Navigant Research Blog

The IoT Gets a Model (and Perhaps the Needed Catalyst for Market Growth)

— August 25, 2016

CodeWith little fanfare, the first Internet of Things (IoT) model I am aware of has been published by the National Institute of Standards and Technology (NIST), the folks who set the standards for smart grid interoperability in recent years. This new model is an important step in defining exactly what the IoT is and outlining the necessary security standards that go along with it. Could this be the catalyst needed to help drive the emerging IoT market? It sure doesn’t hurt.

Up until now, there has been a vacuum of standards and uncertainty around the buzzy IoT. The new model, called Network of Things (NoT), was created by Jeff Voas, a NIST computer scientist, and was announced in late July. Voas based the model on a traditional idea of distributed computing. It should be noted that the model uses two acronyms—IoT and NoT—extensively and interchangeably, and the relationship between the two is subtle, according to the published document.

The NoT model features four fundamental elements: sensing, computing, communication, and actuation. The model goes on to describe five primitives, or building blocks, which are:

  • Sensor: An electronic utility that measures physical properties such as temperature, acceleration, weight, sound, location, presence, identity, etc.
  • Aggregator: A software implementation based on a mathematical function(s) that transforms groups of raw data into intermediate, aggregated data.
  • Communication Channel: A medium by which data is transmitted (e.g., physical via USB, wireless, wired, verbal, etc.).
  • External Utility (eUtility): A software or hardware product or service. The current definition of an eUtility is deliberately broad to allow for unforeseen future services and products that will be incorporated in future types of NoTs yet to be defined.
  • Decision trigger: A trigger that creates the final result(s) needed to satisfy the purpose, specification, and requirements of a specific NoT.

The model describes more technical aspects of the IoT/NoT, and anyone who is working on the engineering end of this trend should study the details. To the less technical, the model might appear too abstract. Nonetheless, having some basic building blocks delineated does everyone a service by establishing standards that can be employed, particularly for security and interoperability reasons.

NoT Model Primitives

NIST IoT(Source: National Institute of Standards and Technology)

The NIST model is a strong first step in creating an easy-to-grasp IoT framework. It might appear simple at first to some, but it also has a certain elegance in that simplicity. Given its lack of complexity or specificity, it is more likely to gain wider acceptance for further development by stakeholders, since it sets a relatively clean starting point on which to iterate as the technologies and market mature. In fact, Voas encourages others to build upon his foundational model, even as he and his colleagues continue to explore reliability and security issues going forward. Members of the Navigant Research team will join industry experts from Silver Spring Networks and Lynxspring to explore key facets of emerging IoT technologies and the security and interoperability issues surrounding the IoT market in an upcoming webinar.

 

Alternative Sales Channels Look to Avoid EV Dealer Woes

— August 25, 2016

EV RefuelingEV sales in the United States continued to climb to new heights in July, and market participants generally agree the growth is despite (not because of) the consumer experience at dealerships. Sales of plug-in hybrids are up a whopping 68% over last July, while battery EV sales are up nearly 51%. This is remarkable considering gasoline is cheaper by 43 cents per gallon than a year ago.

Many consumers have reported that trying to buy an EV is about as enjoyable as a root canal, with many dealers underinformed on charging requirements, local incentives, and even basic EV operating requirements. This frustration goes back than more than 20 years according to EV marketing guru Chelsea Sexton, who worked on GM’s EV1.

“There’s no question that dealers are one of the larger hurdles facing EVs, and that too many automakers are in denial…,” said Sexton, adding, “the only way to improve things is to start with acknowledging things need improving.”

Californian Oasis

The Sierra Club sent volunteers to California and nine other states with zero emission vehicle (ZEV) mandates and published a report highlighting  the challenges in the EV buying experience. The report noted significant differences in dealer support for EVs between the oasis that is California and the rest of the country. According to the Sierra Club, dealers representing car companies with EVs in the ZEV states were 2.5 times more likely not to have an EV on the lot than in California and to have only half as many EVs available to buy per dealership. These figures are likely much worse in the other 40 states, where it’s often easier to find a cheap seat to Hamilton than it is to find an EV.

