Navigant Research Blog

Is the Smart City Market Entering an Acquisition Phase?

— September 19, 2016

Intelligent BuildingIn my last blog, I wrote about how the smart city market is at an important point in its evolution. In that blog, I focused on the changing priorities for smart city projects. Another side to this evolution is the changing market dynamics as suppliers refine their approach to the market and look to extend their capabilities. The most recent Navigant Research Leaderboard Report on smart city suppliers shows the continuing evolution in strategy and offerings among key players in the market.

One important indicator of the maturity of any technology market is the level and focus of merger and acquisition (M&A) activity. It is a sign of the relative immaturity and uncertainty associated with smart cities as a market that there has been little activity in recent years. But there are indications this is changing.

Internet of Things Focus

The acquisition of sensor network company Sensity by telecoms giant Verizon is the latest example—and one of the most significant. Sensity provides sensors and network controls for street lighting systems and has been targeting the emerging market for city platforms. For Verizon, the move marks a step up in its Internet of Things (IoT) and smart cities strategy and gives it the ability to offer a range of city solutions beyond intelligent street lighting, such as traffic management, smart parking, security, and air quality monitoring. It also increases Verizon’s attractiveness as a partner in the complex ecosystem of smart city and IoT suppliers. The alignment with the company’s broader IoT strategy is important to this acquisition, as well. Indeed, the growing focus on IoT capabilities across the technology industry is one of the main reasons why the smart city acquisition picture is changing. Cisco’s $1.4 billion acquisition of IoT platform provider Jasper Technologies in early 2016 can be seen as part of the same pattern. While enhancing their ability to play a bigger role in the IoT space, Verizon and Cisco are also developing strong smart city platforms. Moves from other big players for sensor technology and IoT platform providers are likely to be on the cards.

Analytics Companies

It is not only IoT technologies that are being acquired; analytics companies are also on the shopping list. Urban Engines, a specialist in the use of advanced analytics for the Internet of Moving Things, has announced that it is to become part of Google Maps. Founded by former Google employees, this may be more of a homecoming than an acquisition. However, it suggests that some of the more niche analytics providers in the smart city space will eventually find their home as part of a broader platform offering from bigger players.

Application-Specific Solutions

The third area of the market that we can expect to see more M&A activity is in application-specific solutions. This is an area with a greater history of activity. IBM, for example, has been adding to its roster of government solutions for a number of years in areas like intelligence and social care. But there has been less activity in new application areas. One exception is Silver Springs Networks’ move to strengthen its hand with the acquisition of street lighting software specialist Streetlight.Vision. If acquisition activity is stepping up across the market, the next phase could see more activity in other emerging solution areas such as smart parking and smart waste, for example.

These important developments will add spice to the conversation at Smart Cities Week in Washington, DC next week. I will be attending with other colleagues from Navigant Research and look forward to discussing these and other issues. Let me know if you would like to meet up at the event.

 

Europe’s Energy Transition Megatrends and Tipping Points, Part VI: New Entrants and Converging Industries

— September 6, 2016

SmartCityJan 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. This blog discusses how converging industries and new entrants are changing our industry, specifically focusing on smart cities as a key area where this convergence and disruption is occurring at an accelerated pace. Finally, we will discuss what this means for the many market players that want to participate and survive in the Energy Cloud.

Our latest white paper describes how changing customer needs, evolving policy and regulation, and accelerating technology innovation and integration drives a more sophisticated two-way grid platform and a rapidly evolving ecosystem. Smart cities—dynamic, localised platforms that recombine technologies and services around energy, transportation, and data communication—provide fertile testing grounds for the industry incumbents and disruptors going after the nearly $1.3 trillion of forecasted new annual industry revenue by 2030 globally.

What’s Happening?

Europe’s focus on the interdependent goals of creating a low-carbon economy, ensuring energy security, and enabling competitive energy markets make it a test bed for many of the developments associated with the energy transition. This is reflected in the European market’s attraction for players across the energy value chain, including many new entrants who see an opportunity to disrupt the traditional utility industry and take market share away from incumbent utilities.

