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Why solar may not be biggest threat to energy utilities

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Much has been made about the massive disruption that rooftop solar systems and distributed energy will bring to traditional energy business models. But there may be an even greater threat – the emergence of smart technology and software.

The growth of “negawatts” – where energy is not consumed – rather than megawatts is emerging as a major focus of industry analysts. What is becoming increasingly apparent is that while the rollout of solar modules may be massively disruptive, the major battles may be fought over software and other gadgets that will further reduce demand on centralised fossil fuel generation.

What makes this battle interesting is that the challenge is not only coming from a group of technology start-ups and up-starts, it is coming from some of the biggest companies in the world, including Google and Apple.

In a recent report titled Energy 2020: The Revolution Will Not Be Televised as Disruptors Multiply, investment bank Citigroup has a quick look at some of the technologies that are going to make life increasingly difficult for incumbent business models.

It notes that Google’s purchase of Nest and Apple’s introduction of its “Home Kit” signal a new era for energy demand management.

“The potential for tech giants to monetise “negawatts” through technology-facilitated energy efficiency represents a potentially significant transfer away from the hydrocarbon producers to the technologists, with utilities standing in the middle,” Citi notes.

homekit-logo1 copyIn June, Apple introduced its Home Kit – a suite of tools for controlling devices in your home such as thermostats and air conditioners, smart appliances, lights, cameras, garage-door openers, and security systems.

The idea of Home Kit is to create a “smart home” that can be controlled from a smart phone or similar. Just by saying, “Get ready for bed,” to your iPhone or iPad could result in automatically dimming the lights and locking the doors.

As CNET reported recently: The home is viewed by many as the next big battlefront for tech companies. That not only includes TV but also a home’s security system, lights, washing machines, and other appliances. All of the devices would connect in a so-called Internet of Things that can be controlled by a person’s smartphone or tablet.

google-nest.jpg?w=538&h=360Apple isn’t the only company making a push to control the smart home. Google in January revealed plans to buy Nest Labs, the maker of the Learning Thermostat and the Protect smoke and carbon monoxide detector.

And Samsung that same month unveiled a new foundation for the smart home that would allow users to manage all of their appliance and devices through a single application.

Citi says of these developments: “Together (they) represent the early rumblings of a potentially epic battle between the tech giants and the conventional energy producers.”

It says energy demand management is one key aspect of the connected home, and the monetisation of “negawatts” (an amount of energy unused due to greater efficiency or demand management).

Negawatts are now as big an industry as the production of megawatts of electricity. As we reported in April, HSBC estimated the global market for energy efficiency was around $US375 billion in 2012 – that’s as much as was invested in fossil fuel electricity generation in that year, and 1.5 times the amount invested in renewable energy.

The International Energy Agency estimates that energy efficiency measures have, since 1974, saved around two-thirds of the energy that might otherwise have been consumed. This “decoupling” of energy use and GDP growth, says HSBC, means that each billion of global GDP required almost 40 per cent less energy in 2012 than it did in 2002.

In all the scenarios painted by the IEA and others on tackling climate change, cutting pollution, decarbonising electricity and saving money – creating “negawatts” rather than adding “megawatts” – is absolutely key in extending the so-called “carbon budget”.

And HSBC says there are four reasons why governments would want to encourage energy efficiency: energy security, industrial competitiveness and decarbonisation and pollution goals. It says energy efficiency is widely recognised as the most powerful tool to meet the challenges of energy demand and security. It can also help meet decarbonisation targets along with enhancing economic competitiveness.

But it is the entry of these new players – with expertise in consumer engagement – that also represents an existential threat to utilities, which have a notoriously poor level of engagement with customers – and little to no brand loyalty.

And it is not just the tech giants that are entering the market. Home security and telcos are also assessing their options. Late last week, Protection 1, a closely held security company backed by private equity firm GTCR, announced it will start selling solar panels to customers.

The home and commercial security and automation company has almost 2 million customers in the US. CEO Timothy Whall told Bloomberg that profits from the fast-growing solar market could “easily equal” those from its security business.

“We certainly like the financial model and it’s a nice extension from our home automation” business, Whall said. “The timing is good for the solar business.”

Protection 1 will offer systems for no money upfront to lease customers in a bid to tap increasing demand from households seeking to cut power bills. Home security and automation company Vivint is already the second-largest home solar installer.  

Pocket
  • Very interesting article Giles. Smart homes would seem to only be the beginning of how technology is changing energy use worldwide.

  • Beat Odermatt

    In every home right now it is possible
    to cut electricity consumption by 30% and it does not even need smart
    technology, but smart consumers. Do we really need to be sweating in
    winter in overheated homes and do we need to freeze in summer because
    air-conditioners are set to the lowest setting?

