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.

 

US State Legislatures Are Pivoting to Blockchain—Will Energy Follow?

— March 1, 2018

Blockchain’s high profile in the news, particularly the billions of dollars pouring into Initial Coin Offering fundraisers (ICOs) and yet more cryptocurrency heists, is pressuring governments and policymakers globally to develop new laws and standards to guide the developing technology.

Policy changes are happening at all levels of government. China has banned ICOs and cryptocurrency exchanges but remains interested in commercializing the underlying technology. South Korea wants to ban cryptocurrency trading altogether. Even in regions where no new laws have passed, existing legislation designed to regulate centralized systems of energy supply or data privacy are barriers to blockchain development and scalability in many parts of the world.

Stakeholder consortia and other groups in the energy sector that see value in the architectures that support cryptocurrencies are working hard to convince utility commissions and local governments to adopt more blockchain-friendly policies. Some worry that too much regulation too soon could scare away developer talent and potentially lucrative new blockchain-based businesses.

In the US, States Are Moving First on Blockchain Regulations

While the US lags behind Europe and Asia Pacific in the number of energy-related blockchain projects, it is making some promising progress in the regulatory space. At least eight states are already tackling issues surrounding legal treatment of blockchain signatures and blockchain data. A few examples:

  • In California, Assembly Bill 2658 would formally recognize blockchain signatures and records as legal electronic records, paving the way for smart contracts
  • In Florida, House Bill 1357 ensures that blockchain smart contracts are treated with the same legal weight afforded to traditional contracts
  • In Arizona, House Bill 2417 adds blockchain databases to the list of electronic records with recognized legal status and enforceability
  • In Wyoming, the House approved two bills in 2018 that set standards for when digital currencies can be exempted from securities regulations (House Bill 70) and modifies regulations on financial transactions that would exempt digital currencies and allow exchanges to operate legally in the state (House Bill 19).

Progress Is Being Made in Unusual Places

What’s particularly interesting about the above list is the range (geographical and political) of states jostling for position in the market. The next question for the energy sector is how, or if, state-level regulations will translate into real change in these states’ energy markets. Utilities have been understandably bearish on blockchain so far, even in traditionally experimental states like New York and California.

Some of the states experimenting with blockchain regulations are usual suspects when it comes to energy market experimentation, but others are not. Will public utility commissions and regulatory authorities in the latter group take cues from their state governments, or will real progress require more pressure from the bottom up? Either way, the pressure will come.

States are often called laboratories of democracy, and they have the potential to become laboratories for blockchain as well. A range of approaches and experiments is the best way to develop best practices and determine a path forward for a rapidly evolving technology. Check out Navigant Research’s upcoming Utility Blockchain Applications report for more insight into blockchain’s growing role in the energy sector.

 

Shell’s Acquisition of First Utility Augurs a New Wave of Competition

— January 16, 2018

At the start of 2018, a warning shot was fired across the utility industry’s bow: competition is showing no sign of abating. If anything, competition is actually heating up. The nature of utility industry competition has changed dramatically since the start of the decade.

If we rewind 5 years, utilities’ biggest competitors were other utilities. Telcos and high street retailers posed a moderate threat, as some showed an interest in the addition of energy supply to existing, mass-market services such as mobile and fixed-line communications, broadband, pay-TV, and financial services.

Telcos Contemplating Market Entry

Over the past decade, I have advised numerous telcos on opportunities in energy, some of which have moved into the space. Most of the market movement has taken place in collaboration with utilities, which essentially whitelabel energy supply. However, the impact of telcos on the energy industry (and vice versa) has been underwhelming. Why? Because there has never been an imperative for telcos to sell energy, or utilities to sell telco services. It’s a nice-to-have add-on that may help reduce customer churn, but little else.

EV Growth a Clear and Present Danger to Oil Majors

The present day competitive environment has shifted significantly. Utilities face new threats from new entrants with a significantly greater reason to enter the world of energy services. Nothing underlines the shift in competitive pressure more than Shell’s acquisition of the UK’s First Utility, the first major energy supply business to be acquired by an oil major.

This acquisition should come as no surprise to anyone monitoring the energy landscape. My last blog of 2017 called on utilities to improve their peripheral vision and monitor competitive threats. It seems that many oil majors have a more mature peripheral vision, and are already acting to mitigate future potential risks to their core business.

The shift to EVs causes significant concern for oil majors. By Navigant Research’s reckoning, plug-in EV sales in 2017 exceeded 1 million for the first time; the significant investments in recharging infrastructure and increasing concerns regarding the pollution of internal-combustion engines will only accelerate the shift to EVs. Any oil major extrapolating EV adoption to an extreme scenario of ubiquitous EVs will recognize the potential disaster for service station businesses.

Oil Majors’ Competitive Response Covers the Entire Value Chain

However, EVs present an opportunity to oil majors. Most oil majors have renewable energy subsidiaries, and EVs present a new customer segment; existing service stations are perfectly placed to convert to EV charging points and 30-minute recharge times are an additional opportunity to attract customers into a retail store. But EVs are just one part of a wider energy service ecosystem which oil majors are targeting. Shell’s recent investments and acquisitions include a sizeable portfolio of grid-scale renewables generation; Sense, a smart home technology vendor; EV recharging points in the UK; and an energy supply business with 850,000 customers.

Oil majors, if certain scenarios play out, could suffer significant loss of value in the energy transition. This has helped create significant momentum behind oil majors’ activity in downstream energy, eclipsing any efforts from telcos over the past decade.

Shell and most other oil majors recognize there is significant value up for grabs in downstream energy. Their challenge is how to pull together their different acquisitions into a service that offers significant differentiation from utility industry incumbents. The challenge for these incumbents is a credible competitive response: utilities in competitive markets must first recognize value-at-risk from non-traditional competition, then develop products and services for the 21st century consumer.

 

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