Navigant Research Blog

Tug of War Over Utility Customers Intensifies

— November 5, 2014

In the last few years residential demand response (DR) has become a thriving market.  Recently, Constellation and Honeywell rolled out a service for all customers in areas that the companies serve designed to encourage consumers to purchase Honeywell thermostats and network them into Constellation’s platform.  Initially introduced only to Startex customers (a Texas subsidiary of Constellation) earlier this year, this service highlights the rising competition for energy customers.

Constellation claims that the program has the potential to shave upwards of $128 annually from customers’ electric bills.  Such services could help utilities reach energy efficiency targets as well as assemble an effective pool for residential DR programs.

There’s only one problem here, and it’s exacerbating tensions between utilities, energy service companies, and regulators.  The problem is that this type of program, also referred to as a hybrid DR model, blurs the lines around who exactly “owns” the customer, as well as who is providing the resource.

The New Disruptors

It seems natural for utilities to be receptive to the continued expansion in resources used to target electric customers for energy efficiency and DR programs.  But many utilities, particularly those in regulated markets, see this as encroaching on an established model in which the utility acts as the face of the service in all cases (regardless of who’s actually providing the service).  As utilities shift from vertical producers and deliverers of kilowatt-hours to being providers of electric services (the Utility 2.0 model), the general consensus is that they want to maintain their statutory ownership of their customer base.  Having already given up so much, it’s likely that utilities will put up a fight in holding onto at least this little bit of status quo and margin.

But that’s not how the many disruptive participants, which have evolved within the energy and utility industry or entered from the broadband and IT spheres, want to play.  They want the customer too, either to expand their business and gain more margin, or because they already own the customer through their primary business (think broadband providers).

Not Letting Go

Looking at it from an economic perspective, some argue that allowing non-regulated service vendors to compete will eventually favor the customer.  Others point out that, while an electric services model does have the characteristics of a highly competitive market, the fact remains that delivering electricity requires substantial and expensive infrastructure, therefore limiting the number of competitors, which could disfavor the end user.  Regulators have been understandably reluctant to institute any sort of rapid overhaul.

I’d argue that regulators and utilities are highly aware that they must change the way they do business in order to facilitate the transition of the energy industry to a lower-carbon state.  But it’s not surprising that they still want to defend their end-user relationships.  Customers like having a single point of contact for their energy services – not separate contacts and bills for delivery and energy efficiency.  Furthermore, as utilities lose revenue associated with dismantled vertical business models, energy efficiency and DR are among the few areas where they have the ability to supplement losses.  As hybrid DR models spread, it’s unlikely that incumbents will let their customer relationships go easily.

 

Power Sector Buzzes with Jargon

— October 2, 2014

As a utilities analyst, I encounter a number of buzzwords –  terms that seek to broadly and catchily define the multivariate technologies and approaches that have been developed to modernize the electric grid.  The most common are “smart grid,” “grid 2.0,” and “utility 2.0.”  In this post, I’d like to assist myself, and any interested reader, in better understanding these terms and how they differ.

Supposedly, the term smart grid was coined in 2003 by Andres Carvallo, then the CIO of Austin Energy, to explain the Electric Power Research Institute’s (EPRI’s) Intelligrid – an electric grid that was monitored and managed remotely and incorporated data analytics into processes.  The term didn’t really stick until 2009, when the U.S. Department of Energy (DOE) awarded 99 American utilities a total of $3.4 billion dollars as part of the American Recovery and Reinvestment Act of 2009 (ARRA)-funded Smart Grid Investment Grant.

So what does smart grid mean?  According to the DOE,  it means “computer based remote control and automation … made possible by 2-way communication technology and computer processing.”  Let’s just call it the foundational definition for all of the technological innovation that exists to modernize the electric grid.

One for the Shredder

As for the second, newer term, grid 2.0, it turns out that this buzzword didn’t really pick up that much, and as far as I could ascertain, it’s used synonymously with smart grid.  So we can just throw that one out right now and stop confusing people.

Utility 2.0, on the other hand, is an important conceptual extension from smart grid.  I’m pretty certain I first saw this word last year in reference to microgrids, in a Public Utilities Fortnightly article that explained how different technologies can enable grid resiliency and lessen the impacts of outages.  The term has also been used to describe the concept of utilities revising their decades-old business plans to take advantage of increased renewables generation, distributed energy penetration, advanced demand-side management, and customer engagement.  Last spring, the state of New York introduced its Utility 2.0 plan, which seeks to introduce regulatory incentives for utilities to fundamentally upgrade their business models, operations, and infrastructure.

Ignoring Complexity

The problem with the term utility 2.0 is that, in most cases, it’s used only in reference to how utilities do business, not to the technological and infrastructure considerations that enable this business.  In that sense, it indicates that utilities and regulators and customers are all going to work together, take some financial hits, and pay for and install a smart grid, and it’s all going to be great.  That simple definition ignores the most difficult parts of the process.

We’ve moved past the simple understanding of the smart grid.  We need to better understand the complexity of enabling different systems within the electric grid to function as a cohesive architecture.  This will be a different process for each utility because each system is uniquely configured to adapt to different constraints, and because there are so many different types of offerings out there that are targeted at similar issues.

