By now the narrative on the rapid transformation of the electricity sector driven by the 3Ds – decentralization, de-carbonization and digitization – is well-known.
Far less, however, is known about how this transformation is going to materialise, and when and who may be the ultimate winners as the incumbent’s traditional business models are disrupted.
Not surprisingly, there are as many predictions on the end game as there are analysts and experts following the developments.
As I write in a recently published book titled Innovation & Disruption at the Grid’s Edge:
“… innovation and disruption enabled by new technologies – notably information & communication technology (ITC) – are transforming the electric power sector at an unprecedented pace … allowing a growing number of previously passive consumers to become active prosumers.”
Prosumer, of course, refers to a consumer who is consuming part of the time and producing at other times, say a homeowner with rooftop solar panels.
These empowered prosumers … can reduce their dependence on the services traditionally delivered by the assets and infrastructure upstream of the meter by increasing their reliance on distributed energy resources (DERS), which by definition, are provided, consumed and possibly stored locally.
You need not be a rocket scientist to guess what happens next.
With the expected emergence of affordable storage, some prosumers can go a step further by becoming prosumagers; this they can accomplish by storing the excess generation for use at later times.
With zero net energy (ZNE) buildings a virtual reality, it is not farfetched to envisage some prosumagers operating virtually independent of the grid for the most part, relying on the network only sporadically, for balancing services and reliability.”
Is this a big deal? Yes, it is.
The rapid transformation of the electric power sector has barely started, but an outline of how it may evolve and who will be the winners and losers is beginning to emerge.
Future prosumagers, enabled by clever intermediaries offering yet to be developed open platforms accessible through ubiquitous mobile devices are likely to disrupt the incumbent utilities’ business model just as Uber and Airbnb disrupted established players in their respective industries.
Add a host of new intermediaries with sophisticated capabilities who can aggregate flexible loads and distributed generation – which can be effectively bid into wholesale markets – and one can see the power of aggregation enabled by automated machine-to-machine (M2M) communication.
Advances in artificial intelligence (AI) are likely to lead to proliferation of services offered by such intermediaries who can provide valuable services to grid operators and distribution networks while better managing energy consumption and reducing participants’ energy service costs.
But innovation and disruptions don’t end there. There is increased interest in transactive energy and peer-to-peer (P2P) trading facilitated by platforms that allow consumers, prosumers and prosumagers to better manage their consumption, distributed generation and storage, and not just internally but with their neighbors and among their peers.
While many regulatory obstacles remain to be resolved, the distribution network physically connecting the participants is already in place.
Bitcoin and Blockchain technologies – among others – offer new opportunities for such transactions to take place among and between consumers using the existing distribution network and related infrastructure.
Microgrids, another promising emerging technology, offers individual customers and/or a collection of customers to better manage their consumption, distributed generation and storage, allowing them to operate independent of, or parallel to, the super-grid …
The implications of such developments on the incumbents in the utility sector are beginning to be felt and speculated.
But what has been experienced to date, say 5+ GW of distributed solar rooftop generation in California and even more in Australia, do not begin to count as even the tip of the iceberg compared to what may follow.
As the consumer, to prosumer to prosumager scenario unfolds, as many expect, the definition of electricity service and – more important – how it is priced – will undoubtedly undergo radical transformation.
Viewed in this context, bundled retail tariffs – designed for the one-directional networks of the past century with passive consumers – which is still prevalent nearly everywhere in the world, is clearly outdated.
Volumetric tariffs no longer capture the emerging value proposition offered by the grid – which offers connectivity, balancing services, frequency control, voltage stability and 24/7 reliability most coveted by increasingly sophisticated prosumers or prosumagers rather than delivering a large volume of kWhs.
This suggests that the power sector is on a path not unlike that of mobile phone industry where most users pay a fixed monthly fee based on a 2-year contract with a network service provider.
While the analogy is not perfect – e.g., currently electrons cannot be delivered without copper wires – it is clear that mobile phone service is increasingly about connectivity and access to the network rather than the volume or frequency of calls.
Subscribers choose a provider on the basis of the ubiquity and reliability of its network access, the strength of the signal, bandwidth and speed.
They are rarely charged on a per-call or per-minute basis.
The cost of service is much better reflected, and collected, through a fixed fee almost regardless of the volume of service.
The same goes for garbage collection and many other services where the fixed costs account for the overwhelming percentage of cost of service.
Another reason why electricity service is moving in this direction is the fact that as the proportion of renewable generation on many networks increases, the cost of electrons – the commodity portion of service – is rapidly falling, eventually approaching zero, occasionally going negative.
The kWhs are already relatively cheap and getting cheaper over time.
Charging based on volume is outdated and will become unsustainable as a means of covering the cost of the delivery network.
Moreover, with the advent of zero net energy (ZNE) buildings, the volume of consumption in many places is flat or falling.
The implication is rather clear: tariffs based exclusively or primarily on volumetric consumption are unlikely to deliver sufficient revenues, nor do they make much sense.
