Navigant Research Blog

Ofgem Grants Supplier Switching Power to UK Retail Customers

— July 5, 2018

Electricity prices have been on a surge across the Big Six of UK’s energy suppliers due to steady increases in the cost of wholesale energy and government policy. Switching service providers is a common practice among domestic consumers—it saves hundreds of pounds in annual bills. However, recent increases in the number of errors has restricted customers from choosing new suppliers. Customers are hesitant to switch suppliers, as they become increasingly concerned about administrative hassles and financial errors.

In the last year, 5.1 million UK electricity consumers and 4.1 million UK gas consumers switched suppliers—the highest numbers in almost a decade. This is arguably only a small percentage of consumers who would have switched suppliers had Ofgem unveiled its new switching proposals earlier.

Why Did Ofgem Make This Change?

The National Audit Office highlights the following priorities for Ofgem to strengthen UK’s domestic energy supply:

  • Give more power to consumers by increasing awareness and supporting service comparisons
  • Penalize suppliers for any delay and switching error
  • Facilitate the adoption of prepayment meters
  • Support free and fair level playing field across suppliers

According to Ofgem’s new proposal, electricity suppliers will now have to automatically transfer £30 ($39.22) in compensation for each erroneous switching. This will be applicable on switching delays of more than 21 days, erroneous transfers, incorrect switching, delay in processing refunds, and final settlements. While some believe that this will eventually reduce the number of switches that could go wrong, Ofgem hopes to overhaul industry systems and help customers to switch within a day. The rule will come into effect by the end of 2018 and is likely to boost consumer confidence while sending out clear mandates that customer service should be at the heart of domestic energy supply.

UK Electricity Supplier Market Is Saturated

The number of electricity suppliers in the UK has increased by a factor of three—from 27 to 66—between 2014 and 2016. This sudden rise in the number of suppliers has led to price wars and poor customer service as suppliers rush to cut operational costs. Despite increased competition, which should drive better customer service, the sudden rise in suppliers has led to price wars. Dramatic price decreases are eventually leading suppliers to go out of business. These closures are leaving 160,000 customers stranded with high gas and electricity bills, and customers are eventually being transferred to deemed contracts or are having to take up new contracts with unattractive service packages. In one instance, a supplier was banned from taking on new customers because of its poor customer service.

Ofgem has initiated actions to protect customer interest and improve financial stability across electricity suppliers. Along with making switching easier, the policy aims to restrict market entry for new suppliers by tightening checks and reviewing its supplier licensing regime. This strategy is aimed to not only include supply side requirements but also streamline operations and monitor activities across electricity suppliers.


The Dynamics of Bitcoin Mining and Energy Consumption, Part II: Mining Incentives and Economics

— June 28, 2018

This is Part II of a series—Part I is here.

Blockchain systems aren’t really single technologies. They are complex architectures with many interacting parts, and hundreds of different architectures exist. For this discussion, the relevant piece of the architecture is the consensus algorithm. That is the group of rules that determine which nodes in a blockchain network are responsible for validating transactions, packaging them into blocks, and storing them in a distributed data structure. One consensus algorithm in particular, Proof of Work (PoW), is the cause of all the hand-waving about blockchain energy consumption.

What Is Proof of Work?

PoW functions by pitting special nodes against one another in a race to solve a mathematical puzzle that requires a huge amount of computational power (energy) to solve but is trivial for others in the network to verify. Miners are willing to invest resources into the race because the winner gets a prize (12.5 Bitcoin, or ~$90,000 USD). Like race cars, more powerful systems are more likely to win the race and the prize. Miners are incentivized to keep investing in compute equipment as long as they win often enough to net a profit—resulting in massive IT facilities like the one in Mongolia.

In the Bitcoin network, a new block is up for grabs every 10 minutes. To keep this interval constant, the difficulty of the PoW puzzle dynamically adjusts based on the total mining power of the network. In simple terms, as cars get faster, the racetrack gets longer—and drivers have to burn more gas to finish.

Proof of Work Difficulty and Mining Power Trends: 2016-2018

(Sources: Navigant Research, Blockchain.Info)

Mining Activity is Ruled by Economics

We can think about mining economics in terms of a simple profit equation, with the implicit assumption that miners will operate as long as profit is greater than zero:

Profit = Revenue – Costs

Costs (hardware, facilities, electricity, personnel) are the most stable component of the miner profit equation. This is because revenue is comparatively volatile: miners are rewarded in Bitcoin, and successful miners receive 12.5 Bitcoin, but the corresponding value in “real money” changes on a minute to minute basis. Miners must convert their rewards to real money eventually to pay their bills, and almost no one accepts payments in Bitcoin.

Economic Complications

A key point is often overlooked: in the Bitcoin network, miner rewards halve every 4 years. For a given mining facility to remain profitable—all else held equal—the value of Bitcoin must double over the same period. If it doesn’t, the revenue opportunity for miners shrinks and they have to reduce costs to remain profitable.

As the value of Bitcoin increases, more miners are incentivized to join the network or invest in new, power-hungry equipment. If the value drops, the incentive flips, and miners will leave the network or shrink their operations. As miner compute power leaves the network, PoW adjusts its difficulty downward, reducing energy consumption.

What Does This Mean for Future Energy Consumption?

Unfortunately, it doesn’t mean that energy consumption isn’t a problem. It just means that energy consumption is unlikely to continue growing at the prodigious rates seen over the last few years. There is only one doomsday scenario: the value of Bitcoin continues to double every 4 years, pulling more miners into increasingly difficult PoW competitions.