The role of energy companies, including utilities, network operators, and oil & gas companies, is being transformed by a series of fundamental shifts, including the following:

  • Energy consumption and GDP growth: Although population and GDP growth (at a slower pace) drive growing energy demand, the trend line between GDP and energy consumption growth has been broken in absolute terms in EU countries. Primary energy consumption in the EU countries was almost the same in 2013 as in 1990 according to the European Environment Agency (albeit partly as a result of economic recession). This dynamic puts pressure on all players in the energy sector. Utilities with no or limited customer growth see their overall revenue declining. Utilities that still see customer growth are reporting that demand (and revenue) is not growing at the same pace. This is creating an unsustainable situation: utilities with flat or declining revenue yet growing costs to serve their customers and maintain the grid.
  • Impacts of climate change: In an earlier blog, we discussed the impacts of the growing number of policies and regulations to reduce carbon emissions. It is clear that this impact is being felt, as Europe is on target to meet its 2020 goals for renewable energy and carbon emissions reductions. However, member states now face the challenge of meeting more challenging new targets if they are to make progress towards the grand goal of making Europe a low-carbon economy by 2050. In the meantime, cities and large corporations are not waiting—they are setting their own sustainability targets and investing in programs that reduce their carbon footprint. Power generators, network operators, and energy retailers are all active in this transformation but also face significant, and in many cases unknown, challenges as they try to understand the new demands placed on their businesses and operations.
  • Big power to small energy and the rise of the prosumer: Commercial, industrial, public sector, and residential energy consumers are all becoming more actively engaged in energy management and energy generation. More and more customers are choosing to install distributed energy resources (DER) on their premises. DER solutions include distributed generation, demand response, energy efficiency, distributed storage, microgrids, and EVs. Europe is expected to have the greatest percentage of new DER capacity deployed compared to centralised generation throughout the next decade. New energy retailers are also taking advantage of these changes and the development of smart energy applications and online service models to provide more innovative and lower-cost solutions for customers. These new entrants are further challenging the established position and profitability of the incumbent players.

How Industry Giants Are Responding

As a consequence of these changes, electricity utilities are under pressure. As revenue declines, costs are increasing due to needed investments to provide safe, reliable, and affordable power while also supporting an emerging, cleaner, and more distributed and intelligent grid that is required to provide needed flexibility. Therefore, utilities are looking for new revenue streams and thinking through new business models that will create shareholder value going forward. Oil & gas companies, under additional pressure because of the continued low oil price, are looking for ways to survive by taking out costs, reducing their upstream capital investments, and shutting down unprofitable assets. However, their long-term future also requires them to find new opportunities to grow revenue and shareholder value in new energy businesses.

Both utilities and oil & gas companies are looking to turn the challenges of the energy transition into their advantage through entry into new markets and the delivery of new energy platforms and services. Total’s Chairman and CEO Patrick Pouyanné has stated that the company’s goal “is to be in the top three global solar power companies, expand electricity trading and energy storage and be a leader in biofuels.” Meanwhile, French energy giant, Engie (formerly GDF Suez) has been investing heavily in renewables and storage technologies, developing its energy services business, and establishing its Cities of Tomorrow programme to target the growing smart cities market.

European utilities have also been embracing DER and developing alternative business models to capitalise on new technologies and the changing resource mix. This is especially true in Germany, where there are high levels of DER, and utilities like RWE and E.ON have begun transforming their business into a more capital-light, DER-based model by shedding centralised generation assets and positioning themselves as enablers and integrators of new DER resources. For example, RWE has invested in and formed a rooftop solar partnership with German solar developer Conergy and is white labelling Sonnenbatterie’s behind-the-meter battery systems for solar-equipped German homes. As DER penetration in Europe accelerates, we see more value in moving from generation to distribution and beyond the meter.

Energy market incumbents are developing strategies to position themselves as the leading force in creating the new order. At the same time, other players—from giants in the transport, IT, telecommunications, and engineering sectors to energy service and technology startups—are looking to increase their share of these emerging opportunities. For example, Europe is seeing the emergence of a new class of DER aggregators aiming to take advantage of these new technologies and the utilities’ evolving business models. LichtBlick, Caterva, Next Kraftwerke, and Ampard are just a few of the companies establishing virtual power plant business models to provide additional value from the integration of DER into the European grid. Many other, much larger players also see the potential in brokering the new relationships emerging between energy companies and their end customers.