Moving towards the inevitable end, however, is not easy for a number of reasons:
• The path and pace forward looks different to different stakeholders who are often competing with conflicting views and perspectives;
• The incumbents don’t like being disrupted and/or becoming irrelevant; and, most important
• The regulators, who control all aspects of the business in most markets, are having a difficult time following the rapid technological changes taking place, let along being in a position to lead or encourage innovation.
This is evident, for example, in the current piecemeal and fragmented treatment of distributed energy resources (DERs) and net energy metering (NEM) in various parts of the US.
The value and/or the cost of DER resources, poorly understood, need to be better monetized and reflected in future tariffs, which must increasingly account for the bi-directional flows of electrons based on time, location and their value or impact to/on the distribution network.
Consider the following examples:
• A solar rooftop panel feeding a huge surplus – in excess of local consumption – to the distribution network on a cool, breezy, sunny day is not adding much value in a place like California, with its famous “Duck Curve” illustrated on page 5;
• By contrast, an electric vehicle or distributed storage device of any shape, form or size, taking unneeded excess electrons from the same circuit, and injecting it back after sunset, is providing a highly valuable service.
Current tariffs and regulations, with a few exceptions, do not fully or even partially recognize, monetize, reward or penalize for the vastly different cost/value of such resources.
The good news is that regulators in states including California, Hawaii and New York – with the latter’s pioneering reforming the energy vision (REV) – are beginning to address how the changing role of the distribution network will redefine the role of stakeholders, including better clarity on who can do what, when and where and under what types of rules, rewards and investment recovery.
A number of such issues are covered in Innovation & Disruption at the Grid’s Edge.
In the book’s Preface, Michael Picker, the President of California Public Utilities Commission (CPUC), says he has “chosen to focus actively at the CPUC on more tangible tasks that can deliver benefits quickly, rather than questioning the fundamental nature of utility business models,” adding “the overarching philosophy I have followed in pursuit of more distributed energy future can be described as ‘Walk, Jog, Run.’”
With so much on his plate, so to speak, the measured approach is understandable.
Picker goes on to say,
“The vision we (the CPUC) are pursuing is that, over time, DERs will be able to benefit from ‘stacking’ multiple value streams.”
Stacking, of course, refers to the fact that DERs, depending on when, where and how they feed or withdraw from the network, imply costs or value, often from multiple sources, as the examples of the solar PVs and EVs (above) described.
In this context, stacking entails improved monetization of the multiple benefits of DERs while – paradoxically – acknowledging their increased demands on the distribution network – for example, with high concentrations of PVs and/or EVs on certain distribution circuits.
California’s regulators are already sensitized to the new realities of DERs and other innovations and disruptions taking place at the so-called grid’s edge referring to the intersection of the distribution network and customers’ meter and beyond- or behind-the-meter.
On this, Picker adds:
“Targeting DERs to high-value locations also necessitates development of a tool to highlight areas of the distribution grid where DERs can provide location-specific values, such as distribution capacity deferral and voltage support.’
Likewise, in the book’s Introduction, Audrey Zibelman, former Chair of the New York Public Service Commission and now the CEO of the Australian Energy Market Operator (AEMO), explains that:
“The crux of the utility changes contemplated in REV (reforming the energy vision) can be summarized into the following 5 areas, many of which are touched upon by authors of the [book’s] following chapters:”
• Creation of a Distributed System Platform (DSP);
• Promotion and encouragement of innovation;
• Regulation of the earnings model;
• System information and transactive markets; and,
• Fair and cost effective universal access.
Two other regulators, Paula Conboy, Chair of Australian Energy Regulator (AER) and Johannes Mayer, Head of Competition & Regulation at E-Control Austria, echo similar sentiments in the book’s Foreword and Epilogue, offering perspectives from Australia and Austria, respectively.
The key question for the incumbents in the business, retailers, distribution companies, generators and gentailers, is how to survive – and hopefully thrive – the transition and the disruptions.
That is the proverbial $64,000 question.
The Future of Electricity: New technologies Transforming the Grid Edge, a report by the World Economic Forum in collaboration with Bain & Co. released in March 2017 and previously covered in the June 2017 issue of this newsletter, offers 4 broad recommendations for utilities, network operators and the regulators in moving forward:
• Redesign regulatory paradigm;
• Deploy enabling infrastructure;
• Redefine customer experience; and
• Embrace new business models.
The challenge is how to implement the sensible words into actionable strategies given the many moving parts and the complicated and highly unpredictable regulatory environment in which many utilities operate.
With so many moving parts, uncertainties, and pitfalls, it won’t be easy.
Perry Sioshansi is president of Menlo Energy Economics, a consultancy based in San Francisco, CA and editor/publisher of EEnergy Informer, a monthly newsletter with international circulation. He can be reached at [email protected]
Source: EEnergy Informa. Reproduced with permission.