Navigant Research Blog

Oil Producing Nations Signal a Warning to the Utility Industry

— April 17, 2018

Saudi Arabia seems to be following Norway’s lead as a major oil producer eschewing fossil fuel generation for cleaner alternatives. This nation-state trend is mirrored at a company level, with major oil companies also seeking opportunities in renewable energy. Utilities may ignore it at their own peril.

From Oil Empire to Renewables Powerhouse

In February 2018, Saudi Arabia’s first utility-scale solar auction broke records: ACWA Power won the right to develop a 300 MW solar farm under a 25-year PPA with a tariff of $0.0234 kWh, made possible through unique market conditions. High solar irradiance and declining costs are assisted by low land costs, a favorable licensing regime, and cheap finance.

This is just part of a much wider shift to solar. In March, the Saudi government and Japanese tech giant SoftBank announced an ambitious $200 billion, 200 GW, 12-year solar generation project. If—and it is still a case of if not when—all this planned capacity is installed, Saudi Arabia’s generation capacity will exceed the country’s needs. Part of the King Salman Renewable Energy Initiative, this project could see Saudi Arabia become a net exporter of renewable power.

Saudi Arabia’s Plans Could See It Become the Norway of the Middle East

Despite obvious differences, there are many parallels to be drawn between Saudi Arabia and Norway. Both are net oil exporters, have huge sovereign wealth funds, and are keen to become the renewable energy leaders in their respective regions. Norway’s renewables strategy is somewhat more advanced than Saudi Arabia, and may point to Saudi’s future.

Rather than self-consume its North Sea reserves, Norway relies on abundant hydropower and 838 MW of wind capacity for its generation, exporting most of its hydrocarbons. With abundant oil reserves, one could expect Norway to be a nation of gas-guzzling vehicles, but the reality is very different. Through a raft of incentives, Norway has become the EV capital of the world. Navigant Research projects Norwegian EV market share could hit 33% in 2017, well ahead of its European neighbors. Finally, the Norwegian transmission systems operator Statnett is deploying interconnectors to help secure Norwegian energy supply and allow its generation companies to export excess generation capacity.

Economics and Environment See Oil Producing Countries Turn to Renewables

There is an economic argument that underpins Norway and Saudi Arabia’s domestic energy policy: with abundant and cheap renewables, neither country relies on hydrocarbon generation, which can be exported to other countries. With further reductions in the cost of Saudi solar, the Kingdom could rapidly follow Norway’s lead. It is not difficult to imagine a future where Saudis increasingly rely on renewable generation for internal electricity consumption and drive more and more EVs.

Utilities Beware: Oil Majors Are Following Similar Paths

There are other parallels to be drawn, however. Two of the largest and cash-rich oil producing countries are making their marks in renewable energy. So are the oil majors, making increasing investments into downstream renewable energy. Which brings me back to a subject close to my heart: a distributed and renewable energy future will also be fiercely competitive. There is no room for monopoly market thinking at incumbent utilities. Oil majors and auto manufacturers are betting heavily on an electrified, distributed, and renewable future. There may be no room at the table for old-school utilities fixed on a centralized business model.

 

What’s Up with the Blockchain Trend?

— April 3, 2018

In March 2018, the blockchain-in-energy hype dial turned up a notch with the publication of the total investment attracted by energy-related blockchain startups. While the numbers are impressive, it’s important to remember the majority is investment capital, primarily sourced from initial coin offerings (ICOs), not utilities’ direct investment into blockchain, which remains a tiny percentage. That will only come if these startups last more than a few years, and that ‘if’ is a rather large one.

How Big of a Deal Is Blockchain?

That energy-related blockchain startups raised $324 million in the last year is an eye-catching headline, and cause for excitement. Yes, blockchain is making an impressive charge well beyond its birthplace in cryptocurrencies. Yes, there is promise for blockchain in the utility industry, in several different use cases. Yet, caution, not unfettered enthusiasm, is advised.

Of this $324 million, 75% came from ICOs, a largely unregulated method for startups to raise investment in exchange for cryptocurrencies. ICOs are often backed-up with only a white paper (rather than a prospectus written by lawyers) created by the startups themselves.