According to the Sierra Club report, the most enjoyable place to learn about buying an EV isn’t at a dealership—it’s at one of Tesla Motors’ growing roster of customer experience centers, which scored much higher in the EV buying experience. Navigant Research’s Electric Vehicle Geographic Forecasts report expects that California will be home to 48% of all EVs on the road in the United States in 2016, which is partly due to much greater vehicle availability at dealerships.

A More Positive Experience

Reborn EV startup Karma is setting up a network of eight independent dealers and a flagship customer center. Following Tesla’s lead, Canadian company is looking to create a more positive EV experience by selling EVs from multiple manufacturers through a specialized dealer network. Perhaps it will become the Uber of carselling by turning an often-frustrating consumer experience into a less expensive and more enjoyable time.

Two other approaches to jump-start EV sales with minimal dealer assistance include group buys and putting EVs in ridesharing fleets. Group buy programs, which aggregate companies’ and individuals’ EV purchases and offer a steep discount, have worked well in Northern Colorado for Nissan, tripling EV sales above the national average. A similar program being put together in Montreal has seen more than 2,800 sign up to purchase a LEAF, well ahead of the entire country’s annual LEAF sales.

GM has decided to put many of the first Chevrolet Bolts manufactured into the Lyft rideshare fleet. The thought is that Lyft, in which GM has invested, will greatly expand the number of consumers who are familiar with the Bolt beyond what can be accomplished by dealers. As my colleague Sam Abuelsamid recently wrote, “Getting people to ride in Bolts with Lyft drivers has the potential to provide positive first-hand exposure without having to go to a dealer first.”

Rather than running around the long-standing dealer problem, automakers need to tackle the issue head-on by greatly enhancing dealer education and providing sufficient incentives to make it just as lucrative to sell an EV.

 

Smart Meters Industry Consolidation Continues with Xylem’s Sensus Acquisition

— August 25, 2016

MeterOn August 15, Xylem, a global water technology company, announced that it had acquired Sensus in an all-cash transaction worth $1.7 billion. Sensus is a global provider of smart meters (with 80 million metering devices in the field), network technologies, and advanced data analytics, with a focus in North America. The company’s roots lie in the smart water metering business, though it maintains a significant installed base in electric and gas utilities. Some of Sensus’ notable electric advanced metering infrastructure (AMI) deployments include Southern Company, NV Energy, Portland General Electric, Alliant Energy, and Cleco Power LLC.

Industry Consolidation

As markets have matured and smart grid technologies have evolved, new industry motivations such as interoperability and deep integration among technologies have emerged, as evidenced by a string of recent industry consolidation transactions. Aclara made headlines in December 2015 with its acquisition of hardware provider GE Meters. This was quickly followed by another acquisition of Tollgrade communications earlier this month. Additionally, Honeywell completed its acquisition of Elster’s metering business in January of this year. The Xylem/Sensus transaction is just the latest example of industry consolidation, and it sets the company up to be a major player in the smart water market.

Smart Water Market

While smart electric meters have traditionally maintained the lion’s share of smart meter coverage, higher penetration rates and increasing concerns over water security offer growth potential for smart water meters and associated technologies going forward. With the low cost of water that many of us experience today, it’s easy to take this increasingly scarce resource for granted. Yet, the United Nations is expecting a 40% shortfall in water supply by 2030. This alarming prediction is the product of a variety of factors—growth in energy and food consumption, wasteful irrigation practices, inefficient pricing, industrial growth in emerging economies, and pollution and water quality issues, among others. All of this is suffice it to say that responsible water management through the use of smart meters and advanced data analytics among other technologies is going to play an increasingly vital role in global security—an opportunity that Xylem is now primed to take advantage of.

