Navigant Research Blog

Preparing for Exponential Technology Innovation: Rethinking Utility 2.0

— March 24, 2017

We are living in an era of exponential technology explosion. Since the performance of these exponential technologies increases rapidly relative to cost and size, they have a knack for completely reshaping markets and societies.

To illustrate, just trace the impact on society from the personal computer through the dawn of the Internet to ubiquitous mobile telecommunications. Connectedness, knowledge sharing, and efficiency across societies have all grown exponentially over the last several decades. There are now nearly 2 billion active users on Facebook, or roughly a quarter of the global population. This is up from 1 million users in 2004—just over a decade ago.

Today’s innovations—artificial intelligence, blockchain, 3D printing, and others—represent the current wave of exponential technologies sowing the seeds of disruption across multiple industries. Collectively, these have catapulted the global economy into what Klaus Schwab of the World Economic Forum describes as the Fourth Industrial Revolution.

Combinatorial Platforms

The utility industry is no exception. Exponential energy technologies like solar PV, artificial intelligence, and blockchain have already crossed the critical threshold of acceptance across the energy landscape. At their intersection lies the potential for a complete paradigm shift across the utility industry—what Navigant Research calls the Energy Cloud. Seven Energy Cloud combinatorial platforms are outlined below.

Emerging Exponential Technology Platforms for Utility 2.0

iDER: Integrated distributed energy resources; IoT: Internet of Things

(Source: Navigant Research)

This Fast Company magazine article captures why exponential technologies pose such a unique threat to business-as-usual thinking:

  1. Often benefiting customers by empowering them with more choice and control, exponential technologies fundamentally disrupt the balance of power and reconfigure traditional power structures. This democratization process, in turn, fuels further exponential (not linear) innovation.
  1. They are wildly controversial. This is owed in part to the fact that they are decentralized—or driven forward by a diverse network of individuals working together.
  1. They take transparency to new heights. Exponential technologies are inclined to make patents public (Tesla) or rely on open source code (Bitcoin). This erodes the competitive advantage of incumbent solutions, putting pressure on traditional business models to evolve.
  1. They create exponential potential. This is typically initiated by a groundswell to advance networks among end-use actors. When the aforementioned traits are strung together, conventional value networks in the power industry disintermediate between sources of generation and end consumers.

Utilities are not oblivious to these trends, but galvanizing an integrated organizational response remains challenging for an industry built on a one-way, centralized infrastructure 150 years in the making. As European utilities have shown, balancing necessary investments in new and existing physical assets with the need to diversify business models is not mutually reinforcing—at least in the long run.

Organizational Reboot

Of course, utilities don’t have the luxury of temporarily shutting down for a business model reboot. As one industry expert explains, “It’s like trying to swap the plane’s engine midflight.”

While tapping into new growth opportunities remains vitally important, it’s not always clear which applications or use cases are poised for exponential growth. For each home run, there will be many more failures.

Rather than investing in one-off technologies, focusing on combinatorial platforms will flatten the learning curve for utilities. For example, smart cities offer utilities a test bed for deploying and building value in a quickly evolving landscape—whether across familiar applications (e.g., aggregating load from high performance buildings into a dynamic virtual power plant) or across less familiar ground (e.g., owning and operating fleets of automated EVs).

Regulatory regimes will need to both value and reward utility forays into business model innovation. For their part, utilities should consider implementing an agile investment framework to manage risk in a rapidly evolving technology landscape. By doing so, utilities can minimize their risk exposure while staying ahead of the curve with respect to exponential innovation.

 

European Utilities Are Moving toward New Energy Platforms at Different Paces, Part 2

— March 22, 2017

The energy industry is experiencing a profound transformation as the sector moves toward more intelligent, more distributed, and cleaner use of energy. Utilities’ traditional business models are being challenged by disruptive firms offering new services that leverage more advanced technology, as described in Navigant’s Energy Cloud analysis in its Navigating the Energy Transformation white paper. In the first post of this blog series, I described six new energy platforms underpinning the energy transformation. In this post and in the next post, I will show that some European utilities have been more active than others in partnering with, and investing in, companies offering new energy platforms. Finally, I will argue that in order to be successful in the transition toward a smarter, more digital energy future, utilities will need to strategically adopt the most relevant new energy platforms.

