Navigant Research Blog

With Developer Program, Nest Raises Questions

— June 30, 2014

This week Nest Labs introduced its Nest Developer Program, which integrates smart devices for both home and lifestyle uses.  The results suggest that energy efficiency is going mainstream without most people even knowing it.  This program, which has already enrolled partners such as Mercedes-Benz, Whirlpool, Jawbone (UP24 maker), LIFX, and Logitech, allows communications between smart devices in order to influence and optimize their overall functionality.  For example, the Nest thermostat could receive better information on a homeowner’s sleep/wake cycle, whereabouts, and habits from data transmitted through the UP24 bracelet.  It can then incorporate this information into its intelligent algorithm for determining household heating and cooling patterns.

But that’s only a small part of it.  Nest has already taken a stab at utility-scale demand response (DR) through its Rush Hour Rewards program for climate control, but the program can now enroll other energy-heavy appliances, such as washers and dryers, in the same DR events.  Following device trends in electric vehicle charging, where smart communications are increasingly integrated and relied upon, it’s fair to speculate that this type of developer program has the potential to solve a lot of the problems utilities are currently facing as growing renewables penetration causes instability along the distribution grid.

Privacy Pushback

The potential to optimize energy usage will grow significantly as cloud-based home energy management advances technologically and adds functionality.  But the market is likely to experience setbacks as privacy issues are raised.  Nest and Apple have both created privacy guidelines for data as it is communicated between devices, but protection and control over this information will still be an issue for customers.  As public utilities incorporate software platforms for managing connected devices, it’s unlikely they will be able to avoid the type of pushback (seen here, here, and here) that has hindered the deployment of smart meters.

Another question inherent in this move to a connected life is how the interaction between devices and software will take shape.  Nest and its associated partners have built value propositions off the premium quality of their networked thermostats and the software that controls them.  But competitors like EcoFactor and EnergyHub build value off the ability be flexible in the devices they connect to – asking if premium devices are really all that necessary to realize the same gains.  When you involve multiple customer demographics (with different levels of income and values) and budget-conscious public organizations, different needs and limitations will require different solutions.  There’s no denying that people become emotionally connected to well-made, well-designed hardware – and they will pay a premium for it.  But, as the cellphone industry has shown, there are limitations in terms of hardware development.  So how long will the novelty last for thermostats?

 

German Utilities Struggle in Renewables World

— June 24, 2014

Germany’s energy policies have promoted strong growth for the country’s renewables industry and have served as guidelines for countries like the United States, Australia, and Canada in adopting similar laws.  They have not, however, benefited German utilities.

Power generators in Germany are struggling as the combination of renewables and other Energiewende policies continue to shift the economics of the country’s power market.  The result has been frightening drops in per-unit wholesale electricity prices, the proliferation of low-cost/high CO2-emitting generation resources, and desperate calls from utilities for policy reform to preserve capacity markets that will provide revenue stability.

Germany allows renewables to take priority on the grid.  Because its energy market is deregulated, compensation for energy resources is set by supply and demand dynamics and marginal costs per unit.   As a result, renewables flood the grid when they are available, which is mostly during daytime peak periods (when prices used to be the highest).  But because the marginal cost per unit of renewable electricity is essentially zero, even when fossil fuel-powered resources are utilized, they are compensated at a much lower price than they have been in the past.  That’s bad news for German utilities (which are surprisingly underinvested in renewables), as they have traditionally made most of their income by generating electricity.  E.ON reported revenue losses of 14% compared to 2012, while RWE reported a loss for the first time in 50 years.

The Brown Stuff

One of the most noticeable consequences of this is the growth in coal consumption.  Due to the intermittency of renewables, utilities are required to ensure sufficient backup power at all times.  Since they are not guaranteed the ability to actually sell these reserves – and face low marginal profits when they do – they choose the most inexpensive generating option – usually coal.  Currently, lignite (brown coal) provides about 25% of Germany’s energy supply, a figure that, according to the U.S. Energy Information Administration, is growing steadily year-over-year.  This is unfortunate because it is the dirtiest fuel source in terms of CO2 emissions.  Furthermore, plants take upwards of 6 to 8 hours to ramp up, which means that it is more cost-effective to keep them running at all times.  But utilities claim that they must increase their use of lignite in order to maintain financial stability.

So what’s the answer? After so much push for renewables and dedication to reforming the energy industry in Germany, it doesn’t make sense for Chancellor Angela Merkel and German regulators to return to the status quo ante.  Grasping the futility of seeking to reverse the Energiewende, utilities have proposed a number of market reforms.  In particular, following France, there has been an increase in lobbying for the establishment of capacity markets that would guarantee utilities a source of income regardless of whether they actually sold their resources.

High Anxiety

Proponents argue that capacity markets would enable utilities to not only use cleaner fossil fuel sources, but also increase their investments in efficiency-related grid projects.  And this makes sense; the Energiewende has proposed grid investments to decrease overall transmission and distribution losses and extend the reach of renewable resources (also promoting energy efficiency).  In addition, the extension of demand response technologies (something that could also proliferate if curtailment is allowed to be sold as capacity) could ease some of the problems surrounding intermittency and high CO2 emissions from spinning reserves.