    Do we really need to have a light on in
    every single room? We can import good LED lights which only use 7w
    for about $4.00 and we can cook using pressure cookers or microwave
    ovens. Every bit of coal ,gas or oil which is not burnt to make
    electricity is available for future generations to make plastic,
    paint, medicines or any other of the 50 million products made from
    fossil fuel. Why burn vital resources if we have alternatives?

    • Ronald Brakels

      I have noticed that LED lights can be bought online for a third what they cost at Coles.

  • Ken Fabian

    “Smart” energy management will look very attractive as time of use metering becomes more common. Especially for homes and businesses with rooftop solar seeking to minimise their purchase of supply from the grid.

  • John P

    If the “smartness” of the home were incorporated at the design stage, then all these high tech add-ons would not be necessary. The house would already be energy efficient and the small amount of energy required could be drawn from the environment by a stand alone power plant.

  • Pedro

    Home energy management coupled with a solar PV system will help maximize self consumption and minimize power exported to the grid. Energy use data collected will be hugely useful in the design of an appropriately sized battery bank so that customer can easily defect from the grid entirely.

    The technology is all about making it easy for the end user so they don’t have to even think about it. Not very Zen. Power bill will go down but your internet will go up!?

  • RobS

    Demand response management massively aids the rollout of intermittent renewables like wind and solar, it abolishes the need for spinning reserves as smart demand management is used to pare back demand seamlessly to shave the peaks and fill the valleys of intermittent generators. I don’t see any point of pitching it as an either or scenario when the two work together so perfectly.

  • Rob G

    We’ve known for some time now that the big tech companies like Google and Apple (even IBM – remember them!) have been interested in the renewable transformation – they already have several fingers in that pie. They know the economic opportunities are there and the have the know to do it. Seriously, the old clunky fossil regime will not be able to combat this next onslaught. If I we’re an owner of a coal fire power station, I’d be thinking of the quickest way to get hold some renewable assets before the ship goes down.

  • Some heartening facts in this article about the energy efficiency industry. But I point out as I have many times before:
    Residential energy is only about 1/3 of the total – Industry is near 1/2 and commercial the rest.
    Transport (mainly) cars and trucks accounts for about 20 % of emissions in US/ Australia and this is highly refined high value fuel. Fuel taxes are low in the US and Aus. and there is no carbon tax on RET on fuels.

    These sectors are paying no tax on emissions; fuels are still relatively cheap and these sectors will not take steps to implement the huge efficiencies achievable until they pay the real cost of their pollution through a carbon tax. They currently get energy dirt cheap e.g. industry pays about 10c/ unit for electricity while we pay nearly 30c (including transmission costs and RET cost which they don’t pay). They will not become energy efficient until they pay the cost and also are bound by pollution regulations such as Obama has introduced for coal.

  • Marcelo

    I am not so sure of the IEA’s estimate of energy saved since 2002. Considering that energy saved equals money saved for there to have been energy efficiency gains the money saved would have to remain unspent instead of being spent on something other than energy. Even if it is banked it is used to create debt which generates economic growth and therefore energy consumption. In this respect, energy efficiency is a myth.

    • JonathanMaddox

      Not a myth, just a tricky concept.

      What you describe is Jevons’ paradox, which is no paradox at all.

      Wealth and growth drive increasing consumption regardless of how efficient consumption is. All else being equal, improved consumption efficiency is excellent for wealth and growth.

      Total consumption will only fall during an economic recession. However, the consumption of an undesirable resource can easily be substituted with a preferable one, *especially* in conditions of growth. In this sense, increasingly efficient consumption of electric energy can facilitate the move from fossil-fuelled power to renewables, for instance.

      Promoting efficient consumption alone can never achieve a goal of *reduced* consumption. The only options are recession or substitution.

      • Bernard Finucane

        Jevon’s Paradox only really kicks in if demand is really there, or (put another way) price is the limiting factor.

        For example, LEDs are likely to reduce energy consumption hugely because energy costs are not really a factor for lighting at home, and commercial users usually have the light they want, regardless of the cost. So LEDs are likely to bring savings.

        Similarly, air conditioning levels are already pretty extreme in America. I checked into a hotel in Boston recently and the thermometer was set at 65 F. I doubt if the hotel would go down to 60 if electricity got cheaper. Cheap solar for air conditioning would just destroy demand for grid electricity.

        Another example: Efficient ICE vehicles or electric vehicles may well increase demand for travel, as they are cheaper at the margin. But the infrastructure and travel time may be the limiting factor here. Jevon’s Paradox is a good argument for not widening roads, but less good for not improving vehicle efficiency.

        • JonathanMaddox

          Jevons’ observation was a macroeconomic one. If you spend less money on energy for one specific purpose, certainly consumption per widget decreases on the spot, but you have more money to spend elsewhere. Due to the pervasive nature of energy resources this leads to consumption of more energy in the economy as a whole, not less.

          I was prepared to contradict you outright and went looking for charts showing global energy consumption with a decline only in the Great Depression. That’s not what the data shows, though. The Depression was a period of continual energy consumption growth!

