner Production 126 (2016) 572e585

parties is low. It does, however, include long-term agreements

with power plants not owned by the group. Furthermore, as
opposed to the other Big 4, it holds strong social ties and
municipal shareholders favoring regional interests; factors that
suggest a reduction in the likelihood of drastic diversification and
organizational restructuring of the BM (Ratinen and Lund, 2014).
Its customer segment builds on this traditional history and can be
characterized as the conventional passive utility customer. Only as
of 2007 did wind projects capture an increased interest and lead
to the development of a specific unit, RWE Innogy: a utility-side
developer of renewable projects with a strong focus on wind-
farms. Yet, as of 2014 RWE electricity production in Germany is
composed primarily by lignite (52%), followed by nuclear (21%),
hard coal (20%), gas (4%) and only 1% renewables (RWE, 2014a).
The revenue stream from this generation portfolio is largely
dependent on wholesale electricity prices, fuel costs and emission
allowances.
As in the rest of German energy regime, RWE experiences
regime challenges in at least three fronts. Namely, the nuclear
phase-out, the rapid increase in renewable market share by non-
utility actors, and the erosion of wholesale electricity prices. The
Fukushima nuclear disaster in 2011 also acted as a landscape shock.
It accelerated the 2002 amendment of the Atomic Energy Act,
ordering immediate decommissioning of the country's oldest eight
nuclear reactors, a stepwise phase-out of the remaining plants by
2022, and a strengthening of policies towards renewables
(Wittneben, 2012). The Big 4, being owners of all nuclear power
plants in Germany, were the most vulnerable to this amendment.
RWE had to shut down 2 of its 5 plants, losing a stable source of
revenue and incurring decommissioning costs. These incumbents Fig. 5. The Merit-Order effect. Stylized graphical representation of the market effect
have resisted drastic changes in the regulatory environment with responsible for the destabilization of the German utility BM through the erosion of
wholesale prices.
activities that include aggressive and professional lobbying. But
once public perception was affected, as it was with Fukushima,
prices, affecting RWE's profit margins of conventional generators
these activities had to be revisited in order to protect corporate
and peak-plants.
image and political bargaining power; suggested to have already
These dynamics also have negative repercussions on renewable
been affected by this shock (Strunz, 2014; Sühlsen and
generators and customers (Hirth, 2013). In fact, since this market
Hisschemo € ller, 2014).
effect is expected with the rise of the renewable niche, this could
In the case of market share loss by the hand of non-utility
have long-term implications on the electricity market design that
renewable developers and customers, no direct costs are
would yield further destabilization of the incumbent BM6 (BDEW,
incurred, but revenue losses from third-party competition pro-
2013; Wassermann et al., 2015). In 2013, RWE publicly
duced pressures to develop a degree of ambidexterity in the market
announced a change in its BM, understanding that the new market
(Richter, 2013a). This is challenging for customer-side BMs, which
conditions are somehow irreversible (Beckman, 2013). E.On had a
involve different dynamics and capabilities than the bulk utility-
similar announcement (Jeevan Vasagar, 2015). Since then, RWE has
side counterpart (Richter, 2013b). As demand response programs,
made significant interventions on its cost structure and announced
DER aggregation and distributed storage take a critical role in
a strategy shift towards renewables and customer preferences
balancing a market with high penetration of renewables, large
(RWE, 2014a). Nevertheless, it is perhaps too soon to observe or
utility firms like RWE will have to develop BMs that do not belong
predict the extent of the reconfiguration of its historical BM.
to their historical core business.
Even though these two described challenges are significant, the
erosion of the German wholesale price is the most meaningful 5. Conclusions
systemic signal of regime destabilization to highlight. Germany's
market is particularly exposed to this effect only because its energy International negotiations to establish stricter climate targets
transition is mature; political proactivity lead to high penetration of and foster national energy transition projects may foster new in-
renewables. Energy efficiency and a high penetration of variable vestments and reductions in technology costs. However, our anal-
renewables affect wholesale prices in competitive markets and ysis suggests that BMs need to be considered as a critical aspect in
thus disrupt revenue streams of incumbent utilities (Sensfuss et al., the acceleration of this process and should be attended to accord-
2008). The sharp increase of PV penetration by 2010 and 2011 ingly. A positive feedback can be traced between disruptive BM
accelerated the “merit-order-effect” in Germany (Cludius et al., innovation and the disrupted incumbent BM; a dynamic that can
2014). It is likely that wholesale price exposure of RWE was not drive sociotechnical transitions.
as significant given backlogged price agreements for its generation We have shown here that a change in value proposition can target
up to 2012 (Kungl, 2014). By 2013, however, the exposure to prices a previously untapped mainstream customer segment, as shown
was indeed more severe, becoming a main factor in the company's
negative net income of V2.8 billion (RWE, 2013). Fig. 5 shows a
generic representation of how efficiency and centralized, decen- 6
The eventual requirement of a revision or redesign of electricity markets is an
tralized and behind-the-meter renewables have reduced wholesale on going debate.
 M.E. Wainstein, A.G. Bumpus / Journal of Cleaner Production 126 (2016) 572e585 583

with the example of third party financing and ownership of distrib- extent can the large utility BM actually reconfigure and adapt
uted solar PV. This tendency attracts partnerships with the financial without being severely affected by a large number of costly
sector, which is significant for enabling niche actors to scale up. underutilized centralized assets? How will possible changes in
Collectively, they can help remove barriers to large-scale incorpora- modernized electricity market design further affect this utility BM
tion of DERs. Furthermore, a higher penetration of DERs and variable adaptation? These are all questions that point to the importance of
renewables can lead to a direct destabilization of the incumbent understanding business models as a driver of the low carbon power
utility BM through the merit order effect in the electricity market. The system transition.
more incumbents are forced to reconfigure their BM, the faster the
power system undergoes a change in its paradigm, further acceler-
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