Transaction cost analysis of digital innovation governance in the UK energy market

Colin Nolden

Abstract

Energy markets are undergoing significant changes. Legacy systems developed around inflexible, centralized and monodirectional supplies are being replaced by flexible, distributed and bidirectional supply-and-demand systems. Where legacy systems are less entrenched, such as in decentralized renewable energy, flexibility and energy service markets, the pace of change is faster, and new technologies, business models and ideas are more likely to be tested and applied. This conceptual paper analyzes the changing governance of decentralized renewable energy, flexibility and energy services in the United Kingdom from a transaction cost perspective. Particular emphasis is placed on the impact of potentially disruptive innovations such as distributed ledgers, emerging digital technologies and big data analytics on the one hand, and the need for value creation from just and affordable decarbonization on the other. In doing so, this paper sheds light on some contradictions between current energy governance and the requirements for a decarbonized, decentralized, digitalized and democratized energy system. The paper concludes that energy governance is increasingly shaped by decentralization and digitalization, which can either facilitate or inhibit value creation through democratization (social value) and decarbonization (environmental value).