At times it seems that the history of the electricity sector is characterized by repeated examples of recovering from one form of disruption (and attempts to establish equilibrium) just before the next major disruption comes down the road. While no sector of society has fully responded to the challenge of climate change, it’s arguable that Ontario’s electricity sector is well on its way to stabilizing the primary after-effects of the Green Energy and Green Economy Act of 2008. As if like clockwork, technology has evolved and dangled the possibility of low-cost distributed generation, storage, demand response and highly intelligent distributed control systems before the eyes of investors, who may be forgiven for asking whether conventional investment analysis techniques are adequate for these conditions.
While the wholesale grid and its major components will undoubtedly retain their positions for years to come, analysts have begun asking how central these legacy assets will be for consumers of the future. Could bulk power lines become the telephone land lines of the future, important for reliability but steadily receding into the background for consumers who have other options?
Change is everywhere. In the retail banking sector for example, scads of innovators are swooping in, offering services that could substitute for all manner of banking functions. “We have to find a way to experiment, or else someone will reinvent our model for us,” Dave McKay, RBC’s chief executive officer, said in November.
Onto this unsettled background innovators are now dropping a new challenge for the power sector. In Germany, the centre of Europe’s photovoltaic power industry, the Sonnenbatterie company has found a way to ease the proliferation of distributed storage – marketing its own battery products and incidentally facilitating the spread of storage infrastructure. In a neighborhood where many consumers have PV panels, only one needs to invest in a sizable battery bank. Other neighbors can use a handy app and some built-in control systems to share underused capacity in their neighbor’s battery bank.
Facilitating many small users’ access to a community scale battery is an example of the often-astonishing phenomenon known as “the sharing economy.” In all types of sectors, online software tools are making it easy for individuals to buy, sell and trade intelligently in small increments, opening up new areas for trade, and redefining which companies are best positioned for growth and leadership in industry after industry. Uber, the ride sharing service, Air BNB, the accommodation sharing service, and Craigslist, the online private seller advertising service, are just a few examples of “sharing” initiatives that have disrupted the taxi industry, the hotel industry and the classified advertising business.
The Sharing Economy may be impactful not so much for the new giants it creates but for the period of turmoil and invention it ushers in.
On November 26, Ontario Finance Minister Charles Sousa delivered the provincial government’s fall economic update, similar to a mini-budget for the province. Among updated figures for the fiscal deficit and projections of growth rates, Minister Sousa introduced a new theme for the government: “Supporting the Sharing Economy”. He said, “As new business models emerge in this important sector, the government is committed to responding in ways that support growth and foster innovation.” There’s no reason to think the power industry will be unaffected by these changes.
The government is aware that unchecked growth of the sharing economy might have unintended consequences. “Going forward, Ontario’s framework will be guided by principles of accommodating new business models, fostering innovation, protecting workers and consumers, promoting a level playing field and ensuring tax fairness. To meet these objectives, new regulations may be required in certain circumstances. In other instances, it may require removing existing obstacles and unnecessary burdens, or maintaining aspects of an existing regime.” He noted that the Province has established a “Sharing Economy Advisory Committee,” with representation from key ministries, to “oversee the development and coordination of Ontario’s approach and to harness the opportunities presented by this emerging sector.” It will report back through the 2016 Budget on its progress towards an integrated strategy. In parallel, the Ontario Securities Commission (OSC) developed, and recently delivered for Minister Sousa’s consideration, a proposed crowdfunding rule that would accommodate newer ways for businesses to raise capital, while maintaining appropriate investor protection.”
Joseph Ragusa, Principal at the Sussex Strategy Group anticipates that “the government’s approach to the sharing economy will emerge as one of the key themes, or narratives, of the 2016 provincial budget.”
Generators are already using crowdfunding, a form of the sharing economy, to raise capital for new projects. As reported last year (“Crowd funding is generating capital for solar power,” IPPSO FACTO, June 2015) a large number of consumers are prepared to invest in generation through vehicles of this nature. The marketing of environmental attributes associated with distributed generation is in some respects an early form of the sharing economy.
The sonnenCommunity scheme unveiled by Sonnenbatterie, the leading residential energy storage player in Germany, has potential to disrupt existing power company business models well beyond Germany’s borders. Jason Deign of SolarPlaza outlined the offering as follows: “Community members are encouraged to store excess PV production in batteries so it can be used for self-consumption, for trading with other users and for the provision of grid regulation services. Under the scheme, currently only available to German customers, users would pay a flat rate of €0.23 per kWh of community energy consumed, roughly 25% off standard electricity prices. At the same time, homeowners putting excess solar energy into the community would be eligible for a feed-in tariff (FiT) of between €0.09 and €0.12 per kWh, plus an extra €0.0027 per kWh from a government energy commercialisation incentive. ... It is currently offering an entry-level solar-plus-storage package, including PV, inverter, controls and a 2 kWh battery, for €9,999 including value added tax (VAT). The battery system on its own is being sold for €3,599.”
