Navigant Research Blog

Are We Approaching the Energy Singularity? Point

— June 27, 2016

CodeElon Musk, doing his best Elon Musk, offered the provocative statement recently at the Code Conference that our existence is actually just a simulation being run by a highly advanced civilization. While a fringe theory, behind the statement is actually a rich vein of academic and philosophical thinking suggesting that we are approaching a point in human history at which the innovation that will occur in the next 5 minutes will outpace everything invented in the last 5 million years. Futurists like Ray Kurzweil describe this point in human history as the singularity.

The energy industry is no exception to this phenomenon. With the pace and scale of innovation accelerating across the energy landscape, grid 2.0 will be unrecognizable from the one we know today. More importantly, the inevitability of significant industry transformation is becoming increasingly difficult to ignore (see my colleague Jan Vrins’ Industry Megatrends blog series), begging the question whether we are approaching an energy singularity. This post suggests we are very likely catapulting toward such an event. In a companion post, my colleague Neil Strother argues a more skeptical approach.

The Energy Cloud and the Energy Singularity

As the end result of rapid innovation, much of which lies beyond our immediate purview, the Energy Cloud describes the confluence of many concurrent disruptions wreaking havoc on conventional ways of doing business. The full realization of the Energy Cloud’s potential as a highly networked grid ecosystem would only be accelerated by such an event.

The future grid will be cleaner, more distributed, and increasingly intelligent. These trends are expected to penetrate all corners of the industry: customers, regulation and policy, technology, business models, and grid operations. These advances will come in fits and starts and evolve differently in accordance with on-the-ground realities across various markets. That being said, the propensity for innovation and change is undeniable; the prolific (and sudden) rise of distributed energy resources (DER) server as a reminder of the destabilizing impact of innovation.

We cannot predict or anticipate all the disruptions that will be triggered by emerging technologies within the Energy Cloud and beyond. However, if you start with a potential endpoint—an autonomous, self-healing, and artificially intelligent grid emerging within the next several decades—we can begin to understand the far-reaching implications of the energy singularity.

The Neural Grid

While today’s grid is a highly transformative machine that has done a fine job powering innovation across the global economy, the crank of history has come full circle as a perfect storm of significant technological leaps that are beginning to take root and transform the industry in dramatic ways.

There is an inevitability to innovation that cannot be ignored. Consider that it was just 2013 when the Edison Electric Institute predicted in its oft-cited Disruptive Challenges paper that DER adoption, fueled by economic trends and policy, would likely cause a disruption of the utility industry, even suggesting the traditional utility could go the way of Kodak, the U.S. Postal Service, or telephone companies if they failed to adapt. Just last year, Energy Secretary Ernest Moniz noted that we are in the [energy] revolution today.

Fast forward to 2016, and the World Economic Forum is predicting that we are in the throes of the Fourth Industrial Revolution, in which the pace, scale, and impact of innovation will rapidly outpace anything we’ve seen in the past. The Fourth Industrial Revolution suggests that human intervention across the grid as we know it today will be mostly a relic of the past. It’s not far-fetched, for example, to consider Siri, Alexa, and Viv as the primary customer contact points for utilities behind the meter. Taking this a step further, a “conscious” grid could obviate the need for regulators or system operators altogether.

With artificial intelligence attracting $17 billion in investments since 2009 (and $2 billion in 2015 alone), machine learning innovation is on the march. Increasingly, this development is going open-source, which is the equivalent of putting innovation on steroids.

  • DARPA sponsored a driverless car challenge in 2004 that resulted in the winning car traveling 7.2 miles. In 2007, the winning entry went 60 miles driving under city conditions. Fast forward to 2015, where you have individuals building self-driving cars in their own garage.
  • Google’s self-driving car logged 1.5 million driving miles in 6 years; Tesla’s autopilot feature has logged 47 million miles in 6 months.
  • Google search processes 12.1 billion queries per day; each provides multiple data points to help understand what makes us human.

If you take these trends to their logical conclusion, grid learning could propel us toward an energy singularity event within the next several decades. Such an event would mark the dawn of the neural grid, with the potential to be far more transformative to human civilization than the dawn of the light bulb.

 

Agile Innovation in the Energy Cloud

— May 2, 2016

Energy CloudOne year ago, Navigant’s Energy Cloud: Emerging Opportunities on the Decentralized Grid white paper described a power industry evolving into a dynamic network of networks far more sophisticated than the traditional hub-and-spoke model of yesterday. Propelled forward by the convergence of multiple megatrends transforming how energy is produced and consumed globally, tomorrow’s grid will be more clean, distributed, and intelligent.

