Navigant Research Blog

In an Age of Digital Disruption, Cities and Utilities Must Work Closer

— December 19, 2017

Energy transformation will force the industry to reassess existing value propositions and identify new revenue streams. Until recently, this value lay in single technologies—such as smart meters or solar PV. However, the industry is recognizing value in the convergence of technologies that have historically been treated separately. These technologies might not currently sit within a utilities’ existing area of influence. The potential convergence of EVs, automated driving, smart transportation networks, charging infrastructure, metering, and billing could create huge opportunities for utilities. The industry should keep an eye on disruption in other industries, particularly transportation and smart cities.

Utilities Must Identify Where Value Will Be Created

Kodak is an often cited example of how companies can fail in periods of industry disruption. Kodak developed the first digital camera and owned many patents related to digital photography. Yet, it failed to recognize where the future of digital photography value lay. It believed that digital photos would still be printed on Kodak paper and did not consider a future where users would share digital images online.

There are many lessons that utilities can learn from Kodak, primarily that nothing within business models can be taken for granted. No part of the value chain is immune from the risk of future irrelevance. Every company must consider where the future value will lie in the energy transition. For many, this will focus on helping customers reduce their power consumption, instead of supplying more power. ENGIE UK and the Netherland’s Eneco have both stated their intentions to shift to this service-based approach. The industry has also recognized the growth opportunity in supplying power to EVs and the associated vehicle-to-grid services.

There Is Significantly More Value for Utilities beyond EV Recharging Infrastructure

However, I would posit that utilities have not yet recognized the potential value that lies beyond EV charging infrastructure, supply, and grid services. The automotive industry is undergoing a period of disruption arguably greater than what utilities are experiencing. As city leaders are increasingly concerned about pollution and congestion, cities such as Paris, Athens, Madrid, and Mexico City have announced bans on the most polluting diesel vehicles by 2025. The UK, France, and China have announced bans on the sale of all light duty internal combustion engine vehicles in the next 20 years.

While EVs will play a large part in the shift away from petrol and diesel and offer an opportunity to utilities, there is significant value to be gained by the most ambitious utility. Decarbonization is just one part of automotive disruption, and we are starting to see a shift in trends of car ownership. Increasing numbers of urban residents are turning their backs on car ownership. Singapore has legislated that there will be no net increase in car ownership after 2020. Auto manufacturers are investing millions in automated vehicles, which could hugely disrupt ownership models and, consequently, the taxi and car hire industries.

Utilities Must Work Closer with City Leaders

City leaders—keen to improve air quality and reduce traffic congestion—could be the primary driving force behind a shift to shared ownership and automated models. However, they will need partners to deliver the sophistication of smart transportation services. Utilities have an opportunity to provide the recharging infrastructure for EVs, so it is not inconceivable that they can manage additional infrastructure, such as the metering and billing of automated vehicle use, predictive maintenance of vehicle fleets, fleet asset management services, and more.

Over the past decade, I have witnessed (at least some) utilities’ reluctance to cooperate with smart city programs. However, the concomitant digitization and disruption of electricity and transport create a strong argument for cities and utilities to work closer for their mutual benefit and the benefit of citizens. Navigant Research recently published a list of recommendations for utilities to work closer with city leaders.

 

Where Are All the Meter Manufacturers in Transactive Energy Projects?

— December 7, 2017

That’s a question I’ve been asking myself recently. The answer seems to be “nowhere.” In the 110 or so trials of utility industry-related blockchain and transactive energy (TE) Navigant Research has identified, meter vendors are at best the silent, invisible partners of other companies. When asking leading blockchain and TE startups about the meter hardware in their trials, the stock response has been “nothing is available that supports our requirements, so we built our own.” So, why aren’t meter vendors making more noise about a potentially significant growth opportunity?