With anxiety rising among both utilities and regulators as the energy business in Germany becomes more and more disparate, it seems important to take a close look at establishing market mechanisms that simultaneously promote renewables and allow utilities and grid operators to maintain financial and operating stability while developing new revenue streams based on energy efficiency.

 

Utilities Respond to EV-Induced Grid Pressure

— June 12, 2014

Going green in one way often creates new energy use – or carbon emissions – in other ways.  When you opt out of paper mail in favor of email, you generate Internet data that must be processed and stored (which requires a data center, something that is heavy in both space and energy use).  It’s also the case with electric vehicles (EVs); you might never insert a card at the pump again, but you’ll use more electricity (and see a spike in your energy bill).  Likewise, with increased adoption of EVs, more generation will be required and distribution utilities will increasingly experience pressure on the electrical grid.

Recently, Itron and ClipperCreek announced the launch of their utility-connected charging station for EVs, the CS-40-SG2.  Equipped with a revenue-grade submeter that communicates specific EV charging information to the utility, the charging station also includes ZigBee Smart Energy Profile 1.1 and cellular and Wi-Fi-enabled communications technologies that provide access to smart grid capabilities such as remote monitoring and demand response (DR).

Stress Response

Utilities that anticipate (or are already experiencing) increased EV adoption are eager to shift peak electricity use in order to maintain efficiency in generation resource planning and to better manage new peaks.  This technology allows the utility to remotely monitor and control residential charging, as well as collect interval data that can help guide future planning and action.  Similarly, a smart grid-enabled submeter allows the utility to implement DR and time-of-use rates to curb electricity use for charging.

Another problem associated with EV charging in heavy penetration areas is transformer overload.  Associated with uncoordinated residential charging of EVs, this can cause both stress and congestion on the local distribution network.  Extending the utility’s monitoring capability and control to the point of use can limit the impact of responding to grid stress to the point of use or the individual charger.

It goes (almost) without saying that for this technology to be effective, the utility must already have a basic smart grid infrastructure that allows for DR functionality and grid monitoring, as well as an understanding of current and future effects of increased EV penetration.  Many utilities in the United States are updating their aging infrastructures to accommodate EVs and distributed generation.  However, the small number of existing state and federal grants for EV supply equipment suggests a sluggishness that could be due to uncertainty as to the current effects and how to best manage residential EV charging.  But as demand for EV charging resources grows, so will the need for state public utilities commissions and utilities to adapt.  The ClipperCreek/Itron charging station will be the first of many tools developed to smooth this process.

 

In Transformation, Utilities Seek Customer Segmentation

— June 5, 2014

It’s no secret that American utilities are in the midst of an industry transformation.  This process, triggered in part by fears of a death spiral induced by the spread of distributed generation, requires adherence to increasingly demanding energy efficiency and renewable portfolio standards, and increased customer interaction and communication.  This reality has caused utilities to re-examine their existing business models, which have informed their policies and business practices for nearly a century.  The customer is now at the heart of the business plan.

A large part of meeting efficiency standards is better demand-side management on behalf of utilities, which requires effective insight on and communication with customers, as well as infrastructure upgrades that support increased grid reliability and the integration of renewables and microgrids.  In order to meet these challenges, utilities must understand the wants and needs of different consumers and the monetary value of servicing specific needs to specific customers.  Utilities are mandated to serve their customers (even in Texas, sort of) ‑ but how well can they serve specific groups of customers, how can they leverage consumer segments for efficiency and reliability programs, and what grid technologies out there are the most cost-effective in doing so?

Getting to Know You

Much of utilities’ segmentation strategy has traditionally relied on clustering customers based on simple demographics, geography, and reliability requirements.  But these strategies are typically one-dimensional and aligned with a single operational goal.  In integrating more advanced (and expensive) grid infrastructure  and demand-side programs, customer segmentation must be multidimensional and aligned with firmwide objectives.  Segmentation needs to incorporate some of the softer customer characteristics, including values, depth of energy knowledge, interaction with social media, residents that rent versus own homes, and communications preferences, to name a few.

These characteristics are quite disparate, and this list is only skimming the surface in terms of potential segmentation dimensions.  Having this sort of open canvas can be intimidating for utility marketing managers, and rightly so.  However, instead of identifying potential dimensions and then working to gather data directly from utility customers to sort them into segments (a process akin to releasing a flock of messenger pigeons with surveys attached to their necks), advances in data gathering and analytics can streamline the process of mining multiple sources of data, recognizing patterns that can potentially define customer segments, and then categorizing these groups for utility marketing purposes.  Navigant Research outlines a number of vendors and considerations for this form of customer segmentation in our report, Smart Grid Data Analytics for Consumer Engagement.

In this way, utilities can develop meaningful segmentation based on multiple attributes that can actually inform business decisions across programs and investments.  Because they operate in a highly regulated environment, utilities are largely unable to make investments where cost-effectiveness is in question.  Infrastructure upgrades and new programs must deliver value by accurately targeting receptive groups of customers.  But the questions remain: How to partition off these groups and how to define them? By way of big data analytics, utilities can define new segments that could help marketers feel less bewildered by and fearful of the actual results.

 

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