Cities at the Heart of the Energy Transition

The continuing interest in developing smart cities is closely aligned to the transformation in the energy market and provides an important example of how the energy landscape is evolving. More than any other region, Europe has recognised the importance of smart city developments to its energy transition programme. Cities are examining the sources and efficiency of their energy to reduce their greenhouse gas emissions and energy costs. In the process, cities are becoming more ambitious and proactive in setting energy strategy. They are seizing opportunities to work with utilities and other stakeholders to create new urban energy systems. The emerging vision is of a smart city with integrated large- and small-scale energy initiatives, including major infrastructure investments, citywide improvements in energy efficiency, and distributed energy generation.

Across the continent, city leaders have been signing up for ambitious carbon emissions targets and are taking an active role in encouraging utilities and other players to support their strategies. Stockholm and Copenhagen have led the way with plans to become carbon-free cities, and many more cities are now following their path. Frustrated at the slowness of the change they are seeing, some cities are even taking matters into their own hands and looking at re-municipalisation of utilities or the creation of new city energy companies. Hamburg, for example, took back control of the city’s energy in 2014. In the United Kingdom, Bristol and Nottingham have established new city-owned energy companies, and the new Mayor of London has made a strong commitment to a new energy policy for the capital.

Utilities are responding to these challenges by working closely with cities and communities to develop new energy models. Alliander, for example, has been a long-standing supporter and investor in the ambitious Amsterdam Smart City programme. E.ON has been working with smart cities in order to test integration of its smart grid solutions that enable more effective energy management and integration of DER. In Malmo, Sweden, the utility and the city signed an agreement to adapt the entire Hyllie district of Malmo to a climate-friendly energy supply. By 2020, the entire district’s electricity, heating, and cooling will be powered exclusively by renewable resources and energy recovery.

Another aspect of Europe’s urban agenda that is having a strong influence on the energy sector is the focus on sustainable transportation. The European Union has put the triple play of energy, transport, and information and communications technology (ICT) at the heart of its innovation programme for cities. Reducing emissions from transportation is the next critical frontier in the decarbonisation of the European economy—electrification of heat and transport pose the most obvious options for sustainable demand growth in the present market. Europe has arguably the strongest level of utility engagement in developing EV charging services. Utilities and energy companies such as Germany’s RWE, Italy’s Distribuzione, Ireland’s ESB, and the Danish utilities SEAS-NVE, SE, NRGi, EnergiMidt, and Energi Fyn have all funded charging deployments or invested in companies that deploy chargers. For example, Danish company CLEVER is owned by the five largest utilities in Denmark and operates a network of several hundred EV supply equipment (EVSE) stations throughout Denmark; the company is now branching out into other geographic markets. Enel has developed an interoperability platform and is aggressively deploying charging stations, with more than 2,000 deployed across Italy.

So What Does This Mean?

The next decade will see a reshaping of the European energy sector to meet the needs and challenges of a low-carbon economy. We have already seen some of the industry’s largest players moving quickly to expand their capabilities and services to meet these new requirements.  As discussed in Part IV of this series, further diversification and mergers and acquisitions are inevitable as players look to gain a footprint in emerging services and exploit new energy technologies.

Energy companies also need to broaden their partnership network, working with those in the public services, transportation, infrastructure, and ICT sectors to deliver the integrated capabilities needed to make the energy transition a reality. They also need to create new relationships with their customers, as they too become partners as much as end consumers. The industry giants of today are using their resources as some of the biggest companies in the world to engineer this energy transformation and to meet future shareholder interests. They will need to continually reinvent themselves and become broader and more adaptable energy companies able to protect existing revenue streams and seize new opportunities. However, not all bets will pay off. We will inevitably see some wrong turns in this process of adaptation and the eventual winners may well be those who learn quickest from their mistakes.

This blog is the sixth in a series discussing how industry megatrends will play out across Europe as well as at the regional and country levels. Stay tuned for our next blog in this series focusing on customer choice and changing customer demands.

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

 

LPWA Networks and 5G Emerging as Key Technologies for Unlocking Smart Cities

— September 1, 2016

SmartCityA number of different networking technologies are underpinning the emergence of smart city systems. Two emerging and overlapping developments in communications are likely to have a wide impact on smart cities: low-power networks and the move toward 5G networks.

Low-power wide-area (LPWA) networks are set to play an increasingly important role in expanding the possibilities for the Internet of Things (IoT) in cities. LPWA networks enable thousands of small battery-powered devices to operate for long periods of time (around 10 years on a standard battery); benefit from low-cost modems (less than $5); and offer cheap connectivity (a service cost of a few dollars per year), long-range access, and deep penetration.

