Navigant Research Blog

How Energy Transformation Investors Are Supporting New Utility Customer Solutions

— May 10, 2018

I recently highlighted how innovative utility customer solutions can have both customer benefits and utility value. Such customer-focused solutions in both the residential and commercial and industrial (C&I) sector are the focus of my new Utility Customer Solutions Research Service.

The Southern Company pilot effort I blogged about last month exhibits the kind of customer-focused thinking needed by vertically regulated utilities, retail energy choice brokers, energy service providers, and technology disruptors. But not all types of new behind-the-customer solutions can come from rate-based, approved pilot projects in the vertically regulated US. For these solutions to begin to scale, forward-thinking investment funds will play a key role in supporting solutions-based technology platform companies with the capital they need to take advantage of the distributed energy solutions being created by the Energy Cloud transformation.

Investment Activity Key to Transformation

By way of example, several of Southern Company’s recent technology investments and investment exits directly support the new residential utility customer solutions framework in my recent report as well as my C&I-focused Energy as a Service report. The following investment funds are playing key roles in this evolution:

  • Energy Impact Partners (EIP) is a utility investor partnership supported by Xcel Energy, National Grid, Southern Company, AGL Energy, and Alliant Energy, among others.
  • Constellation Technology Ventures (CTV), a subsidiary of Exelon, seeks to invest in energy technology companies at various stages of development to deploy the company’s products via Exelon’s commercial platform.
  • Shell Ventures seeks technology to help residential customers better manage their personal energy use and commercial opportunities to bring power to remote communities. The company invests in renewable power generation, distributed energy solutions, and energy storage solutions.

Key investment/divestiture examples from these three investors include:

  • EIP’s joint investment with Amazon’s Alexa Fund in ecobee, an integrated home energy/smart home company with smart thermostat, smart lighting, and smart sensor technology. This investment supports Navigant Research’s take that technology like ecobee’s, coupled with smart home technology like Alexa, will revolutionize the way people interact with their homes. It also will extend the role a smart home platform can play to support efficient home energy use.
  • CTV’s investment in Sparkfund, a company focused on a subscription-based energy efficiency technology deployment business model to deploy lighting, HVAC, building controls, and energy storage at C&I facilities. Sparkfund’s approach highlights the C&I customer’s need for energy as a service solutions without CAPEX.
  • Shell Ventures’ investment in Sense, a smart home-focused home energy disaggregation platform that enables customer smartphone visibility at the plug and device level. These types of platforms are poised to add depth to utility partners looking to engage with their customers with new, cutting-edge technologies for the home.

Tipping the Scales

Transformative change takes time and the scales never seem like they will tip until they do. Navigant Research believes that the scales will tip when utilities, energy services, technology providers, and investors focus first on the customer and what customer problems these new technologies can solve. EIP, CTV, and Shell Ventures are providing the support necessary to bring these solutions to the marketplace.

 

Distributed Energy Storage Poised to Support UPS Service Needs

— February 6, 2018

In a previous blog, I highlighted how corporate commercial and industrial (C&I) energy, facilities, and sustainability managers have new choices to manage their energy management and sustainability needs, giving rise to the growth of Energy as a Service (EaaS) solutions. Within Navigant Research’s EaaS framework, distributed energy storage systems (DESS) is a key component of the load management and optimization solution given its unique ability to control load and support resiliency needs alongside onsite distributed generation like solar PV.

Are New Solutions Worth the Expense?

The value of onsite resiliency creates much debate within the industry. There is little choice but to deploy uninterruptible power supply (UPS) systems to provide continuous electrical service with high power quality to support resiliency needs for mission critical operations such as data centers, telecom operations, financial services centers, and hospitals. These mission critical UPS systems use complex, valve-regulated lead-acid battery systems. And given critical needs for continuous electrical service, these customers have been slow to adopt new or untested UPS systems using standalone lithium ion, even if these new solutions could improve the total cost of operation.

