How Open Platforms With Demand Flexibility Offer Utilities New Revenue Opportunities
The fastest-growing companies in America generate billions of dollars from platform business models that match suppliers directly with customers, free from the debt burden of ownership of physical assets. In spite of the success of such models, most electric utilities are heading in the opposite direction and maximizing capital investment as a vehicle to maximize returns.
In an era of declining sales and explosive growth of distributed energy resources (DERs), utilities should look to other industries — from transportation to hospitality to apps to music — to figure out what a platform-based future looks like. That future is likely to have less capital investment and more focus on revenue opportunities that provide connection and integration of services for customers.
The predominant utility market strategy is a result of the incumbent utility regulatory framework, leading utilities to overinvest in the grid capacity and underutilize distributed resources. Most investor-owned utilities create shareholder value every time they make capital investments, regardless of the value of that investment to society or in the market. In other words: utilities build it, rate-base it, and get a regulated return on it. Regulators authorized this system under the assumption that the grid directly and indirectly powers the economy, keeping rates aligned with sales.
In several states, that assumption is now under fire. For decades, we’ve seen a steady decoupling of GDP with growth of the grid, with primary energy consumption per dollar consistently falling. Added to that, utility revenue is likely unable to keep pace with rising peak power capacity costs, the estimated $1.5 trillion in costs needed to maintain and upgrade aging infrastructure, and the looming costs to retire coal plants approaching the end of their useful life.
Utilities have not kept pace with the rapid reductions in installed DER costs and DER financial models leading to exponential growth in interconnected assets on the customer side of the meter. Consequently, utilities will be forced to recover billions of dollars of increasing infrastructure costs from a declining sales base, indicating retail rates will likely rise for customers.
First-mover states such New York, Hawaii and California are tackling this problem by investigating how to align utility investments with a more efficient grid that relies less on peak power from centralized assets, and more on integrating DERs into enhanced planning, grid operations, and market operations. New York is positioning its electric utilities to serve as distributed system platform providers, shifting from traditional wires (assets) companies to enabling and providing innovative services via a platform.
However, there are fundamental distinctions between an electricity and software platform that policymakers are considering. The grid is physically interconnected, and service reliability is a public safety necessity. If an Uber driver doesn’t show up, it is inconvenient, but not nearly as disruptive as the power going out. In light of these factors, what might a platform-based utility service actually look like?
A platform for demand flexibility
Demand flexibility — the intelligent management of customer demand based on fluctuating grid prices and changing grid needs — has the potential to generate $13 billion per year of avoided grid investments and up to 40 percent savings on customer bills.
The platform operator’s role would be to make the market for demand flexibility, and set price signals to competitive suppliers of load resources. The platform will allow providers to compensate customers for the opportunity to flexibly manage DER assets that are in development across the industry.
Think of a provider that pays you to rent and manage your thermostat, similar to how Uber interfaces with cars and drivers. The provider might pay you to precool your home to avoid peak power during hot summer days, or might also pay you to use more electricity to power flexible appliances like hot water heaters during off-peak hours, when more central renewables like wind farms in West Texas are available.
During peak-demand events, or during conditions where supply exceeds demand, the service provider would offer payment incentives to customers to shift their electricity loads and better align supply and demand on the grid. The key for the platform is to directly connect demand flexibility suppliers to customers, make the service simple for customers to understand, and offer customers a means to earn revenue (or avoid costs) effortlessly.
A platform for data-as-a-service
In order to attract DER services and investment in the utility platform, utilities need to investigate the market value of data. While there are critical customer data privacy and security issues that require special attention, utilities may be sitting on a gold mine of customer and system data. Much of this data has been collected via monopoly power access.
Therefore, the data should be made available transparently through standardized customer interfaces such as Green Button Connect through a single platform provider like Smart Meter Texas. Companies like Opower, Tendril, Simple Energy, and Spirae are already providing value-added services to customers and utilities using customer data, and potentially greater value may be created through streamlined access to system planning and operations data.
Enhanced data analytical services should be monetized and can help identify demand side opportunities that offer bill savings to customers, as well as grid services to grid operators. Additionally, customer data can open value propositions across the energy value chain, such as linking utilities with home appliance manufacturers in order to provide home diagnostic information.
Even if granular location-, time-, and attribute-based customer data is not available, utility system operational data (e.g., SCADA, substation peak loading, power quality data, customer complaint data) can help identify congestion, power quality problems, and areas of the system where DERs can provide services the grid needs.
A platform enabled by democratized access
A key issue with platform services relates to control of the interface. In the 2000s, Apple became the largest gatekeeper of the music industry and later the app economy via iTunes and the iPhone. The utility industry is similar in how it protects its power over the meter, the technology enabling the customer interface to the platform, or in Apple’s case, iOS.
In the digital world, measurement, verification and settlement occurs directly between the app or product supplier and the platform, but critically, these platforms also enable billing directly between the app and the customer. Imagine buying a song on iTunes from Austin-based folk singer-songwriter Shakey Graves. The payment goes from customer to Shakey, and Apple gets a small cut for providing the platform (iTunes).
While utilities have long fought to extend their monopoly power over control of the meter, this position is shortsighted in a platform model. The upside to competitive platform access and competitive enabling technologies (e.g., metering, or chips embedded in inverters and smart thermostats) will be much greater than the downside of losing control.
Utilities can operate a platform via a standardized interface, and speak the same language to any service provider, regardless of who “owns” the interface. An open platform can maximize utility revenues from transactions between a competitive mix of service providers and customers.
As considered in the recently issued Market Design Platform Technology working group report as part of the New York REV proceeding, the structure of the market frames the platform operation. For example, the initial market construct recommended in the recent MDPT report is to connect one buyer (the DSP) with many suppliers (DER providers) to provide distribution services such as capacity relief and distribution ancillary services.
However, both the types of products, as well as the market structure, are expected to evolve over time, moving from monopsony to (potentially) a many-supplier-to-many-buyer construct (like the digital examples described above). This future evolution underscores the importance of monetizing the platform that connects suppliers to customers.
Utilities and their regulators are inherently risk-averse, and the transition to a platform model requires visionary management and regulation that embraces change. However, if the dramatic loss of revenue and share value exhibited by many European utilities portend what is to come here in the U.S., the alternative is equally problematic, including increased capex and likely increases to rates.
Fortunately, the utility industry can start to turn via incremental changes in course. Utility demonstrations of platform models are perfect examples of stepwise change. Those utilities that pivot first toward a platform model have the opportunity to lead the market.
This piece was originally published at RMI’s Outlet blog and was reprinted with permission.
Matthew Crosby is a manager with RMI’s electricity practice, where he serves as project manager for the New York Reforming the Energy Vision proceeding and is involved with RMI eLab. Matthew focuses on regulatory and energy policy development to facilitate market-oriented energy delivery disruption and product innovation.