LPWA networks offer the prospect of sensors and other intelligent devices being able to connect instantly into a communications network at a cost of a few dollars a year and with no additional investment needed. These networks are suitable for applications where high bandwidth and low latency are less important. Equally important, they allow for low-cost piloting and easy scaling of innovative applications. A supplier developing a smart city solution, for example, could quickly demonstrate the benefits of an application for air quality monitoring or smart parking.

Some Drawbacks 

Note, though, that LPWA networks are not suited to applications requiring high bandwidth such as video streaming or low-latency applications requiring a real-time response. Moreover, they are not suited for the continuous tracking of moving objects. LPWA networks are largely complementary to existing network technologies; however, they do present a challenge to radio frequency (RF) mesh technologies for some applications. These networks may offer a cheaper approach to applications such as smart street lighting and smart parking. Silver Spring Networks, for example, has offered its Milli 5 solution to directly address this challenge, providing a lower-cost, wide-coverage communications module for its mesh network.

Compared to 5G communications networks, the amount of data that can be transmitted through LPWA is also far lower. Generally expected to be commercially available around 2020, 5G networks will have a major impact on connectivity for a wide range of smart city applications. There are signs however, that 5G may be deployed sooner than 2020. In September 2015, Verizon announced it was working with a range of partners, including Qualcomm, Cisco, Ericsson, Nokia, Samsung, and Alcatel-Lucent, to make 5G available sooner.

While there are several different technology options for connecting cities of the future, LPWA and 5G appear to be the front-runners—for now, at least. For more information on smart city communications trends, see Navigant Research’s Smart Cities report.

 

Smart Cites Are Shifting the Focus from Technology to Outcomes

— August 19, 2016

SmartCityNavigant Research’s latest Smart Cities report highlights how the smart cities market is entering a critical phase. The drive toward connectivity, real-time data, and embedded intelligence is expected to accelerate the availability of smart solutions for core city services and operations over the next 2 years. However, many cities still need to be convinced that such solutions can deliver real benefits against their key priorities. One of the biggest challenges therefore is to make a link between successful technology pilots and large-scale deployments of solutions that benefit a broad spectrum of city service users. Pilot projects that focus on the viability of specific technologies have their benefits, but the real requirement is to show how specific solutions can deliver real outcomes for cities within a realistic payback period.

One challenge is that the relatively small scale of most pilots makes it difficult to build a substantial business case to support wider deployments. For this reason, leading cities are now shifting their interest to demonstration projects that show a strong emphasis on both measurable outcomes and supporting business cases rather than technical viability. However, as we highlight in the report, there is often a funding gap between smaller demonstration projects and larger scale programs that can provide real evidence of scalable benefits.

A Focus on City Outcomes

It will be interesting in this regard to watch the progress of Columbus, Ohio as it implements its program funded by the US Department of Transportation’s Smart City Challenge. The award was worth $50 million, but the addition of an extra $90 million from a group of local businesses puts Columbus in an enviable position and makes the project a particularly interesting experiment for other cities. The combination in Columbus of a strong focus on city outcomes around social inclusion and inequality and sufficient funding to make a real difference precisely meets the bill for the next generation of smart city initiatives.

An encouraging development generally is that both cities and suppliers understand the importance of this shift to a focus on outcomes in smart city projects. Navigant Research’s white paper on smart city progress in the United Kingdom, for example, found a strong emphasis on developing outcome-focused programs in leading cities. Similar thinking also underpins the latest European Union-funded large-scale smart city demonstration programs that are using the concept of lighthouse cities to develop replicable solutions that can be tested in associated follower cities.

Innovation and New Approaches

Examples of supply-side innovation include AT&T’s work with partners and selected cities to demonstrate the concrete value of multi-application programs to cities. Another interesting approach is Cisco’s work with a number of national governments on Country Digitization Acceleration programs that aim to address the barriers to the adoption of digital technologies in key sectors of the economy, including cities.

Smart Cities Week in Washington, DC in September comes at a timely moment to discuss these developments and review progress on smart cities across North America and globally. I will be attending and look forward to discussions with city leaders and suppliers on how cities can further accelerate innovation and realize the benefits of smart technology on city services. Let me know if you would like to meet up at the event.

 

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