Marking a shift in industry sentiment, there is now nearly unanimous consensus among utility executives and stakeholders that the industry is facing profound change. Utility Dive’s State of the Electric Utility 2016 survey shows that 97% of the 515 U.S. electric utility executives who responded to the survey believe their own utility’s business model needs to change.

But while some aspirational endpoints may be clearly defined (e.g., “Grid to Cloud“), the pathways to position for success in this emerging environment remain elusive.

Stakeholders continue to run up against the same issue: yesterday’s playbook to capture and grow revenue no longer applies. Whereas yesterday’s coal plants could be rate-based over a 30-year timeframe, for example, today’s distributed energy resources (DER) technologies are likely to be obsolete in a matter of years, replaced by ever cheaper and more efficient solutions. Navigant Research analysis shows that new global DER capacity deployments, for example, are expected to outpace centralized generation deployments by a factor of five by 2025—both a reflection of a rapidly evolving energy landscape and the emergence of a more modular, plug-and-play grid.

As the scale and velocity of DER adoption accelerate, utilities will become more exposed to technology innovation than ever before. With many hemmed in by a regulatory model better tuned to centralized generation, utilities must maneuver to allow sufficient flexibility to continuously swap out obsolete assets and programs.

Holistic Planning

Today, nearly all major utilities in North America and Europe are heavily invested in demand-side management, utility-scale renewables, and DER, according to Utility Dive’s survey. However, many utility investments remain siloed, focused on new business models targeting single technology solutions. Meanwhile, the emerging Energy Cloud is a multi-variable landscape where agility and flexibility are fast becoming a strategic necessity. The threats transforming the industry are both nuanced (e.g., value of clean, intermittent power versus reliable, baseload power) and multifaceted.

Take the aforementioned trends—clean, distributed, and intelligent. While each are profoundly disruptive in their own right, they are also interrelated and cut across multiple dimensions: customers, regulation, business models, technology, and operations. Strategic planning requires a view toward the multitude of disruptive forces eroding utility revenue.

Perhaps most challenging for utilities, strategic planning must embrace the ability to fail fast, early, and often to keep pace with the rate of technology change. If innovation tells us anything, it is that most initiatives are bound to fail, or worse yet, return just enough to sustain interest and occupy resources for several years before finally flaming out.

While the pursuit of new business models remains vitally important in this shifting landscape whether regulated or not, the utility opportunity lies more in the ability to continuously shape and prune DER portfolios, shedding laggard components and embracing emerging solutions rich in grid services.

Agile innovation, an extension of an approach to product development that gained fame in the highly competitive software industry, provides a useful blueprint. Focused on two objectives—accelerating the time to market readiness and reliably producing high-quality results—agile innovation is designed to be highly iterative, enabling rapid adaptation to unfamiliar and turbulent environment. Sitting on the precipice of profound industry change, utilities that embrace holistic planning while remaining flexible are likely to be prove most successful at preserving and growing revenue.

 

Reserve Margins Undermined by Climate Change in the West

— June 10, 2015

A recent Arizona State University report has found that estimated reserve margins across the Western states will be far lower than previous estimates suggest. Reserve margins are a measure of available generation capacity over and above the capacity needed to meet normal peak demand levels. Regulatory bodies usually require producers and transmission facilities to maintain a constant reserve margin of 10% to 20% of normal capacity as insurance against breakdowns across the system or sudden increases in energy demand.

The study, which looks at power delivery over the next 50 years for the 14 Western states served by the Western Electricity Coordinating Council (WECC), found that extreme heat events and drought are occurring with greater frequency and duration, putting a significant strain on installed and planned generation capacity.  According to estimates published in the study, power providers may be overestimating planning reserve margins by as much as 20% to 25%.

For a system designed to deliver safe, affordable, and reliable power, this is a problem. Power providers do not currently account for climate change impacts in their operations, which could leave utilities and grid operators more exposed to unforeseen weather events than previously thought.

Varied Impacts

According to the study, forecasts about the impact on specific generation sources vary. Baseload nuclear and coal power plant capacity would be most impacted by reduced cooling water during the hottest days. Reduced stream flow would is also expected to reduce hydroelectric capacity in drier regions, but increased precipitation, particularly in the Pacific Northwest, could temper these losses. Although, combustion turbines – fueled by natural gas or renewable natural gas (RNG) in some cases – and solar PV lose output as air temperate rises, the impact on solar PV capacity is expected to be negligible. The researchers also concluded that potential changes in wind speed and air density would not have a major impact on wind generation capacity.

