The ethos of the Internet revolution is captured in the phrase “information wants to be free”. It expresses both a guiding principle of open access and an economic phenomenon of falling costs enabled by digitization. Electric utility companies are now being disrupted by similar trends in the energy sector as more people and businesses produce their own electricity from abundant renewable sources like wind and sun. In a future where electrons are free, utilities will have to transform their business models and identities from selling kilowatt hours to providing grid services.
The Great Disruption
Utilities have had virtually the same business model for over a century. Until relatively recently, these companies operated in a largely analog space within monopolistic markets. Electricity was produced by digging fossil fuels out of the ground and burning them to produce electricity transmitted across vast distances before being distributed to end users through a complex infrastructure of pipes, plants, and wires. Their customers have traditionally been captive to their service territories. Utilities were formed as natural monopolies given the high costs of building and maintaining infrastructure. They were also heavily regulated to ensure equal access for all to the most fundamental aspect of modernity – electricity.
Digitization and the proliferation of distributed renewable energy are disrupting the 20th century business model and forcing utilities to undergo drastic operational changes. It is also exposing them to an unexpected competitor – the consumer.
Enter the “Prosumer” Era
An increasing number of private residents and businesses are installing renewables like solar and wind allowing them to produce their own power. Net power fed into the grid by consumers has grown 500% over the past five years, while that by utilities has grown barely more than a percent. This is effectively turning utility customers into competitors for selling the generation and distribution of electrons. Consumers become prosumers – new market participants who are both producers and consumers. People can now generate power that only a utility would have been able to produce in the past; much like the Internet enabled people to produce, distribute, and consume content for free.
All structures like buildings and parking lots have the potential to become mini clean power plants connected to the grid. The ease of financing solar installations provided by innovative Silicon Valley companies such as SolarCity and Sungevity combined with dropping prices for photovoltaics and storage mean that prosumers are positioned to deploy renewable energy resources more quickly and cheaply than highly regulated utilities. If enough small scale prosumers go solar in a short amount of time there will be a rapid increase in the amount of power provided by clean energy. And unlike fossil fuel resources, renewables are technologies built to capture ambient energy in the environment, technologies that have steadily increased in efficiency. There is an initial environmental payback period for the carbon footprint that goes into the production of a solar or wind system, but the equipment produces power for many years after its environmental breakeven point.
Disintermediating the Grid
The existing energy infrastructure was designed to be centralized and go in one direction from the power plant to the end energy consumer. The new distributed energy system introduces a multi-directional relationship. Plus, renewables like solar and wind produce power intermittently, making smart controls and storage essential.
The Internet of Things has a big role to play in forecasting and managing loads on the grid to keep it stable. It is a disintermediating force that offers opportunities for third parties to erode the centralized control of the grid utilities. However, utilities also have new digital resources to exploit that are created from the data produced by smart meters. This pool of data will provide new sources of value for utilities in the future, provided data security and privacy are addressed appropriately. Sharing the data also requires utilities to confront the monopolistic mindset that came with their historic business model.
The Internet of Energy
As more of the energy infrastructure becomes digitized and as smart devices proliferate, the intelligence involved in controlling and optimizing these networks – a smart grid – can help drive sustainability efforts. Managing the grid for energy productivity can also provide new business opportunities for utilities. The Internet of Energy is an emerging phenomenon. It won’t reach its full potential until transport is electrified over the coming decades and vehicles become nodes in the smart network. Tesla’s recent acquisition bid for Solar City, if successful, may just accelerate that future in accordance with Elon Musk’s master plan to decarbonize our energy system.
It is even more important to reduce use of energy than it is to produce clean forms of it. The growing digital energy infrastructure holds great promise for helping governments around the world meet the emissions reductions targets they pledged in Paris last December at COP21. It also holds promise for utilities to make money from new services that benefit both the grid and the environment as we move into a world where prosumers have liberated some electrons and the rest want to be free.
The second installation of the Swiss US Energy Innovation Days will be held in San Francisco this August 22-24. Join the brightest minds in energy from Switzerland and the US to discuss new technologies, services, and regulations that are disrupting antiquated paradigms in the energy sector.