Navigant Research Blog

2016 Marks a Year of Disruption for the Energy Industry

— December 29, 2016

Energy CloudAs 2016 draws to a close, it’s difficult to identify which events of a tumultuous year will affect the energy industry the most. The UK’s vote to leave the European Union and Donald Trump’s victory in the US presidential election will certainly top most lists for significant events in 2016. However, no one yet knows the extent to which either will affect the industry. I would like to remember 2016 for other events that gained less airplay than Brexit and Trump but still demonstrate the significant disruption that is occurring to traditional energy business models.

For many years, I have discussed the hypothetical risk of competitive disintermediation caused by the future convergence of electricity and telecommunications markets. Until this year, I relied on a handful of small-scale projects and strategies that amounted to little substance to make this point. However, events in 2016 show that the risk is no longer hypothetical, nor will convergence happen in the future: major utilities are planning large-scale telecommunications projects now, while telcoms are entering the mass market for electricity.

The Spread of Smart Grid

Enel is Italy’s largest utility and has led the charge into smart grid technology adoption. Italy was the first country to adopt smart meters, and it also has one of the most advanced distribution automation projects in Europe. However, Enel’s ambitions extend well beyond the utility industry. It is targeting the Italian broadband market, aiming to provide 250 towns and cities with broadband, and the company’s recent Metroweb acquisition sets Enel on this path. Enel has also discussed plans to deliver broadband to its international customers through wholly owned electricity subsidiaries in Spain, Romania, and South America.

SoftBank is Japan’s third largest company and provides fixed and mobile telephony, Internet, and digital TV services. When the Japanese market liberalized in early 2016, SoftBank recognized an opportunity to expand its services into electricity supply. It has partnered with TEPCO—the former Tokyo Electric Power Company—to deliver power products to its telecommunications customer base of 60 million. In a bold statement that highlights SoftBank’s ambitions in Internet of Things (IoT), the company also acquired leading chip manufacturer ARM for $31 billion.

Transactive Energy

Finally, 2016 saw a profusion of announcements of transactive energy proofs of concept. From North America through Europe, across Asia and into Australia, utilities are investigating ways that customers can start trading power between themselves. Again, transactive energy has been something the industry has discussed for several years, but has seen very little activity. The combination of solar PV, storage, and transactive energy platforms threatens to turn the old centralized business model on its head. The three technologies are complementary and each contributes to the accelerated deployment of the others: solar PV provides the opportunity to self-generate; storage enables the use of electricity at other times of the day; and transactive energy allows the owner to sell power to whomever they choose, at an optimal price.

Utilities face innumerable risks. There are threats from new entrants encroaching on the mass supply market, and massive changes in consumer behavior bring their own share of uncertainties. How each utility reacts will depend on market conditions and their appetite for change. Some will do their utmost to force regulators to protect their current businesses, and others will procrastinate their way to extinction. The likely winners will be those that recognize where future value lies and innovate their way to future success.

 

Europe’s Energy Transition Megatrends and Tipping Points, Part VIII: Building a Competitive Advantage in the Emerging Energy Cloud

— September 12, 2016

AnalyticsIn our initial blog in this series, Take Control of Your Future – Megatrends Part I, we discussed seven megatrends that are fundamentally changing how we produce and use power. In this blog (Part VIII), we will discuss the emerging Energy Cloud, how this is driving the energy transition in Europe, and how utilities can build competitive advantage.

What’s Happening?

There is widespread consensus that a historic transformation of the utility industry is now well underway, and Europe is leading the way. From the move to cleaner generation resources to the prolific rise of distributed energy resources (DER) to customer empowerment to digitisation efforts across the value chain, disruptive changes are transforming the way power is produced and consumed. The result is an increasingly intelligent grid that is cleaner, more distributed, flexible, and efficient. We call this the Energy Cloud.

In the Energy Cloud, as described in Navigant’s Navigating the Energy Transformation white paper, changing customer needs, evolving policy and regulation, and accelerating technology innovation and integration will drive the creation of more distributed transactions and dynamic business models, a more sophisticated two-way grid platform, and a rapidly evolving ecosystem. Sitting on the cusp of major market evolution, innovation is accelerating beyond one-off, standalone technologies (e.g., renewables) and the pairing of these technologies (e.g., solar plus storage) toward the orchestration of complex ecosystems of technologies working in concert to deliver more flexible, responsive, and customer-centric services. Moving beyond siloed technologies, for example, ongoing digitisation efforts are laying the foundation for dynamic platforms that combine technologies and services like integrated DER (iDER), smart cities, Internet of Things (IoT), and transactive energy. These platforms provide fertile testing grounds for industry incumbents as well as disruptors and are expected to result in €400 billion (~$446 billion) in new annual industry revenue by 2030 in Europe. This future state is no longer a question of if, but rather, when—and more importantly, how.