The study points to increased momentum behind the power grid becoming more distributed and dynamic. Not only are solar PV, energy efficiency, and other distributed energy resources (DER) a powerful tool for reducing greenhouse gas emissions across the grid, with the emergence of the energy cloud, they will help utilities and grid operators deliver on their obligation to provide safe, affordable, and reliable power.

A Way Forward

Increased penetration of DER also reduces the impact of line loss, a key issue across the West. As bulk high-voltage power cable shoulders the burden of moving capacity from remote areas to population centers dispersed across the expansive Western region, aging high-voltage power cables are prone to expansion and sagging, causing more resistance across the system and requiring increasing levels of generation. Severe heat events could exacerbate the situation further, eventually posing a threat to public safety.

Although the Arizona State University study is worrisome, many of the innovations and tools necessary to mitigate the impact of climate change on the grid are available today. Efforts by the U.S. Environmental Protection Agency to regulate carbon emissions in the power sector through the Clean Power Plan (CPP) are expected to force utilities and regulators to shift the generation mix away from heavily polluting generation sources, which would help insulate the WECC region from the impact of severe heat and drought.

 

The Customer Interface in the Cloud

— May 12, 2015

As described in Navigant Research’s recent white paper, The Energy Cloud, the power grid is undergoing a fundamental transformation to a decentralized architecture. This shift will bring profound changes to traditional stakeholder relationships. Specifically, the broad array of residential consumers—most of whom are beholden to their utility service providers and lumped together as a monolithic entity in traditional rate design—are emerging as one of the key underlying drivers of this change.

For utilities and stakeholders responding to this shifting market, early battles are being waged to lock-in consumer engagement. As Tesla’s recent Powerwall announcement demonstrates, in this emerging landscape, brand matters. Interface matters. Ultimately, as described in a recent article in Intelligent Utility, future customer engagement strategies will have to be diverse, flexible, and multichanneled. But above all, these strategies must seek to facilitate a connection between the residential consumer and the products and services they demand.

Prosumer Defection

Empowered by greater access to tools and direct marketing from intrepid companies, residential customers are exercising more control over their electricity usage and spending and over when and what type of power they buy. In some cases, these consumers are demanding the ability to self-generate and sell onsite power back to the grid. The dramatic rise of solar PV has demonstrated that, at the right price, consumers will embrace choice and ownership over their energy consumption patterns.

A growing minority of energy prosumers, meanwhile, are cutting out the utility entirely. As zero-energy homes demonstrate, when the capabilities of rooftop solar and other distributed energy resources (DER), energy efficiency improvements, and home energy networks are integrated, the resulting network can render the traditional utility-customer relationship obsolete. When aggregated across a distribution network, utilities take notice—which is exactly the scenario described in the Rocky Mountain Institute’s Economics of Grid Defection report.

Renew and Replace

Customer empowerment is not unique to the power sector. As markets mature, the industrial model of companies owning and people consuming is often undermined by technology innovation. This typically results in a power shift in favor of customers. In the power sector, companies like NRG Home are positioning for just this scenario.

While the initial adoption phase of customer empowerment has ushered in a broad transformation on the grid through energy efficiency and DER, the next phase, replacement, will bring about a far more profound shift. Ford’s Model T proved that customers were willing to embrace the automobile over horse and buggy, for example. As disruptive as this was, the next hundred years proved that customers will exercise greater scrutiny and demand for product diversification, giving rise to a $1 trillion dollar industry.

During this replacement phase, companies invest to compete both for existing customers and for the customers of competing entities. They refine their product lines and cater to increasingly specific segments of the market. Some bundle services to drive value. Others sell no tangible products at all and instead provide access or an interface.

Who Needs Products?

Meanwhile, residential consumers are moving beyond the static behaviors accounted for in traditional utility rate design. Regardless of the market or circumstances, over time, consumers become more sophisticated and knowledgeable about the products they consume. They exercise greater scrutiny around quality and sourcing. They seek value and convenience. Eventually, they come to expect that technology will cater to their preferences.

Ultimately, presented with more choice with respect to price, quality, attributes, and features, consumer’s preferences and demands begin to define product lines. It’s the coming replacement market for demand-side energy solutions. In the home, for example, consumers have responded to product diversification in seemingly banal appliance markets like washers and dryers and more recently thermostats and smoke alarms.

It takes a long time to break down something as longstanding—and with as many private sector and government interests—as the power sector. But as the emerging energy cloud demonstrates, it’s happening; people are opting for more control over their energy dependence.

As customer engagement strategies mature in the energy cloud, there are important lessons to glean from the fast-expanding sharing economy where consumer entrepreneurs are competing with well-established entities. Interestingly, some of the fastest-growing companies facilitating these transactions—Uber, Facebook, Alibaba, and Airbnb—own no products at all.

 

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