Due to the high costs associated with these systems, many C&I facilities without mission critical operations have been slow to deploy UPS systems to address electrical service outages. These non-mission critical facilities currently view electrical service outages—and the resulting financial impacts of the associated downtime—as an unmanageable cost of doing business. A recently released Navigant Research report, Advanced Energy Storage for UPS Applications, focuses on the drivers, barriers, technology issues, and market forecasts for this new non-mission critical UPS service segment.

UPS and DESS Go Hand in Hand

In this report, Navigant Research anticipates the emergence of a new UPS service option that will leverage DESS technology to provide resiliency support for certain non-mission critical C&I operations. Specifically, it’s expected that these DESS will be designed to provide demand charge reduction, enhanced demand response market participation, UPS service, and/or grid ancillary services to utilities and competitive markets where applicable. Further, DESS systems integrators and project developers are expected to leverage the energy storage financing innovation in the marketplace to provide UPS as a service without CAPEX to non-mission critical facilities to meet their unmet resiliency need.

In the near term, it will take some time for the regulatory frameworks to mature to allow DESS to efficiently provide ancillary services to the grid and add that project revenue stream. Further, ESS integrators and project developers will need to work on a cost-effective software/hardware technology for this new UPS service application. And while there are already systems integrators and project developers, like Sharp SmartStorage®, now pursing this segment, Navigant Research will continue to watch how these factors come together to grow this DESS market segment.

 

Customers Hold Keys to Growth of Turnkey Energy as a Service Solution Providers

— August 15, 2017

A recent Navigant Research blog highlights how corporate commercial and industrial (C&I) energy and sustainability managers are choosing to apply new technology and business model innovations to meet their energy management and sustainability needs. These new customer choices are giving rise to the growth of energy as a service (EaaS) solutions. Navigant Research’s recently released report on the evolution of EaaS defines specific solutions that make up a comprehensive EaaS solution offering:

  • Energy portfolio advisory solutions: Comprehensive, enterprisewide strategic guidance to help customers navigate their unique procurement, energy management, financing, business model, and technology opportunities across all energy management and sustainability needs
  • Onsite energy supply: Distributed generation solutions like solar PV, combined heat and power, diesel and natural gas gensets, microturbines, and fuel cells that improve energy supply
  • Offsite energy supply: Including electricity procurement options from offsite sources in retail choice deregulated electricity and gas markets and from emerging large-scale, offsite renewable energy procurement business models
  • Energy efficiency and building optimization solutions: Comprehensive energy efficiency assessment, business case analysis, financing, implementation, monitoring and verification, and building commissioning services to reduce energy spend and use
  • Load management and optimization solutions: Comprehensive, end-to-end energy management solutions to optimize energy supply, demand, and load at the site and enterprisewide, including demand response (DR), distributed energy storage, microgrid controls, electric vehicle charging equipment, and building energy management and building automation systems and software controls

Turnkey Solutions to Drive Growth

C&I customers that begin to take advantage of these new solutions will increasingly look to turnkey solutions providers that can provide not only strategic advice across their property portfolios, but execution expertise as well. The key driver to enabling the growth of turnkey EaaS solutions vendors will be the ability to deliver comprehensive financing solutions to help customers avoid spending capital on energy projects. However, there are two additional drivers that vendors who are considering creating and delivering turnkey EaaS solutions will need to consider:

  • Historically, C&I customers have needed multiple regional partners to manage even a portion of their energy management needs. Turnkey EaaS vendors seeking to address C&I customers’ portfolio-wide needs for EaaS will require widely trained and deeply experienced advisory capabilities to address their customers’ complex energy procurement, financing, and technology deployment needs. For example, in the United States, a turnkey provider will need to have the depth of regional expertise under one roof necessary to address customer strategic needs in diverse energy markets and climate zones like Texas, California, New York, the Southeast, or the Midwest.
  • Experienced C&I energy and sustainability managers have endured years of disappointment from energy use and cost reduction claims that never materialized. Moreover, many of these managers have still not yet even tried to reduce energy spend. What C&I customers truly want is guaranteed lower energy costs, whether from solar PV, energy storage, energy efficiency, or DR. Vendors that blend execution expertise across all EaaS solutions with financing tools to guarantee cost savings through a single point of sale will be best positioned.

