Micro-utilities: New kids on the block(chain)
The electricity sector, which always seems to be responding to changes of one sort or another, may have a fresh challenge on its doorstep. A new category of players could soon be entering the field, bringing in different business models, new thinking on how to serve customers, and forcing others to adapt. A wave of micro-utilities appears to be taking shape, with potential reverberations and uncertain consequences across the energy system.
In New York for example, a network of customers has begun generating electricity, storing and trading energy at opportune times of their own choosing, and completing their transactions without going through the dominant regional utility, Consolidated Edison. Fortune magazine cites other examples: "A peer-to-peer network in Germany already counts 8,000 producer-consumers, and in Bangladesh, where an estimated 65 million people lack access to a central grid, rural households sell excess power into a network where their neighbors can buy it in small increments using their cellphones." Link: http://fortune.com/2017/03/14/brooklyn-microgrid-solar-energy-blockchain-startup/.
Although these examples of virtual utilities may be enjoying a period of rapid growth and visibility, the concept of a physical micro-utility serving geographically connected customers can leverage both physical efficiencies and online business models. As such, micro-utilities may be moving to occupy a sector of the market that has not received much attention, or even been clearly identified until recently. At least two micro-utilities are under development in Ontario, driven in part by their ability to focus on meeting the needs of a clearly defined customer group. It’s entirely possible that more are on the drawing boards. Proponents contend that micro-utilities may be one of the best ways of meeting local development needs, reducing carbon impacts and protecting against extreme weather events.
Similar to micro-grids, micro-utilities leverage the benefits of rapidly evolving digital technology to manage power systems specially designed to tailor services to customers at a level much more granular than that offered by conventional utilities. However unlike micro-grids, micro-utilities can have a relatively large number of diverse customers, many of whom have no affiliation with the central proponent except as electricity users. Because virtually everyone is an electricity user, micro-utilities can extend their business reach well into markets in which traditional utilities operate. Micro-grids are designed to manage a defined physical infrastructure, whereas micro-utilities are designed to manage a business infrastructure that can grow in some respects without the addition of physical assets.
Karen Farbridge, Kirby Calvert and Ian McVey, energy professionals who have identified opportunities for micro-utilities in Ontario, have identified three primary drivers creating the demand for micro-utilities:
• The desire to transition to low carbon communities and “net zero energy emission communities”: Micro-utilities can assist with optimizing and interconnecting distributed energy resources, helping to integrate emission reducing systems.
• Extreme weather resilience: Micro-utilities localize generation and distribution infrastructure, and with appropriate design can enhance community resilience to disruptive events.
• Local economic development and investment: Micro-utilities are capable of being integrated into local development planning and are well-suited to being highly focused on serving local economic development needs.
The primary challenge this group has found in delivering these benefits is that the capabilities of energy technology have evolved very quickly to a point where these needs can be met relatively easily in a physical sense, whereas the existing business models and governance systems remain set in models developed many years before current technology was available. “We see potential for a rethinking of business and regulatory rules and frameworks that would allow for a wide variety of micro-utilities to grow, serving customers and delivering societal benefits in ways that have barely been imagined before now,” Dr. Farbridge said.
With the advent of micro-technology it is inevitable that consumers and entrepreneurs will ask: Why would I need to rely on a large, expensive utility far away when a relatively light and agile infrastructure close by can meet my needs? The answer is likely more nuanced than that portrayed in such a simple dichotomy. Yet, whatever the end result, it’s becoming clear that certain applications may be ideally suited to micro-utilities, and there’s a significant chance they will start to encroach on traditional utility territory, figuratively and literally.
The Community Energy Knowledge - Action Partnership
In Ontario a multi-stakeholder initiative focused on community energy planning is seeing roles for micro-utilities. The Community Energy Knowledge-Action Partnership (CEKAP) supports collaborative efforts between academic researchers and community energy planning practitioners with the goal of "better understanding, and facilitating, positive changes through the implementation of community energy plans." As part of an ambitious research agenda, CEKAP has completed a set of case studies on the potential for Net Zero Communities in five urban areas of Ontario (London, Guelph, Toronto, Brampton and Ottawa). The potential for micro-utilities was assessed in London and Ottawa.