The Energy Cloud

EnergyCloud

(Source: Navigant)

A 2030 Energy Cloud Scenario

European utilities are at various stages of integrating distributed generation (DG), demand response, energy efficiency, EVs, and electric storage. Navigant expects this trend to accelerate. Based on our forecasts, DER is expected to grow more than 5 times faster than new central station generation in the next 10 years in Europe. That makes DER one of the most disruptive factors affecting the grid today and into the future. Under an aggressive scenario, we describe a transformative Energy Cloud ecosystem in 2030 as follows:

  • Utility-scale and distributed renewables account for 50%-100% of generation; DER uptake is widespread, accounting for a vast majority of new build capacity.
  • Annual industry revenue reaches more than $1 trillion in Europe in 2030, resulting in more than $8.7 trillion in cumulative revenue generated between 2016 and 2030 across the region. Digital innovations (i.e., information and operations technology, data analytics, and connectivity) account for more than one-fifth of total revenue generation.
  • Revenue across the electric value chain shifts significantly downstream toward the edge of the grid and beyond (customer side of the meter). Revenue and cost allocation of generation and supply and new energy services effectively swap. Cost and revenue of distribution and customer energy management represent more than half of revenue allocation across the value chain.
  • Grid boundaries are expanded, integrating the existing infrastructure with behind-the-meter building energy networks and community-scale nanogrid and microgrid infrastructure, as well as supergrids linking power networks that extend across geographic regions well beyond traditional state-nation boundaries.
  • The distributed, intelligent grid gives way to a neural grid that is nearly autonomous, self-healing, and leverages innovations in artificial intelligence and cyber-physical systems (i.e., IoT, self-driving EVs, and the smart grid). The application of blockchain technology gives rise to peer-to-peer power exchanges and transactive energy.

How to Build Competitive Advantage

The most critical part of the Energy Cloud transition is balancing ongoing investments in the core grid and additional dynamic platforms that support new technologies, products, and services. Over time, the total volume (and with that, revenue) that flows through the core centralised assets will decrease. These assets will increasingly become at risk of being stranded, and they may become obsolete or financially unsustainable. Asset owners must plan now to mitigate this risk to minimise the cost to incumbent utilities, customers, and society.

Utilities play a key role in this transition. They must integrate new platforms, technologies, products, and services with the existing infrastructure, transforming their organisations into network orchestrators so that the full value of distributed energy is captured while the impact of stranded assets is understood and managed. Existing planning mechanisms, like strategic plans (with typically a 5-year horizon) and integrated resource plans (typically 30 years), are insufficient. A medium-term strategic identity and growth plan (10-15 years) and an agile Energy Cloud Playbook (6-12 months) are needed to pinpoint the trends, opportunities, and threats and introduce new technologies and business models that address merging markets and client needs.

To help navigate our clients in this changing landscape, Navigant has developed an Energy Cloud Playbook. The first step in the Energy Cloud Playbook is an assessment of your current status and level of preparedness. Navigant’s multifaceted iDER Maturity Model provides an assessment of a utility’s progress in DER integration capability. We start with a blueprint for what a fully integrated DER system looks like, and then define five levels of iDER maturity based on that blueprint. We will assess your strategy, organisation, and operations against these maturity levels.

iDER Maturity Model

iDERModel

(Source: Navigant)

Final Advice: Take Control of Your Future

No two markets are alike, and the Energy Cloud transformation will play out differently across European countries, reflecting unique on-the-ground realities. While not all strategic pathways to navigate this transformation will be appropriate (or even successful) for all players across all markets, those that already acknowledge the complexity of the challenge ahead have an advantage. Facing more uncertainty, industry stakeholders—and utilities in particular—will need to adopt a more agile mindset to maneuver their organisations and position for long-term success.

After assessing your iDER maturity, current and future state, and benchmarking it against your peers, an integrated DER strategy, architecture, and roadmap needs to be developed. Through pilot and demonstration projects, your strategy, go-to-market approach, and business case assumptions will be tested, after which viable and market-ready products and services will be implemented. Stakeholder engagement and change management are key to get the right level of buy-in and develop the organization. Measuring and verifying the actual value of the new products and services will be the basis for adjustment of the strategy and fine-tuning of your Energy Cloud Playbook.

Energy Cloud Playbook

EnergyCloudPlaybook

 (Source: Navigant) 

In Closing

The tipping points are clear and the megatrends discussed cannot be underestimated. We are only at the beginning. These trends are accelerating transformation in the energy industry, enabling the entry of new players, putting pressure on incumbent players, and altering traditional strategies and business models. We will likely enter into a 20-year period of uncertainty, trial and error, successes, and many failures as we figure out ways to transform our power generation, delivery, and consumption systems to an orchestrated, agile, open, and efficient Energy Cloud platform. Organisations will need to adapt, and there will be winners and losers as this transformation takes shape.

Navigant’s advice to senior leadership of energy companies is to take an integrated, holistic view of the opportunities and challenges that are flowing from these megatrends. To help you, Navigant has developed the Energy Cloud Playbook, which describes the steps you should take. Only then will you be able understand the full impacts and path forward. And that is the only way you can really take control of your future.

Navigant is at the forefront of what is happening in our industry. We collaborate with our clients to help them navigate the rapidly changing energy landscape. Learn more about our clients, projects, solution offerings, team, and the Energy Cloud Playbook at www.navigant.com/industries/energy.

 

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