Until recently many investors relied on estimates of “minimum efficient scale” for specific sectors to help them determine which companies were likely to prevail in competitive rivalries. However, the concept of minimum efficient scale is too simplistic for an interconnected digital age. In the future, the most effective scale could be the level at which you can attract the most subscribers. In the sharing economy, the likelihood of duplication of infrastructure, or a relatively high upfront investment requirement for infrastructure, is secondary to the widely distributed gains in efficiency, flexibility and responsiveness of daily transactions. The impacts on existing assets (i.e. sunk costs of infrastructure for the bulk system) are frequently considered a non-issue. Although sunk costs are a pretty important issue in reality, they may play a minor role in determining the choice of new technology or the overall pace of investment in new technology. (Duplicative infrastructure appears to be acceptable between land lines, cell phone networks, cable networks and fiber networks, although many economists would have seen that as classic example of economic inefficiency.)
Apple’s iPhone has demonstrated that consumers are in some cases prepared to pay significant premiums to have the latest control and convenience technology close to themselves. Whether they are prepared to invest their own hard-earned dollars to have power supply, storage, regulation and trading functions at their fingertips is an open question. But it’s reasonable to assume that at least a savvy subset will be moving in that direction. Rationally, paying extra for control and flexibility when basic electric service requires no investment at all, may be a riskier proposition than large centralized grid infrastructure with a regulated rate of return. However, the risky investments in the sharing economy come in much smaller increments, are often bundled with a suite of conveniences, and it appears the risks for large scale infrastructure are growing.
One of the impediments to the proliferation of distributed power technology, as noted by Joe Kelliher (see “New technology facing multiple challenges, page 10) is the likelihood that regulators and policy makers will attach financial responsibilities to those who would deploy and use the new technology – partly to help redress the social inequities that will likely result from market-driven deployment. New technology, although it might reduce costs and save money overall, will likely save money primarily for those fortunate enough to own it, while leaving the costs of legacy infrastructure to be borne by low income consumers and those without the option of buying into the new technologies.
Sharing economy solutions like those proposed by Sonnenbatterie, while they won’t eliminate the social equity issues of deploying new technology, could go a long way toward mitigating them, as many more consumers will be able to participate in new technology initiatives through the sharing economy. Once a distributed generation solution looks attractive economically, what’s to prevent owners from parceling out an expansion to everyone willing to pony up a few dollars?
The sharing economy may have little to do with the more generic concept of sharing. It retains almost all the characteristics of private sector investments in a market economy. However it could have a democratizing effect on access to capital-intensive technology, helping to address the social equity problem that may accompany the proliferation of micro-grids and distributed generation.
In addition to regulatory rules modulating the proliferation of new technology, technical issues could complicate deployment. The progress of micro-grids for example will almost certainly be delayed by uncertainty over the appropriate types of data to share between different types of control centres. The issue is not that there is any difficulty setting up the technical systems to share data or allocate responsibility for different types of control. It’s that there’s uncertainty about precisely where the primary responsibility for each type of control should reside.
The European Sharing Economy Coalition explains that, “The Sharing Economy (otherwise known as collaborative economy or collaborative consumption) refers to economic and social systems that enable shared access to goods, services, data and talent as opposed to shared ownership. These systems take a variety of forms but all leverage information technology and peer-to-peer communities to empower individuals with the distribution, sharing and reuse of excess capacity and under-utilised assets (i.e. low frequency of use) in goods and services.”
Elzbieta Bienkowska, the EU Commissioner for Internal Market, Industry, Entrepreneurship and SMEs, has said, “Properly managed, the sharing economy could create additional jobs and growth. It is already benefitting consumers by offering them social interactions and cheaper alternatives to services and goods”. The coalition lists many examples of Sharing Economy disruptions:
• Retailers: disrupted by Peerby (goods exchanges)
• Hospitality: disrupted by Airbnb (shared accommodation)
• Banking: disrupted by Zopa (money lending)
• Transport: disrupted by Cambio (shared mobility)
• Employment Agencies: disrupted by Upwork (services)
• Volunteering: disrupted by TimeRepublik (timebanking)
• Education: disrupted by Skillshare (shared learning)
• Food: disrupted by Feastly (shared meals)
• Clothing: disrupted by 99dresses (clothing exchange)
• Journalism: disrupted by GrassWire (shared newsroom)
• Art: disrupted by getARTup (art exchange)
• Office Rental: disrupted by Liquidspace (co-working places)
• Travelling: disrupted by Easynest (travel costs sharing)
• Music: disrupted by Spotify (shared music)
• Manufacturing: disrupted by 3D Printing (co-creation manufacturing)
Potentially Ontario and other electric control areas could soon have to
manage a sizable new sub-sector in the power business with networks of micro-grids supported by micro-trading. Major new players and new types of entrepreneurs could enter the power sector. Existing operations, including Ontario based generators, could diversify into shared consumption models in addition to wholesale marketing. Perhaps the Ontario Energy Board will issue collaborative hub licenses akin to wholesaler licenses, after setting up basic consumer protections of course. There is no telling how far it might go, but the next couple of years could certainly be the beginning of major conceptual change and fundamentally alter how the energy sector is organized.
Ironically, the value of existing generation infrastructure with robust physical connections could rise significantly if large volumes of customers opt for greater use of local generation.
For the power generation sector this could be an intensely creative period. There are innumerable ways in which new technologies can be integrated with generation to create new synergies with added value for consumers, generators and the grid. There will be new opportunities for investors to finance boundary-crossing technologies leveraging the interests of the affected sector in the process. It could be an innovator’s dream.
In all likelihood large parts of the power industry are already planning responses to disruption that would have been unimaginable only a few years ago.
- Jake Brooks, Editor