Blockchain is the hottest, most hyped technology in the energy industry, and TE is its hottest use case. If current TE trials prove successful, I expect rapid adoption, particularly in countries with high penetration of solar, supported by ratepayer-funded incentive mechanisms. TE’s market-based incentives could replace subsidies. Large-scale, fully automated TE platforms have a number of requirements, as discussed in Navigant Research’s Blockchain for Transactive Energy Platforms report:

  • TE pricing requires visibility into local network conditions, including network assets and distributed energy resources.
  • Smart contracts—which determine when transactions are opened and closed—must be hosted locally and fed with market data.
  • Meters measure and record all TE power supplied and consumed.
  • Communication networks will transport data to interested parties.
  • Transactions must be recorded to the blockchain.
  • Significant distributed compute power will support automation of the TE platform.

Meter Vendors Can Support Many TE Functional Requirements

TE markets will have to be settled in much the same way as wholesale power markets are today, in accordance with strict market regulations and technology standards. This is a complex system, where a lot of trust will be placed on the technology platform. Meter vendors have many capabilities that could put them in a commanding position to lead the TE space:

  • Smart meters already provide visibility at the point of consumption.
  • Advanced metering infrastructure communications could provide the data networks on which TE runs.
  • Smart meter data concentrators could be used as nodes for the blockchain, store smart contracts, provide compute power for localized pricing calculations, and so on.

There is another feature that meter vendors have so far overlooked: it is difficult to amend records already committed to the blockchain. Consequently, it is vital to ensure that transaction data is correct before it is recorded. This will be a difficult task in a largely automated TE platform. While smart meter accuracy is generally high—between 99.5% and 99.9%—a validation algorithm is run regularly to estimate missing or erroneous meter readings. In TE, a similar algorithm must run on transaction data. However, it is likely that validation will be distributed alongside the ledger, rather than a centralized batch process. Most meter vendors also offer a meter data management system with an associated validation algorithm.

Despite meter vendors’ requisite hardware and software, they are nowhere to be seen in the TE world. There are many reasons: ongoing major smart meter rollouts command a lot of attention, and there is little money to be made in TE right now. However, I would have expected at least one vendor to have taken the leap into the world of TE. The biggest risk is that meter vendors are trapped in the old utility world, where metering innovation was driven by utilities—with whom meter vendors have decades-old relationships—and adoption of new metering technologies was slow and incremental.

TE adoption will be different. It is driven by startups that have no previous relationship with meter vendors. These startups could develop their own validation algorithms; they could choose to use public 5G networks for data communications; or they may decide to deploy their own distributed compute. If this happens, meter vendors will miss out on potentially billions of dollars of value created by TE. Meter vendors must wake up to the reality of TE and the opportunities and threats the market presents.

 

Utility Cloud Use Soars in 2017

— December 5, 2017

I’ve been analyzing technology markets long enough to have observed the entire cloud computing hype cycle; it’s now a well-understood, mature technology. Which also means that there’s little to write about for an analyst more used to covering emerging technologies. However, from 2008 to 2011, I never got the chance to write a detailed report about cloud computing in the utility industry. While the cloud hype volume was cranked up to maximum, the utilities industry was doggedly refusing to move any IT infrastructure into the cloud. Which was a personal disappointment: for a fan of puns, it was difficult to resist the temptation to write a report titled Utility Computing in the Utility Industry.

I even advised a couple of cloud vendors that wanted me to tell them how to break through the conservatism of the utilities industry. My only advice? “Lobby the regulators, because utilities just aren’t going to budge on this one.” And why? Three primary reasons:

  • Conservatism: No utility ever liked going first with something new. In any monopoly market, moving first was only ever a disadvantage. Rather, utilities would wait for someone else to stump up investment capital and let vendors learn from the mistakes of others before bringing a more reliable product to market.
  • Security: I have been told more than once of security officers halting vendors’ cloud pitches midway because of security concerns.
  • Regulatory: Some regulators would not let data be transported outside of certain geographic areas, killing off any idea for clouds based in other jurisdictions.
  • Finance: The key selling point of cloud is its OPEX-based pricing scheme. While music to the ears of CFOs in other industries, it killed cloud’s chances in utilities rewarded for making capital investments.