To date, with customer-sited distributed energy resources, too much emphasis has been placed on trying to figure out where to sell technology outside of a focus on solving customer problems. For turnkey EaaS vendors, market growth will not necessarily be led on a technology-first basis. For at-scale revenue generation, these vendors should start with the customer experience and work backwards to the technology. Navigant Research anticipates that vendors that place a keen eye on how to bring turnkey, customer-focused EaaS solutions into the market through a trusted, single point of contact with a financed savings guarantee will be at a competitive advantage.

 

Consumer Choice in the UK Energy Market: The Year of the Tracker Tariff

— July 11, 2017

A year ago, I wrote a two-part blog post (part one and part two) about the surge in consumer choices in the United Kingdom’s energy market. A lot has happened since those articles were written—the second of which was published on the same day as the Brexit referendum results.

Energy price hikes made headlines over the 2016/2017 winter, as five of the Big Six energy suppliers (EDF, E.ON, SSE, British Gas, Scottish Power, and Npower) raised prices by 8%-15%. British Gas was the only exception, promising to hold prices until at least August 2017. These increases put a political spotlight on energy prices during the country’s general election in June—during which even the Conservative Party (generally associated with free market policies) proposed energy price caps.

The Year of the Tracker Tariff

Although the political debate has not devolved into any specific energy policies yet, small energy suppliers and new entrants (such as Octopus Energy, Pure Planet, and ENGIE) have used the price hikes as an opportunity to launch a new class of energy tariff: the tracker.

Prior to May 2017 (when the first tracker was launched), consumers in the United Kingdom could opt for either a standard variable rate (SVR) or a fixed price rate:

  • SVR: In a SVR tariff, the unit price of electricity can go up or down at any time. The supplier must notify the consumer of price rises (and of any other changes to the consumer’s disadvantage) but the price charged is completely at the supplier’s discretion. This is the most basic offering from energy suppliers and it is usually their most expensive. Consumers usually end up on this tariff after a fixed contract expires.
  • Fixed price rate: In a fixed price tariff, the unit price of electricity is agreed upon at the beginning of the contract and remains fixed for a certain period (often 12 months in the United Kingdom). This fixed price is usually below the SVR.

Energy suppliers have been criticized by Ofgem (the United Kingdom energy regulator) for widening the difference between their best rates and their SVRs. So, in a bid to win consumer’s trust through improved transparency, a few energy suppliers have launched tracker tariffs.

Retail Price Comparison by Company and Tariff Type: Domestic (Great Britain)

(Source: Ofgem)

Tracker tariffs resemble SVR tariffs in that the price the consumer pays for electricity changes with time; unlike SVRs, the price is not discretionary. Instead, it is linked to the average wholesale electricity price on the day of consumption.

The precise structure of the tracker varies from supplier to supplier. For example, Octopus Energy charges a fixed standing charge per day and then the wholesale price plus transmission and distribution costs, other regulated costs, taxes, and a fixed margin per kilowatt-hour consumed. Another supplier, Pure Planet, charges a fixed membership fee that includes all non-energy related costs and then wholesale prices for each kilowatt-hour consumed (100% renewable, in this case). ENGIE, the last of the companies offering tracker rates, has not yet disclosed how its tariff will be structured.

It is too early to judge whether consumers will embrace trackers or if they will prefer the certainty of fixed price rates. Perhaps the majority of consumers simply do not care enough about energy contracts and will continue to pay SVRs. Regardless, trackers are a step toward a residential energy as a service product. This is especially true of Pure Planet’s offering: by incorporating its margin into the fixed component of the bill, it is in a position to offer add-on services that increase comfort—or reduce energy consumption—without sacrificing profit margin.

 

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