Investment Numbers Aren’t Necessarily Stable

Additionally, this $324 million may already have shrunk significantly. In a typical ICO, “investors” buy the tokens or coins on offer with cryptocurrencies like Bitcoin or Ethereum rather than with dollars and cents. The price of Bitcoin has crashed since the end of 2017, so $1 million raised in a Bitcoin-backed ICO in December 2017 will today only be worth 40% of that figure. It’s also not representative of industry interest in blockchain: it’s mostly private investors riding the Bitcoin hype, chasing get-rich-quick cryptocurrency schemes.

Energy Companies Are Hesitant

Despite claims to the contrary, blockchain isn’t taken seriously by energy companies. A few have dabbled. GTM list four in its article: Centrica, RWE, Innogy, and TEPCO. Given that RWE’s blockchain investment is through its erstwhile Innogy subsidiary, three utility investments don’t represent a gold rush. Centrica is often at the forefront of technology innovation: for example, it was the first energy company to acquire a smart home technology business. Yet it placed its blockchain bet on LO3 Energy, one of the most mature and visible blockchain companies. Similarly, TEPCO invested in a company with a unique focus: Electron works on device registration and customer switching, a far cry from the cryptocurrency-based transactive energy (TE) business models of most startups.

Be Wary of Bubbles

But what of the big ‘if’ I mentioned above? I witnessed the internet bubble burst in the late 1990s and see many parallels to blockchain today. In that goldrush, investors poured billions into poorly-regulated businesses that promised the world yet only delivered losses. I believe the same is happening with blockchain. While there will be winners, there will be a lot of losers too. Given that TE is by far the most commonly pursued business case, bear in mind that:

  • Blockchain startups typically cannot demonstrate an ability to code enterprise-grade applications
  • Peer-to-peer energy trading is illegal under most regulatory regimes
  • Even if TE were permitted, to date there is no functional business model
  • If TE were permitted, the world will only ever need a handful of TE platforms from which to choose.

Investors may well be throwing money into an over-populated marketplace that may not be able to deliver a software product, that supports a business model that fails to gain regulatory approval, or may never turn a profit.

Expect Disruption

I am positive about TE. I believe the industry can make it work. TE can benefit all participants in the electricity system, especially because its market-based financial incentives can replace existing subsidies. I also believe that around 90% of the TE-focused startups will no longer be with us by the turn of the decade. Investors and utilities, caveat emptor.

 

Make Sure You Have a Strategy before Asking Whether You Need a CDO

— March 1, 2018

Before recruiting high level staff to drive digital transformation, it is worth remembering that staff alone—regardless of their skills—are not a guarantee of success. Digitization is an enabler for business transformation. Business transformation requires a solid strategy roadmap backed by C-suite executives.

Late last year, Strategy+Business published an article that asked whether utilities need a chief digital officer (CDO). It discussed how the industry is undergoing a rapid transition that is underpinned by the digitization of previously analogue processes. The value of a utility’s enterprise data is soaring. Data is central to the energy transition. All the new business models currently being discussed—such as smart EV charging, automated demand response, advanced distribution management, and many more—rely on connected devices spitting out ever-increasing volumes of data. Data is also central to the efforts to improve the efficiency of business processes across the entire value chain. The old maxim “you can’t manage what you can’t monitor” still rings true.

Are CIOs Poorly Suited for Digital Innovation?

Strategy+Business correctly discussed how the traditional CIO role is unsuited to adopt the mantle of a CDO. CIOs have historically been in charge of large-scale IT deployments and an organization’s digital transformation can often be, somewhat naively, regarded as a simple extension to a CIO’s current job description. However, digitization is far from a standard IT project.

Digitization is the fundamental enabler of strategic change. It dramatically changes a utility’s go-to-market and relies on the convergence of business units with IT. Unfortunately, CIOs can be too heavily invested in the old ways of doing things. In my experience, a CIO’s intransigence is one of the most often cited barriers to analytics and digitization projects. The article states, “The reality is that leading digitization will require an executive—regardless of the title he or she holds—with skills and roles that depart from those of the CIO.” It goes on to list a bunch of skills that set a CDO apart from CIOs.