          The greatest and perhaps only global energy consumption declines were in the early 1970s and early 1980s.

          The first oil crisis in 1973 triggered a recession thanks to the world’s primary energy resource quadrupling in price. Energy consumption fell a little, but returned to growth from 1975-78. The “1970s oil crisis” only finally caused a really significant consumption decline 1979-1983 as another recession hit at the same time as the investment in efficiency improvements and fuel switching, motivated by the 1973 price hike but only committed in the intervening growth period, finally made it to the market in a large scale.

          By 1983 oil was no longer used for electricity generation anywhere except OPEC countries and smallish island grids. 1980-2008 saw spectacular growth in *coal* consumption for electricity generation, however, even as total oil production has peaked and (possibly) declined a little.

          Thus, even though the “1970s oil crisis” caused significant energy efficiency improvements and the only two observable declines in global energy consumption since the start of the Industrial Revolution, the growth period in the middle was sufficient that global energy consumption at the 1983 low point was still way higher than the 1972 high. *Oil* consumption was a little lower in 1983 than 1972, but growing consumption in energy from both coal and uranium had more than filled the gap.

          While oil price spikes are a major incentive to improve consumption efficiency, the truth is that efficiency is improving all the time. But more efficient engines do not reduce fuel consumption if they are merely installed in ever-larger cars, as happened throughout both the 1960s and the 1990s. The “post-industrial” economies of the USA and UK may have seemed to “decouple” economic growth from energy consumption growth post-2000, but this is largely illusory as they have substituted energy-intensive domestic manufacturing for imports from places like China, where energy growth was moving forward at breakneck pace.

          I don’t think genuine decoupling is impossible, I think it’s a gradual thing which has been happening all along. Economic growth is, on the whole, significantly faster than energy resource consumption growth. I think actual consumption decline, however, really has been restricted to recessions and I can’t think of a logical reason why it wouldn’t continue to be.

          If we want any economic growth while reducing consumption of fossil fuels, I really think we will *need* to substitute cleaner energy sources for fossil fuel.

          • Bernard Finucane

            I don’t think those historical arguments are worth much. Banks used to argue just a few years ago that American house prices in America would never fall, because they hadn’t ever fallen since the Depression. It’s the same argument you are using. But prices did fall, and all the supposedly super smart banks went bust.

            I basically agree with you that efficiency standards are not a great way forward. The government should just tax energy, and demand would fall.

          • JonathanMaddox

            Efficiency standards and evolutionary efficiency improvements *are* a great way forward, they have worked very well for us so far. They just haven’t reduced energy demand, because we’ve almost always had strong economic growth at the same time (and at least partly as a consequence). Consumption efficiency measures are good for growth: Jevons’ paradox in a nutshell.

            If all else remains equal, the historical argument is perfectly valid. Improved efficiency *alone* will not reduce consumption. If we’re talking about a fundamental new change in the energy economy, why then yes, things would change.

            Neither efficiency standards nor an energy tax represent any significant change, though. We have had both already for a long time. The changes I had in mind were dramatic cost reductions in renewable energy technology, and increasingly punitive policy measures to reduce pollution from fossil fuels. These aren’t fundamental changes either; I expect gross energy consumption would continue to grow except during recessions. Neither measure would even be intended to reduce gross energy consumption; merely substitution of clean energy for dirty.

            A highly punitive energy tax (which is essentially what the oil crises of the 1970s were, albeit on petroleum alone) would certainly reduce consumption, but at the cost of recession. Oil consumption was decisively reduced over the course of the decade 1973-1983 (only for growth to resume afterwards), yet gross energy consumption including that from coal and uranium had risen on the whole. Only during the two short periods of recession did gross energy consumption fall.

            I guess the reasons energy consumption was able to continue growing during the 1930s Great Depression are many, but the biggest one is that energy prices didn’t rise. They fell with wages, in fact. Also it wasn’t a global depression as the USSR was completely insulated from Western markets at the time and was enjoying a massive growth spurt as it began in earnest to exploit its enormous domestic energy resources with modern technology.

            My point about substitution was that it isn’t energy consumption per se which is undesirable, but the consequences of the specific forms of energy we use. It is the exhaust gases and other hazardous waste from the combustion of fossil fuels which are undesirable.

            A Pigovian tax on the undesirable quantity should result in efforts to clean up, including both efficiency in consumption and substitution with cleaner energy sources. Make the tax sufficiently high (and, this is important, sufficiently reliable — if business expects it to be repealed after the next election, that’s not quite good enough) and those efforts will be heroic.

  • orko138

    These smart energy management systes require installation of sensors and receivers to be built in to households. The cost of this may be prohibitive for mass rollout unless the DIY open source community can come up with solutions for homeowners to do these installs as pet-projects. Anything touching an electricity line would likely require an electrician however.