I analyzed the level of activity for eight of the largest European energy utilities engaging with companies offering new energy platforms. Partnerships, which often take the form of exclusive contracts, and investments, which are characterized as direct capital into companies, were grouped and assessed. Note that only partnerships and investments announced in 2015-2016 were included in the analysis; any previous announcements do not appear. The analysis also excludes any internally developed products and services that may fit in the new energy platforms.

(Source: Navigant Consulting)

The matrix above provides a high level overview of the major European utilities’ strategic positioning within and across the six energy platforms. Distributed Energy Resources (DER) Integration and Electric Mobility are the two energy platforms with the highest level of activity from the major European utilities. Internet of Things (IoT) and Smart Cities are platforms where European utilities are more moderately active, while Transactive Energy and Telecommunications Networks feature the lowest level of activity. Of the eight European utilities covered, ENGIE, Total, and E.ON/Uniper are most active in DER Integration, while Enel, RWE/Innogy, and Vattenfall are most active in Electric Mobility. ENGIE also stands out as being particularly present in IoT and Smart Cities. Although Centrica and EDF appear to be relatively less active in new energy platforms, one should recognize that they have been developing new products and services internally rather than externally—an element that is not captured in this analysis.

The relative activity in partnerships versus investments varies across energy platforms. Electric Mobility activity consists almost entirely of partnerships—where companies prefer signing agreements with automakers and charging infrastructure developers. In contrast to some of the other platforms, utilities may not consider Electric Mobility to be a core business and so are less prone to directly invest in this new platform. This is the case of Enel with Nissan and RWE with Volkswagen. On the other hand, almost all of the European utilities’ activity with the IoT platform has been through investment. For example, Centrica acquired water leak detection and flow monitoring company FlowGem and added it to the Connected Home portfolio Centrica offers to British customers.

In the next post of this blog series, I will show that the majority of partnerships are with companies located in Europe, while most of the investments are made in organizations based in North America.

 

Applying Financing Innovation in Distributed Energy Storage to Make Battery Technology Bankable

— March 20, 2017

In a recent blog, I took a look at the importance of proper evaluation of the total cost of ownership (TCO) of battery energy storage systems (BESSs) from both a power and energy performance standpoint. Such an analysis reveals how extended battery lifetime and other battery performance factors can reduce the ultimate costs BESS owners would pay over the life of the system. This type of revenue and cost predictability is key to unlocking energy storage financing innovation anticipated to drive new technology deployments.

The Bankable Battery Challenge

Today, equity and debt providers and project developers looking to finance BESS have a limited choice of battery technologies. NGK Insulators has a proven sodium sulfur (NaS) battery technology that plays a role in certain long duration, utility-scale energy storage or microgrid applications. For other applications, lithium ion (Li-ion) technology backed by warranties from large, multinational conglomerates like LG Chem, Samsung SDI, BYD, and Panasonic are among the few technologies determined to have bankable BESS technology from a financing standpoint to date. This remains to be the case even though few of these Li-ion BESS installations have been up and running for extended periods of time.

Financing Innovation Enabled by Contracting and Technology Advancements

Many developers, systems integrators, and technology providers are focusing on creative ways to make BESSs bankable from a financing standpoint. Powin Energy is an Oregon-based energy storage systems integrator that recently developed and commissioned a 2 MW, 8 MWh battery energy storage system in Irvine, California under Southern California Edison’s (SCE’s) Alison Canyon emergency procurement. But there is more behind Powin’s efforts than just project development/systems integration.

Powin’s patented Battery Pack Operating System (bp-OS) is designed to enhance the monitoring of battery performance. Its software claims to do this by tracking battery system functions and lifespan at the cell level using its proprietary Battery Odometer and Warranty Tracker products. The Battery Odometer reportedly measures degradation and calculates remaining battery lifetime based on voltage, temperature, state-of-charge, and charge and discharge durations on a cycle by cycle basis. And the Warranty Tracker claims to express that status of battery performance relative to the specific warranty status in real time.