Job Descriptions Are All Well and Good; Just Don’t Forget the Underlying Strategy

While there is no arguing with the piece’s sentiment, I believe that the article missed the most fundamental requirement: the need for an enterprisewide analytics strategy. I am not alone in writing extensively on the gaping chasm between the executive board’s proclamations regarding a digitization strategy, and what is being done on the shop floor to effect the digital transformation. Teradata’s David Socha’s blog from 2017 is another great resource.

A CDO is a pivotal role within a company’s digitization, bringing skills—Strategy+Business lists skills including strategic thought, experience of transformation, execution, and experience with data—that many CIOs will lack. However, these will come to naught if there is no CEO-backed, companywide strategy that drives the digitization project. Who leads the digital transformation is a side issue. No one will lead it if they lack the ammunition to effect change.

Enterprisewide Strategy Must Define a Utility’s Digitization

Utilities first and foremost need a plan to guide themselves through the digital transformation. Digitization is just an enabler for wider strategic objectives. Therefore, utility executives must identify the products and services they could (not should or will) deliver in the future. They must then identify what technologies will be required to support these services, how these services will evolve over time, and the changing requirements in underlying technology.

These strategic goals will help define the roadmap that a CDO—or anyone else, for that matter—will implement. Simply recruiting someone with an impressive CV backed up with vague pronouncements from on high will take a company exactly nowhere.

 

European Utilities Will Never Tame Enterprise Data, but That’s Okay

— February 22, 2018

The last decade bore witness to the beginning of the energy transition. In 2018, the European energy transition is well underway. Without doubt, the next decade will be the most disruptive in the industry’s history. Investment in innovation is running at unprecedented levels as incumbent energy suppliers seek out the business models that will serve the 21st century customer. It is now commonplace for utilities to acquire technology companies; 10 years ago, this would have been largely unheard of. In addition, startups are bringing new products and services to market at a pace which the industry has never experienced. While the energy transition is concerned with decentralization, decarbonization, customer centricity, and increased competition, none of this will be possible without a concomitant digital transformation.

Energy Supply and Distribution Operation Will Significantly Transform

In Defining the Digital Future of Utilities, Navigant Research discussed what future business models could look like in 2030. European utilities are leading this transformation. The old utility supply businesses are rapidly shifting focus to energy services, based on a decentralized energy value chain. Many European utilities are already shifting focus away from traditional supply, recognizing that future value lies in helping customers reduce energy consumption, become greener, become more responsible for their own power needs, and create community-based business models for power generation and consumption. In the future, energy service providers will also help maximize economic returns on customers’ investments made into demand energy resources (DER). This will be done either by aggregating customers’ loads and supply to offer large-scale grid services, or by providing a platform for customers to buy and sell electricity with whomever they want.

Managing future distribution networks gets much harder with high concentrations of DER. Consequently, distribution network operators (DNOs) are undergoing their own transition to distribution system operators (DSOs), shifting focus from managing assets to active network management and the provision of distribution platforms that will be the mainstay of new energy services. This transition is essentially digital: the first step must be to improve visibility into distribution networks. Once a DSO has visibility, it can then improve control. Flexibility markets will be increasingly important in the future and their data demands are even greater. If flexibility markets expand into residential loads and supply, the DSO must allocate a time-sensitive value to each of these assets. This is not an easy task, and requires the integration of existing grid management applications, plus additional functionality not yet in existence.

Digitization Requires a Pragmatic Approach to Data Management

Neither the energy service provider nor DSO business model is viable without data. Data is critical to the energy transition and data flows are critical to electrons. European suppliers and DNOs must prepare for the energy transition by undergoing a digital transformation. While most understand the benefits, few fully understand the requirements for digital transformation, the full costs involved, or the enormity of the task.

The exponential growth of connected devices with relevance to the energy transition (devices like smart grid monitoring and control and in-home smart thermostats) create an exponential increase in data. Few, if any, utilities will ever tame this data; however, the smartest utilities will create IT infrastructure to maximize the value derived from this data. They will invest in platforms that are sufficiently flexible to stack increasingly sophisticated use cases, rather than reinvent technologies whenever requirements change.

However, this investment in platforms must be matched by more prosaic investments in data management. A digital platform is only as useful as the quality and completeness of the data on which it relies, and the analytics algorithms that provide insights.

 

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