A key conclusion of the research was a recommendation for provincial level agencies to “mainstream net zero policy objectives into land use and energy planning framework for municipalities.” In addition, the report said, “Alternative regulatory and market frameworks to enable LDCs to act as platforms for energy services, including generation and storage, are needed.” For municipalities and LDCs it recommended supporting “business model innovation,” and stressed in particular the value of “local energy companies (e.g. Hydro Ottawa, London Hydro, and Enwave) partnering with the private sector to develop community-scale low carbon energy generation and distribution networks.” A recommendation addressed to the development industry said, “In the absence of a supportive energy planning framework for district energy solutions, engage with municipalities and LDCs to establish public-private partnerships to implement community-scale micro-utilities.”
In terms of its research method, CEKAP conducted in depth reviews of municipal and provincial policy frameworks applicable to each case study, and followed-up with targeted interviews with key municipal, public and private sector stakeholders involved in each development.
Part of CEKAP’s work has been to develop a definition for Net Zero Communities. They say that, “in the context of municipal and regional planning, a net-zero energy emissions community is highly efficient in terms of energy needed to meet demand for: buildings (electricity plug loads, space and water heating), transportation (excluding long-haul freight and personal travel outside of regional boundaries), and municipal services (e.g. water treatment and distribution, wastewater management, and waste management). Energy demand is met by sustainable zero GHG emission sources, ideally generated within community boundaries.”
Just as Regional Transmission Organizations have found benefits from governance structures that span the service territory of multiple transmission companies, it may be that regional and community planning agencies will derive added benefits from planning systems that span the territory of multiple micro-utilities.
There are a number of drivers that could motivate investors and their customers to pursue the development of a micro-utility. In remote areas it may be the easiest and quickest way to develop a new service where none existed before. In urban areas it may be the best way to enable access to new features and services not normally available through the existing utility. In special circumstances, where prevailing costs are high, it may be a means of saving money. And for some customers a micro-utility could be an attractive option simply because it offers an alternative to the prevailing utility, ensuring that there is a meaningful choice for customers in how they buy their energy services. People concerned with community energy planning like the CEKAP may see micro-utilities as a means of encouraging local engagement in energy decisions and of ensuring that key business entities are fundamentally integrated with local energy planning processes.
Because of their size, micro-utilities are expected to be relatively closely connected to their customers, and attuned to their specific needs and preferences. In many cases customers may be owners of micro-utilities as well. Business models are possible where a micro-utility is designed from the ground up to meet the particular requirements of a community or group of owners.
The analogy to micro-computers is appealing, although it may not apply perfectly to micro-utilities. Economies of mass production may in some cases outweigh economies of scale. In other words, economic outcomes can be achieved through production of many similar small units, as well as through production of a small number of large units. Large central utilities, like large mainframe computer companies, may find that costs and reliability can be improved with miniature utilities using software and hardware manufactured in large numbers, and perfected by the process of repetition, compared to installing a small number of relatively large units.
Examples in London and Ottawa
Ontario’s Electricity Distributors Association (EDA) sees potential for integration of community objectives with power system development. Writing in a 2017 publication, the “Power to Connect Vision Paper” Fact Sheet, the EDA notes that in Ottawa, “the local utility Hydro Ottawa and its partners are building North America’s first-ever district utility called ZIBI, where future residents will benefit from living in a brand new, green and technologically advanced community.”