A technology package that truly enhances and simplifies the approach battery warranty monitoring would be compelling. Such clarity and simplicity from a battery performance standpoint could open up opportunities to standardize battery performance warranty insurance coverages across a variety of battery cell technology manufacturers, which would lower costs and provide additional comfort to project finance investors, thereby driving more financing activity.

A Promising Sign for Energy Storage Financers?

A proper turnkey financial TCO analysis should look at the total cost of operation for power and energy. However, projecting the cost of operation of the BESS at year 3 or 4 of a 10-year financing is uncharted waters. Technology such as Powin’s bp-OS coupled with battery performance insurance underwriting merits a careful eye in the journey by project developers to develop and finance BESS projects. As discussed in previous blogs, lower costs coupled with more predictable project revenue feeds the growth financing innovation that will drive the deployment of stationary energy storage technology.

 

European Utilities Are Moving toward New Energy Platforms at Different Paces, Part 1

— March 15, 2017

The energy industry is experiencing a profound transformation as the sector moves toward more intelligent, more distributed, and cleaner use of energy. Utilities’ traditional business models are being challenged by disruptive firms offering new services that leverage more advanced technology, as described in Navigant’s Energy Cloud analysis in its Navigating the Energy Transformation white paper. In the first post of this blog series, I describe six new energy platforms underpinning the energy transformation. In the next two posts, I will show that some European utilities have been more active than others in partnering with, and investing in, companies offering new energy platforms. Finally, I will argue that in order to be successful in the transition toward a smarter, more digital energy future, utilities will need to strategically adopt the most relevant new energy platforms.

(Source: Navigant Consulting)

Integrating Distributed Energy Resources (DER) into a single automated system allows utilities to manage resources more simultaneously and optimally than traditional network operations. DER include distributed generation (mostly solar PV systems and combined heat and power plants), energy storage (which can be used as both load and generation depending on the need), EVs (which act as a mobile battery), and demand response (i.e., adjusting customer load in response to a grid signal).

Electric Mobility refers to the electrification of transport and includes bikes, cars, buses, and trucks. The use of electricity as a substitute to traditional fuels requires the deployment of an electric charging infrastructure covering major routes and endpoints—both homes and offices. In addition to decreasing carbon footprint as compared to internal combustion engine vehicles, EVs can be used as a mobile battery providing capacity and flexibility services to the electric grid.

The Internet of Things (IoT) allows remote monitoring and control of objects connected together via a digital network. It provides new services in energy consumption intelligence and optimization for end customers. Residential customers can benefit from a connected home and commercial and industrial customers can benefit from a more intelligent building.

Smart Cities encompass a combination of services in energy, transport, water, and waste management. Such services are enabled by the three abovementioned platforms—DER Integration, Electric Mobility, and the IoT. City managers can benefit from a reduction of the city’s energy consumption and carbon emissions, improvement of residents’ quality of life, and resilience against catastrophic disasters.

Transactive Energy is a more granular approach to exchanging electricity. Traditionally, electricity is generated by large power plants and sold on a central wholesale market to retailers that in turn sell electricity to the end consumer. Transactive Energy leverages peer-to-peer trading technology such as blockchain and allows a more localized exchange of electricity at the individual level. Consumers with onsite DER such as solar PV and battery storage become prosumers and sell the excess electricity to neighboring consumers at a mutually agreed price.

New Telecommunications Networks based on wide-range technologies enable IoT and machine-to-machine communications. Traditional energy and telecommunications companies are competing in deploying and expanding these new networks that are complementary to existing communications systems.

These six new energy platforms require entrepreneurial creativity that is more likely found in a startup environment rather than a traditional utility. This is why several energy utilities—including the largest European utilities—tend to partner with, or invest in, recently created companies focused on some of the new energy platforms. In the next post of this blog series, I will show that some European utilities have been more active than others in partnering with, and investing in, companies offering new energy platforms.

The Energy Cloud

 

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