Sensus has traditionally been focused on North America with limited international deployments; nearly 70% of the company’s 2016 revenue was generated in the United States. This may be set to change as Xylem has highlighted its expansive customer relations and ability to extend the reach of Sensus’ technologies to new global markets. Combining the capabilities and scope of these two companies sets Xylem up for strong growth potential and the opportunity to be a global leader in smart water technologies moving forward.

 

Europe’s Energy Transition Megatrends and Tipping Points, Part IV: Delivering Shareholder Value through Mergers and Acquisitions, Restructuring, and Divestment

— August 24, 2016

AnalyticsJan Vrins coauthored this post.

In our initial blog on Europe’s energy transition, we discussed seven megatrends that are fundamentally changing how we produce and use power. The increase in merger and acquisition (M&A) and divestment activity is reshaping the utilities industry. Large acquisitions and restructuring maneuvers are happening globally, with some particular impacts on the European utility markets, which we will discuss below.

What’s Happening?

In the search for increased shareholder value and to address policy changes by governments encouraging clean energy, companies are looking at scale, synergies, and reducing exposure to lower-yielding parts of the business. Europe has seen renewables leader DONG Energy become the largest IPO in 2016 with a valuation of approximately €13.5 billion (~$15 billion), and RWE Innogy is slated for its own IPO by year end. E.ON announced it will be separating its more traditional forms of power generation into a new company that is expected to be listed during the second half of 2016. Engie and Centrica are investing billions in new distributed energy resources (DER, which includes distributed generation, energy efficiency, demand response, storage, and more) development and energy services businesses through numerous strategic acquisitions. Even the oil majors are getting back into new energy, making strategic investments well beyond their traditional oil & gas businesses.

What’s Driving This Change?

There is a widely recognised downturn risk, with global growth forecast downward, the impact of the UK referendum, the mature European market, and the growing awareness of the impact of the slowdown of four of the largest emerging economies (China, Russia, Brazil, and South Africa). Despite this, there is evidence of healthy deal flow in the utility sector affecting incumbents and new participants alike. The main drivers behind this are low demand growth (which limits earnings growth), increased carbon reduction policies, changing customer demands, the growth of DER, and the attractiveness of the steady returns from regulated assets in the sector.

But it goes further than that. With the emergence of the Energy Cloud driving a broad and deep digitalisation of the industry, utilities, manufacturers, technology companies, and others are looking for ways to retain their customers, improve their market position, and grow earnings. They are targeting a completely new market of technologies and services, including DER, building-to-grid, electric transportation, smart cities, the Internet of Things (IoT), and transactive energy, which Navigant has estimated will generate $1.3 trillion in new annual industry revenue by 2030. The European energy transition in many ways is leading the way globally, and we see the following acquisition, new venture, and divestiture scenarios playing out across the industry.

Utilities Acquiring Other Utility Companies or Assets

A combination of falling deal value in Europe and rising deal value in other parts of the world resulted in a decline in European utilities’ share of the of the global mergers and acquisitions (M&A) deal market over the last 4 years. A large part of this was due to European acquisition targets being in short supply, being less attractive when coupled with the policy constraints faced by many European power utility companies, and the US government’s clampdown on cross-border tax inversion deals.

Utility M&A Deals 2012-2016

GajanBlogTable

(Source: Mergermarket)

However, there has been targeted activity driven by a renewed search for international growth and synergy savings. Enel Green Power (EGP) in January 2016 took the first step into the German renewables market with the acquisition of a majority share in Erdwärme Oberland (EO), a company that specialises in the development of geothermal projects. In addition, Iberdrola made a $4.4 billion acquisition of UIL Holdings in the United States, which is the most notable outbound move by a European utility for expanding outside Europe, and MET Group made an acquisition of Repower’s energy supply operations in Romania as part of its expansion along the value chain. We do see large-scale M&A increasing again after this year once divestitures and IPOs have stabilized and the overall investment climate in Europe becomes more favourable.