Norm Fraser of Hydro Ottawa recently explained the project: “The Zibi development plan includes a district-wide energy system that integrates renewable energy generation and can provide the community with zero-carbon energy by 2020 (Zibi 2015). Hydro Ottawa is collaborating with the project’s developers to provide energy services to the community far outside the traditional LDC business offering. They will advise on combined heat and power, battery storage, microgrids, and smart homes. They will also build the Zibi community grid - separate from Hydro Ottawa’s own distribution assets - and help to connect the Zibi community to one bulk meter for off-site renewable electricity. They will additionally facilitate the organization of all public utility charges on a single bill for every user. To encourage an innovative mindset, the LDC assigned their newest engineers to work on this project and encouraged them “to think outside the box,” disregarding any regulatory or financial consequences. Hydro Ottawa’s collaboration with the Zibi One Planet Community will be instrumental in demonstrating the innovative capabilities of an LDC.”
In London Ontario, a community based initiative is advancing the development of another micro utility in a section of the city known as West 5. A feasibility study has been completed showing that conditions are attractive for the micro-utility. Proponents anticipate further progress as the idea becomes better known and support grows in the local community.
A report from CEKAP explains the electricity aspects of the West 5 initiative saying, “District electricity – i.e., micro-grids, will manage electricity produced within the community. Net metering will sell any excess electricity generated to the grid. Electricity generation is solar PV although combined heat and power may be considered in the future. District heat will be considered as higher density phases of the development come on line. However, the energy efficiency being achieved in lower density developments – e.g., townhouses, means heat loads will be insufficient to support district heat. The first office building has been built to be district energy ready but will be heated with best available technology today; air-sourced heat pumps distributing heat through VRF (Variable Refrigerant Flow). The town-homes will be heated individually with small air-sourced heat pumps. S2E Technologies, Sifton Properties and London Hydro are investigating a joint partnership to develop a micro-utility to provide energy services to the community. The micro-utility may also play a role in promoting resident and tenant behaviour that supports the energy goals for the community.”
Where is this going
Because the concept is so new and in some respects unresolved, micro-utilities can encompass a range of business opportunities that is virtually unlimited at this point. “The varieties of business ventures are as numerous as the many diverse locations in which micro-utilities may choose to operate … possibly even more numerous,” said one observer. One has to bear in mind of course that anything purporting to be a utility may sooner or later become subject to the dictates of a regulator. The application of regulation, is likely to create conditions on the growth of micro-utilities, but is unlikely to stop their growth.
The disruption is likely to be welcomed by many just because the entry of new players will open doors and create footholds for new businesses and business concepts that are entirely unconnected to the assumptions if not dictates on which conventional utilities are founded. A break from traditional utilities may seem refreshing to those who have grown dissatisfied with the atmosphere or style of businesses that have evolved as cautious regulated entities, in some cases for more than 100 years.
What would it mean to be a utility in the connected digital world of the future? Could it be anyone who signs up customers on the internet and finds suppliers to match their demand? Does a utility have to own physical assets and if so, which types? What kind of advantages will flow to those with physically connected customers? What rules will govern the extension of software platforms into the management of real world assets and services? As the market evolves what will be the minimum efficient scale of operation? To what extent will a locally owned and operated micro-utility enjoy advantages of customer loyalty and certainty of revenue? Much will depend on the views and responses from local electric distribution utilities. Will the affected utility in each case see the growth of self-supplying entities as an opportunity or risk? These are questions that affect society as a whole as much as they do the proponents and customers of micro-utilities. However the growth of micro-utilities may bring the issues to the fore and prompt resolution.
Ultimately the form adopted by micro-utilities will be determined by three things: what technology will enable, what consumers will demand, and what regulators will allow.
It is not necessary for micro-utilities to be universally accepted in order for them to have a significant benefit for consumers or to cause meaningful changes in the market as a whole. It is entirely possible that micro-utilities will take their place alongside other business models, including conventional utilities, essentially creating another option in an increasingly rich menu of opportunities for energy consumers.
Even if only a fraction of the current propositions are successful, the era of micro utilities may be about to begin.
Note to readers: Karen Farbridge is a Community energy consultant and previous mayor of Guelph, Ontario. Ian McVey is with the Ontario Climate Consortium and Toronto Region Conservation Authority. Kirby Calvert is an Assistant Professor of Geography at the University of Guelph. CEKAP can be found online at www.cekap.ca