Navigant Research Blog

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.

 

Ericsson Presents Its Future Vision for the Neural Grid

— February 13, 2018

At its London-based industry analyst event, Ericsson detailed areas for future growth. Its primary customer base (communications service providers [CSPs]) is looking for growth in an age of flat revenue from existing services. Ericsson believes this future growth will be made possible by the rollout of 5G communications—by 2026, Ericsson predicts 5G will contribute to a potential 36% of revenue growth for CSPs.

Ericsson cites the utilities industry as the largest opportunity for digitization. With a $101 billion addressable market likely in 2026, utilities present the second largest Internet of Things (IoT) opportunity (after manufacturing). The energy transformation is central to this growth. As the industry shifts toward a distributed future, connected asset deployments will increase exponentially. In addition, regulatory focus on advanced network flexibility requires significant improvements into a distribution utility’s visibility of loads and supply. All things being equal, the energy industry presents a juicy opportunity for CSPs.

Cellular Carriers to Prosper in Utilities with a Group of Technologies

Ericsson stated that CSPs will only succeed with a combination of technologies, and presented the reasonably compelling proposition of IoT services, supported by network-slicing-enabled 5G communications, and a concept it calls the distributed cloud.

IoT is often cited as the next big thing for CSPs. The term IoT has failed to gain traction in the utility industry primarily because the industry was comfortable with the technology long before the term was used to describe it. But this experience also presents a problem for telcos chasing profits in energy—the industry has to be convinced to switch from the proprietary, self-built, and decades old IoT communications networks to public carrier networks. The critical question is how Ericsson, and its CSP clients, can profit from the utilities industry.

Existing infrastructure may be difficult to convert to a public carrier, particularly for utilities rewarded for CAPEX on new assets. However, the sheer volume of low value assets that will become connected in the future pose many problems to utilities. Passing responsibility onto a third-party provider could well be an attractive proposition, if issues surrounding scalability, security, cost, and network availability are overcome.

5G may be the answer to this, particularly when connecting lower value, less critical assets (such as customer owned distributed energy resources (DER) or network equipment on low voltage networks). 5G offers much greater bandwidth than previous communications, while the ability to create virtual slices of the same physical network communications will help utilities overcome concerns regarding network availability for more valued assets.

Ericsson’s Distributed Cloud Approach Could Help Future Distribution Operation

Ericsson’s distributed cloud concept plays well into utilities’ current and future needs for edge computing. Ericsson has identified an opportunity for CSPs to host cloud servers in their existing real estate. CSPs’ buildings often have underutilized floorspace, yet are in central locations, directly connected to fiber rings and have good power supply. Ericsson believes its distributed cloud could compete as a low cost alternative to utility-owned, grid-edge computing that provides local data filtering and analytics.

Navigant Research has actively defined the technological needs of future transactive markets, in particular real-time visibility into DER, the calculation of hyper-local pricing of network access, the hosting of localized smart contracts for transactive energy participants, and more. The technology proposed by Ericsson has surprisingly close alignment with these requirements. Ericsson’s biggest challenge to convert an opportunity into sales is to overcome the industry’s innate conservatism and the current preference for proprietary IoT infrastructure. Regardless of how attractive the public network is, utilities still have a strong preference to build their own networks. Increasing cybersecurity concerns will only reinforce this attitude.

 

Blog Articles

Most Recent

By Date

Tags

Clean Transportation, Digital Utility Strategies, Electric Vehicles, Energy Technologies, Finance & Investing, Policy & Regulation, Renewable Energy, Smart Energy Program, Transportation Efficiencies, Utility Transformations

By Author


{"userID":"","pageName":"Stuart Ravens","path":"\/author\/sravens?page=2","date":"5\/26\/2018"}