Editorial:
The case can be made that anyone in business today, and particularly those in the energy business, absolutely must pay attention to the development of micro-grids and Distributed Energy Resources. Without presuming to know precisely how the sector will change, it is becoming apparent that these new technologies, taken together, open kingdom gates previously thought to be little more than brick walls. The character of the revolution underway goes well beyond the choice of generation technology, or who will own power companies, wires, or other infrastructure. It may redefine the purpose of the energy system, what consumers expect of it, and even what it means to be a consumer in the first place.
The smart interconnection of virtually all electrical hardware has made it possible for consumer empowerment to be a distinguishing feature of mass market product offerings. Those companies whose offerings enable the most meaningful forms of consumer empowerment stand a real chance of prevailing over their competitors. When those customers gain the added leverage of being able to offer or redirect generation, storage, and Demand Response services, it would be a serious mistake to underestimate the scope of change in customer empowerment that will characterize the coming energy system.
Why business needs to pay attention to microgrids and DERS
In the current environment, a business model focused on minimizing costs and extracting value could be missing some of the best opportunities. Business does well when it anticipates change and uses that insight to correct inefficiencies in the system. It does better when it develops new services that expand the value generated, while sharing benefits with consumers. In today’s energy system, opportunities to both correct inefficiencies and expand value are abundant.
According to many experts, the world is moving towards micro-grids and distributed energy resources. Small units that optimize value through mass production now have certain advantages over large power plants that rely on economies of scale. While technological progress and innovation will continue at the wholesale level, and significant advances will continue in large scale energy systems, it is innovation at the retail end that will cause game-changing disruption, redefining who is in business to do what.
New forms of real-time commercial competition will arise between distributed resources and wholesale grid resources. This new realm of competition carries the seeds of big change.
The intuitive appeal of benefiting directly and visibly from real time competition between local resources and the wholesale grid will be irresistible for customers. People and businesses will come to expect the kind of control and service that come from micro-grids and distributed resources, if only because they want alternatives.
Even though bulk grid power will remain essential, its role will change, and interfaces that leverage local resources are likely to drive development of both the grid and consumer-oriented businesses. The bulk grid will have to compete against a variety of local resources to see who is most effective as a balancer and stabilizer, in real-time and over the long term.
The electrical grid will be valued for its ability to facilitate myriads of small transactions between producers and consumers, as much as for its ability to transfer bulk power from one location to another. Although its mechanics are still being developed, the Transactive Energy System appears to be growing within and alongside the conventional power grid. Its growth is indistinguishable from countless incremental smart technology enhancements and private trades, yet at the same time it is redefining the purpose of society’s most critical shared energy asset, the electric grid.
Reducing transaction costs vs enhancing benefits
Successful businesses in this area will likely be based on reducing transaction costs, enhancing customer benefits, or both. There is little doubt that a wide range of technical innovation and all kinds of business development in the near future will be focused on reducing transaction costs. It’s fair ball, beneficial to virtually everyone, and potentially profitable.
New businesses built on enhancing benefits to customers have a much wider playing field. Business models may evolve that bundle together energy services with communication functions, banking, home security, social networking, and other services. What will be of growing value to consumers is an open question and one that bespeaks a great deal of commercial opportunity. Sizable spoils may go to those entrepreneurs who can answer questions of what best enables consumers to enrich their daily lives and achieve purposes higher for them than simply consuming energy.
The electricity sector, which was once considered slow-moving and unimaginative, is now becoming vital and full of innovation just like its relatives in the digital technology sectors. This is evident in all the new technology for which the major commercial barrier appears to be the risk that it might destabilize long term capital investments in existing infrastructure, before lawmakers and regulators allow the floodgates of new innovations to open.
The crucial role played by the new orchestrators
Many energy experts, notably led by Navigant, are projecting that a crucial new role will emerge in the power system, that of platform orchestrator. According to Navigant, in an Energy Cloud environment, where the quantity of power flowing through the bulk grid is significantly reduced, but transactions across the edge of the grid sharply increase, orchestrators will co-ordinate and facilitate others. Rather than supplying power or other energy services, they will push electrons through the wires, intervene to smooth out power flows, and provide other kinds of services.
Mackinnon Lawrence, a director at Navigant, recently wrote “it will be increasingly difficult to scale and build a sustainable business around individual technologies. Margins on rooftop solar, wind power, and fuel cells, for example, will erode faster going forward. Orchestration (not necessarily ownership) of integrated asset networks is what will unlock the full value of these platforms and their underlying technologies. .... orchestrators are more likely to insulate themselves from competition (and disruption).”
In this area there is an opportunity for human beings to exert a certain degree of control over the direction of development. Arguably, the shape of the energy system will be determined in large part by the approach taken to the structure of the orchestration function. Policy makers and regulators will have to determine:
* To what extent will orchestrators be affiliated with LDCs?
* What limits and powers of orchestrators will be established by regulators?
* Will orchestrators be owned and controlled by larger international networks?
* What protections are needed to ensure that new security problems or social inequities are not created as new systems displace old?
Ultimately, the story will be told by where the revenue goes. In the past, revenue went to generation, transmission and distribution in approximately that order. In the future, the mix may be more like generation, distribution, storage, transmission, and ancillary services. Where in that hierarchy will orchestration fit?
To see the future, look at the revenue streams. They are changing and continually offering up new opportunities. The energy sector is economically exciting and full of promise.
Conclusion
While each and every customer may not be fully informed and engaged in energy transactions, many will likely be empowered by tools and services resembling those used by the savviest of today’s energy traders. The apps that succeed are often those that give customers visible, intuitive control over what they believe matters. Customers often pay a premium for such control. Businesses that underestimate the impact of increasingly sophisticated customer preferences do so at their own peril. Intuitive appeal matters. System operators will appreciate these developments as well because customers who are technically engaged tend to use energy services more efficiently and more predictably, and have the effect of improving visibility to the grid operator.
It could be that the most successful energy companies will be those who are most effective, not in assembling physical assets, but in disseminating meaningful, effective control over key network functions to the widest number of active users of the grid. Asset management will likely be a fine business to be in, but forward-looking development of assets and the rest of the system will be defined by how those assets are dispatched through rapidly-evolving networks of people.
It may be increasingly difficult to understand the energy system in isolation. While energy services need to be designed, planned and managed, it may be more apt to look at those services as components of a wider system of consumer empowerment. If this line of development continues, entrepreneurs may be looking to understand more clearly the kinds of services consumers will see as enabling them to lead rich and meaningful lives.
— Jake Brooks, Editor
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