Until a year ago, cloud’s adoption by utilities was slow and steady. However, 2017 has marked a dramatic change in the industry’s attitude toward the technology. There is no better way than using cold facts to describe the rapid acceleration of its adoption. In a recent call with SAP, I was astounded at the company’s growth in cloud-based revenue in the first three quarters of 2017: a 90% year-over-year increase on 2016. SAP’s utilities business unit recorded the second-highest growth in cloud revenue across the business, just behind retail.

Market Requirements Have Eroded Resistance to Cloud Adoption

This growth isn’t completely unexpected. European utilities are under significant pressure to reduce costs and are no longer concerned about the OPEX versus CAPEX argument. The cloud is helping them achieve this. Cloud vendors have also made great strides to improve security issues. So much so that investment in security is typically higher than a utility can manage for its onsite data centers. And with the growth in demand for cloud, vendors can build infrastructure in more locations, negating the need to move data across international borders.

What’s next? The industry is becoming more comfortable with cloud, and more IT infrastructure will be moved to it. However, this will be done in a controlled manner. Despite some (frankly laughable) claims to the contrary, private clouds will account for the vast majority of utilities’ use. Core IT infrastructure likely will never be moved to public clouds, due to the inherent increased risk.

Finally, a word of caution. I predict that some utility’s adoption of cloud services will be piecemeal, unstructured, lack a coherent strategy, and uncoordinated. Different departments will procure cloud services for their own departmental means. In effect, reversing the recent trend to consolidate data in a data lake or data warehouse. Instead, new cloud-based operational data siloes will be created, where access to data is restricted. To counter this threat, individual departments must be reined in just enough to ensure enterprisewide data management without choking innovation.

 

Utilities Will Rely on Vendor Ecosystems to Support the Energy Transition

— November 10, 2017

Until recently, I often introduced presentations or blog posts with a warning that the utility industry was about to enter the most disruptive decade in its century-long existence. That is no longer true, because I believe the industry has now entered that decade. Okay, the timing for different countries may vary, as will the length of the period of disruption. In fact, some countries—Germany and Denmark in particular—have experienced significant disruption already. But for most markets, the rumblings, threats, omens, and rumors have only recently turned into action.

Navigant Research has a significant volume of commentary on future energy markets, all based around its concept of the Energy Cloud—where energy becomes more distributed, clean, intelligent, and mobile. The old business model of centralized generation will shift to a decentralized, customer-centric value chain, where energy services become far more important than energy supply. Navigant Research also identified an additional $1 trillion of new value created in the Energy Cloud by 2030.

There Will Be No Energy Transition without a Digital Transformation

It is important to note that the energy transition is as much a digital revolution as it is an energy revolution. The $1 trillion of new value identified by Navigant Research will likely be created through the provision of digital energy services, from automated demand response to transactive energy. None of this value will be delivered without access to vast quantities of data from an enormous and heterogeneous array of devices. None of this value can be delivered without a robust IT infrastructure to support digital energy services.

As part of thought leadership, Navigant Research has identified seven platforms that are critical to the delivery of digital services within the Energy Cloud. Additional white papers are on the roadmap to discuss these platforms in further detail. Next up is a white paper on the neural grid platform, which describes—among other things—the devices, communications, and analytics that will underpin all other digital services in the Energy Cloud.

Vendor Ecosystems Will Help Manage the Complexity of the Energy Cloud

Navigant Research’s upcoming Neural Grid white paper will shine a light on the sheer complexity of the IT infrastructure required. There will not be any plug and play platform for the foreseeable future. The market is new, moving rapidly, and different utilities have different requirements. As a result, over the next decades individual utilities will deploy many platforms that rely on many datasets created by many devices communicated over many networks using many protocols stored in many locations supplied by many, many different vendors.

It is critical for the success of the Energy Cloud that vendors cooperate within official and unofficial partnerships and work toward their customers’ common goals. Join us on November 14 at 2:00 p.m. EST for an Intel-sponsored Navigant Research webinar. We’ll explore in more detail how the energy transition and associated digital transformation requires strong vendor ecosystems and gain some insights from Intel, which sits at the heart of one of the largest smart grid ecosystems.

 

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