Institutional Investors and Private Infrastructure Funds Acquiring Utility Companies

Institutional investors’ search for steady yields remains undiminished across the world. The steady, long-term returns available from regulated assets in the power utilities sector are attractive to investors, particularly in today’s low interest environment. Institutional investors, especially cash-rich private equity funds from the Far East and China, are moving into generation, where in previous year the interest was based in network assets.

We have also seen an increasing number of investment yield vehicles and holding companies designed to give Middle Eastern investors in particular access to portfolios of longer term contracted assets, with the renewables sector being a particular focus. A number of the largest deals announced in 2016 fall into this category, with 16 deals worth a total of $4 billion in the first quarter. The most notable of these were Beijing Enterprises Holdings’ acquisition of German energy-from-waste company EEW Energy for $1.6 billion, ISQ Global Infrastructure Fund’s $1.1 billion acquisition of Viridian Group, and Danish pension provider PKA and Kirkbi A/S’s acquisition of 50% of DONG Energy’s UK offshore wind farm project for $1 billion.

Divestitures and IPOs

Divestment of non-core assets to focus on capital projects and growth through acquisitions will be the likely source of restructuring activity in Europe in 2016. The number of divestments marks the highest half-year deal count since 2003, according to figures published by Mergermarket. DONG Energy’s intended divestment of its oil & gas pipelines and review of its exploration & production business will be a significant deal in this respect. This deal would represent a milestone in unbundling one of Europe’s largest power utilities.

Other landmark deals include RWE’s separation of its renewable power generation and distribution business into Innogy and selling a 10% stake through an IPO later in the year. The company intends to use the funding from the IPO to increase its capital expenditure in renewable energy and trends of the energy world of tomorrow. There’s also E.ON’s separation of its conventional power business into a separate entity called Uniper, which is expected to be listed in 2016. While developments both were in response to Germany’s drive to develop more renewable power capacity at the expense of more conventional coal and gas-fired plants and to close its nuclear stations, all big utility companies in the major European markets are reviewing their portfolios in response to the decarbonization drive and to optimise their balance sheets. In the UK, National Grid’s intent to dispose of a majority stake in its gas distribution business is likely to attract considerable interest from a range of institutional funds. Similarly, competition is likely for OMV Group’s planned sale of up to a 49% minority stake in Gas Connect Austria.

Utilities Buying Energy Technology Companies

Globally, we see more technology companies being acquired by utilities with acquisitions of renewables, energy storage companies, and DER. In a recent cross-border transaction, French utility giant Engie took a majority stake in Green Charge Networks. In Europe, this trend is distorted by the size of the deals falling below the radar; many of the deals are small to midsize in nature or joint ventures and tend to focus on beyond-the-meter service offerings, energy storage solutions, and other disruptive technologies. In March 2016, Ecova, a leading US energy company, acquired Power Efficiency Ltd., a leading European energy procurement and carbon reduction service provider. In late 2015, E.ON signed an agreement with Samsung to develop a business model for targeting applications for lithium ion batteries in selected markets. Earlier that year, E.ON sold its Italian solar operations to private infrastructure fund F2i SGR as it exited the Italian solar market. F2i subsequently signed an agreement with EGP to form a joint venture to boost the development of solar PV in Italy. In that same year, EGP opened its first solar power plants combined with battery storage facilities with technology partner General Electric.

A development we are seeing in the United States that has yet to make its way to Europe is the acquisition and investment of analytics companies by utilities in an effort to adapt to the increasingly complex distributed energy environment. A recent example is the $20 million investment in AutoGrid Systems from Energy Impact Partners, a utility group that includes Southern Company, Xcel Energy, Oncor, National Grid, and Envision Ventures.

Oil Majors Diversifying Into the Sector Through Acquisitions

When Chatham House warned oil majors that they must transform their business or face a short and brutal end, no one expected the ensuing events. There were always signs that oil & gas majors were moving into the power market for their resource production, with Gazprom being the most notable until now with its $4 billion purchase of Moscow Integrated Power Company in 2013. With Shell and Total now diversifying their portfolios into the local carbon and cleantech markets, the landscape has genuinely changed. We see oil & gas majors making investments in renewables, DER, transportation, smart infrastructure and cities, and energy management.