As we’ll see in Part 3, that scenario is highly unlikely (unless you’re this guy). Now that we have a basic framework in place, we can discuss the various factors that will affect PoW mining and energy consumption in the future, and what this means for utilities that have to make plans today.


New Trends Point to Virtues of Fuel Cells and Direct Current for Modular Microgrids

— June 12, 2018

The beauty of a microgrid is that it can come in so many sizes. It can also incorporate many different types of distributed energy resources (DER)—from different forms of generation to creative load management and even energy storage—to bridge any gaps in supply or demand.

DER Growing Ever More Popular for Microgrids

Navigant Research has projected that both solar PV and energy storage will emerge as the two most popular DER options over the next decade. Yet, that doesn’t mean other technologies—such as fuel cells—won’t play a growing role in the microgrid universe. Perhaps the company most keen on this market opportunity is Bloom Energy, which ranks in the Top 10 vendors in terms of projects deployed in the forthcoming update to the Microgrid Deployment Tracker. The company has deployed its fuel cells in more than 60 microgrid projects, representing roughly an equal amount of megawatts. But those numbers will increase dramatically in the future.

Earlier this year, Navigant Research estimated growth in all major DER technologies going into microgrids, including fuel cells. Though relatively modest in scale, the microgrid fuel cell market is anticipated to reach nearly $2 billion in annual sales over the next decade.

Annual Fuel Cell Microgrid Capacity and Implementation Spending by Region, World Markets: 2017-2026

(Source: Navigant Research)

Optimizing Fuel Cells

Historically, fuel cells were deployed by market leaders such as Bloom Energy within single resource microgrids for clients such as data centers. These are clients that are extremely conservative in nature and are comfortable with the steady stream of electricity flowing from non-variable onsite generation. Since fuel cells can be fickle when it comes to small deviations in frequency, integrating them into microgrids featuring a plethora of variable renewable energy resources has been problematic. The emergence of lower cost energy storage solutions is beginning to change this basic assumption.

What about Direct Current?

One solid step in the direction of more advanced microgrids is Bloom Energy’s integration of a direct current (DC) bus to create a more modular structure to integrate energy storage devices into its fleet of microgrids. Working with PowerSecure, which was featured in Navigant Research’s recent ranking of microgrid controls vendors, Bloom Energy is rolling out its new DC bus platform for a fleet of microgrids to be deployed at Home Depot stores. Another big win for Bloom Energy was the integration of its new DC bus offering into the new Apple campus in Silicon Valley, whereby 4 MW of fuel cells were integrated into a 5 MWh system with its new platform. The microgrid also features 16 MW of solar PV.

Among the other vendors extolling the virtues of a DC bus are EnSync and Tecogen. The latter has perhaps the first plug-and-play microgrid offering (and also ranks in the Top 10 of vendors regarding numbers of microgrids deployed). Look for a Navigant Research report, Direct Current Distribution Networks, later this year to dig much deeper into the value proposition surrounding DC and the emergence of a modular microgrid movement.


Amazon Continues to Expand Its Services, but Where Will It Go Next?

— May 29, 2018

In 2017, we saw how far Amazon was willing to push the boundaries of technology to make its customers’ lives more convenient with its Key service, which granted access for in-home deliveries through a compatible smart lock and the Amazon Cloud Cam. Then earlier this year, we saw Amazon push this service further with its acquisition of Ring, which allows the company to own the entire delivery experience, instead of having to rely on partnerships to enable the Key service. And now, we are seeing the company expand this service even further by bringing deliveries to the car.

The Dawn of in-Car Deliveries

On April 28, 2018, Amazon announced that it was partnering with General Motors and Volvo to grant couriers access to a person’s vehicle to deliver packages. Amazon has been testing the service in California and Washington for the past 6 months, and is now rolling it out in 37 US cities. The service is currently only available to Amazon Prime subscribers and those who own a model year 2015 or newer GM or Volvo vehicle. There have already been a series of automakers experimenting with in-car deliveries, including Audi, Volvo, and Volkswagen. The technology equipped in GM and Volvo vehicles, primarily OnStar and Volvo On Call, which are used for features like roadside assistance, make these manufacturers a good fit for Amazon’s service expansion.

More Companies Are Offering Security Services

Amazon’s tentacles seem to be extending in any direction touching direct to consumer services, which begs the question where Amazon might be expanding next. A move reported by many news publications at the end of April 2018 may provide a clue. Amazon is now selling home security services, including professional installations, with no monthly fee. The security package is available at five price tiers ranging from $240 to $840 and includes devices like an Echo Dot, lighting, Ring, a camera, and sensors, depending on the tier. Security is a value proposition in which many companies are increasingly engaging. Comcast is using security to generate new revenue as its existing cable TV business model is under threat from companies like Netflix. Nest, which started with its Learning Thermostat, recently expanded its product portfolio with six new security products. Amazon wants in.

Amazon Is Only Adding to Current Offerings so Far

However, this move isn’t quite as profound as it sounds. The package deal is largely just a collection of things that Amazon already sells or services it is already implementing. If Amazon were to actually move into home security through the acquisition of a security company like Vivint, it would place the company as a home management and service provider. The company would not only provide e-commerce services and a handy digital assistant, it would own nearly all pieces of the smart home value chain and become the only real smart home platform provider. This could have serious implications for the market’s development, especially in a space that is fragmented and is expected to see further consolidation.


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