So, to me, the term utility 2.0 is not just about reshaping business practices and integrating new technologies, such as distributed generation and demand response; it’s the systematic integration of diverse systems that allow for each utility to realize its own transformative goals.  This concept, also called interoperability, might be the single most enabling aspect of updating our electric infrastructure.

 

Bill Gates: How to Fund Energy Miracles

— August 21, 2014

Through the Gates Foundation, Bill Gates has taken a stand on improving global public health, investing in programs focused on basic advances such as developing a next-generation condom to prevent the spread of sexually transmitted diseases, creating a standalone vaccine cooler for communities that are stranded without electricity, and inventing a toilet that can solve sanitation issues by pyrolizing human refuse into something more usable (using solar power, no less).  Meanwhile, Gates is also challenging U.S. energy policymakers and their funding practices for energy R&D.

In a June blog post titled “We Need Energy Miracles,” Gates called for the United States to look hard at R&D allocations, potentially redirecting funding from the military and healthcare sectors toward energy research and pilot projects (presumably renewable ones).  Given the imperfections (intermittency, inefficiency) of existing renewable resources, Gates argued, this research is necessary to establish an equitable energy mix, both in the United States and abroad – especially in developing nations that must increase energy use to grow their economies.  He stressed the need to invest in projects that are “high risk/high reward” in order to achieve the sort of miracle needed to support growing demand and limit climate change.

Memo to Bill: DIY

Responding to Gates, Solar Wakeup (republished by Clean Technica) noted that Gates has been active in investing in energy storage with Aquion and LightSail but challenged him to be the major financer of the next energy miracle.  Why?  Simply put, it’s unreasonable to expect increased investments (private and public) in risk-agnostic energy R&D, and if one of the world’s richest men wants it to get done, he should do it himself.  Payoffs are slow for energy projects, the uncertainties many: macroeconomic conditions, volatile energy and resource markets, policy reversals, infrastructure needs, and high operating and maintenance costs.  Solar Wakeup’s challenge is based in reality.

But the cleantech and renewable energy sectors are already substantial in countries all over the world, and growth is accelerating.  China has recognized this.  In recent years, China’s public and private investments in cleantech, both at home and abroad, have explodedReports by Azure International explore the drivers for increasing investment in cleantech in China.  Risk is inherent in investors’ strategies for expanding their energy-related portfolios, and intangible values, such as technological and innovative prestige, sometimes compete with return on investment (ROI).  Encouraged by the government, Chinese investors have become increasingly willing to fund energy efficiency and conservation projects such as smart grids and smart buildings.

The topic of investment in renewables and smart grids is thorny, with many caveats and nuances that tend to shape the potential for ROI – but it’s safe to say that with China’s example, maybe Gates has a point in his stance against being risk-averse toward investing in potential energy miracles.

 

With Thread, Nest Targets Wireless Energy Devices

— July 29, 2014

It’s been a busy year for Palo Alto, California-based Nest.  In January, the firm was acquired by Google.  Last month, Nest announced that it would acquire Dropcam, which offers a Wi-Fi-enabled portable camera that pairs with a cloud-based video monitoring service.  Days later, the company launched the Nest Developer Program, enrolling early partners Mercedes-Benz, LIFX, Whirlpool, and Jawbone.

More recently, Nest introduced Thread, a personal area network (PAN) specification for device interconnectivity.  This specification will be regulated by the Thread Group, of which Chris Boross of Nest will be president.  Competing with other wireless specifications such as ZigBee, Wi-Fi, and Bluetooth Smart, Thread is a low-power mesh-based solution that follows the IEEE 802.15.4 and IPv6 standards.

Much of the coverage (see here and here) of the Nest/Thread announcement has asked whether we really need another standard for networking in-home devices.  Thread, though, has some advantages over Wi-Fi and Bluetooth.  Wi-Fi uses a lot of power, which makes it impractical for low-power battery-operated devices such as thermostats or smoke alarms.  Bluetooth Smart is already installed in most smartphones and is low power, but its range is limited.  ZigBee has encountered problems with vendors making proprietary adjustments to the specification, making it impossible or very difficult for devices to interoperate.

Looking for Options

The burgeoning number of entrants in the networking protocol space signals increased competition and perceived high value to be found in the market for connected devices.  For retail consumers, this means better products at lower prices that are easier to integrate into their connected life schema.

Unfortunately, for utilities looking to integrate energy-saving devices such as smart thermostats and lighting controls into their energy efficiency and demand response programs, multiple network protocol alliances present problems.  In order to implement these programs, utilities are subject to numerous technology restrictions and standards from state public utilities commissions or regional independent system operators.  OpenADR and ZigBee Smart Energy Profile are among these standards, and the further that protocol competition pushes the retail device market away from these, the narrower the options will be for utilities.

Sacramento Municipal Utility District (SMUD) has engaged in extensive research on different models of smart thermostats, hoping to identify those that are easy to use and will yield a stronger customer experience (as well as meet energy efficiency and curtailment goals).  However, any model that the utility looks at is subject to a number of technical requirements.  Since these are set by regulating bodies, it’s unlikely that requirements will remain in stride with developments driven in the commercial market.  As it is, the economics of utility deployments are not always favorable to vendors, particularly in programs where more than one thermostat option is offered and sales volumes are uncertain.  It remains to be seen whether vendors will offer devices and platforms that can be used by the organizations that will require them to meet energy efficiency directives and load curtailment needs.

 

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