In the first half of 2016, Total acquired Lampiris, a renewable power vendor based out of Belgium, for $225 million, as well as battery maker Saft for $1.1 billion. Total has a stated ambition to be the top renewable and electricity player within 20 years; the company previously acquired a majority stake in solar company SunPower, and in April announced the creation of a Gas, Renewables and Power division. Shortly after, Shell, Europe’s largest oil giant, established a new division called New Energies to invest in renewables and low carbon power generation. With close to $2 billion in capital investment already attached to this business and an estimated $200 million in annual funding, the company has ambitious plans to be at the leading edge of the transition to lower carbon economies.

Manufacturers or (Energy) Technology Companies Acquiring Other Manufacturers and (Energy) Technology Companies

Globally, this category has seen significant activity with solar companies acquiring other solar companies, solar companies merging with energy storage companies, and even technology companies buying other technology companies. In the United States, from Google buying Nest to Oracle buying Opower, there is an acute interest to be part of the momentum, and companies are looking for unique and differentiating technologies and capabilities to stay ahead of the competition. In Europe, we see a tremendous number of new companies coming into the energy space, selling new and innovative energy technology products and services. This is expected to be the growth area for the volume of deals, with a significant amount of investment pouring into newer, greener ways of producing, managing, and using power. Europe is at the beginning of a greentech groundswell, and IKEA is leading the way with a pledge to invest $650 million (on top of its earlier investment of $1.6 billion) into cleantech energy projects.

So What Does This All Mean?

Our advice to utility companies is threefold. Your landscape is changing rapidly, and technology improvements and new participants in the market are forcing the pace of this change to unfamiliar territory. If you take the “low regret cost” option, you will end up with stranded assets as new entrants will innovate, provide utility products and services, and gain market share. Think out of the box on how to diversify your revenue streams from new products and services along the value chain, as well as complementary products. Look beyond your comfort zones into emerging markets and form partnerships with local incumbents.

Your customers today can become your competitors tomorrow (as seen with IKEA), or they could seek to be energy self-sufficient, as seen in Apple’s search for European sites with renewable energy sources to power its data centers. This emerging trend with customers using the grid infrastructure to buy and sell power (i.e., transactive energy) where the traditional utility companies are required to maintain the infrastructure has the real risk of forcing you down the low ROI direction. If you are not proactive in forming strategic partnerships with non-traditional participants to explore opportunities, however insignificant and tangential it may seem in your current environment, you will become a reserve source of energy rather than a primary one.

The transition from fossil fuels to a low carbon mix due to technologies and market players will transform the sector from what it looks like today. Embrace green technology—your customers and your stakeholders are. If you do not, then you will lose customers who opt for newer, greener technologies as they change their strategy to meet their own customers’ desires for low carbon energy consumption.

Balancing today’s business with tomorrow’s opportunities is key. Thinking through strategy and future case scenarios will help you understand the opportunities and threats. Existing planning horizons and tools, such as strategic plans and integrated resource plans, are insufficient. A more agile strategic planning approach is needed to pinpoint the trends, opportunities, and threats, and to introduce new technologies and business models successfully to address market and customer needs. Our latest white paper, Navigating the Energy Transformation, offers a framework for approaching strategic planning within an industry facing historic transformation, outlining five steps industry participants should follow to prepare their organizations to maneuver around disruption and capture value in the Energy Cloud. Navigant can help clients understand the impacts of the many industry changes in their business and develop and implement a Strategic Identity and Growth Plan (10-15 years), as well as an agile Energy Cloud Playbook (6-12 months) that will help you navigate a path forward and take control of your future.

This blog is the fourth in a series discussing how industry megatrends will play out across Europe as well as at the regional and country level. Our next blog will be about the globalisation of energy resources. Stay tuned.

Learn more about our clients, projects, solution offerings, and team at Navigant Energy Practice Overview.

 

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