Driven by environmental concerns and consumer demand, and enabled by the rapid rise in distributed energy technologies, a Navigant examination of the “Energy Cloud” predicts that within two decades the distribution system of today will be virtually unrecognizable.
“The end result of this transformation is a reimagining of how we generate, store, and consume energy in the next 20 years,” Navigant said in its recent white paper. “More specifically, the energy cloud represents a transition from one-way power flow to a dynamic network of networks supporting two-way energy flows at the periphery of the grid.”
The change is sweeping across the United States as well as globally. Spending on grid automation and demand response reached $70 billion globally last year, the firm said, and its forecasts show distributed capacity additions will exceed new centralized generation capacity additions by as early as 2018.
Mack Lawrence, senior research director at Navigant and the author of the white paper, described the changes as “an all-encompassing evolution.”
“The energy cloud ties together a lot of the emerging technologies we're seeing hitting the grid,” Lawrence said. “Complex energy transactions, changes from one-way to two-way energy flows. It's kind of a platform on which these technologies and services will be better integrated and coordinated to allow for a more modern and dynamic grid.”
But the changes in how energy is marketed and distributed has also thrown a wrench into the traditional utility business model, and has left utilities struggling to understand their revenues and where they fit into the new energy future.
“So many of the assumptions that have traditionally underpinned the grid are changing so quickly that the rules of the game, from a revenue perspective, are being rewritten,” Lawrence said.
Growth of the cloud, and a threat to utilities
Navigant's analysis finds four key factors driving the evolution of the utility space and distribution grid, including an increased focus on carbon emissions and reduction mandates. The United States' Clean Power Plan will target a 30% reduction in greenhouse gas emissions by 2030, and the European Union is on track to meet a 20% reduction within the next five years.
The Obama administration's carbon plan “is certain to face litigation after it is finalized,” Navigant said. “However, many states and utilities are moving forward with low carbon plans that include both energy efficiency and distributed renewables despite the uncertainty surrounding the final regulation.”
The transition to a increasingly-decentralized grid architecture is also being fueled by the dramatic rise in distributed energy resources, greater availability of high-quality data related to grid-edge technologies, and a customer base that is showing growing interest in taking control of its power consumption.
“The customer engagement piece is a hot area in terms of who is going to own that relationship going forward,” Lawrence said. “As you integrate new technologies, customers are more empowered in terms of using tools and taking control of their energy use.”
As the rewards for conscious energy use grow, Lawrence said customers are “going to be more in the drivers seat, in terms of who they transact with. Utilities are the ones who are set to lose.”
That means utilities are having to focus on new business models, and many are beginning to work on partnering with their unregulated arms, discrete technology or service providers, and solar installation companies. The partnership, Lawrence said, “becomes the vehicle for owning that interface with the customer.”
Duke Energy CEO Lynn Good echoed that sentiment at a recent utility customer service conference, telling the audience during her keynote address that utilities need to catch up with other industries in terms of putting the customer at the center of their operations and tailoring services to them.
“Our customers have opportunities to understand what great customer service is every day of their lives as they interact with Amazon or they go to Nordstrom or … anywhere where they have the opportunity to experience another service provider's product or service,” she said.
“[Customers] want flexibility. They want different tariffs. They want their bill options to be different," she continued. "They want products and services. They might want rooftop solar. They want communication in the form that they want to be communicated with and in a language that they understand."
The best defense? New revenue streams and an updated grid
The utilities best situated to deal with the changing grid landscape will be those who develop strategies to shore up customer engagement and satisfaction, while also seeking out new business models, Navigant argues. The white paper describes improved customer service, equitable net metering solutions and developing utility-owned renewable assets as defensive strategies.
On the flip side, the creation of new revenue streams will be vital to utilities' growth, Lawrence said. Organizations must integrate sales and service and operations, grids need to be upgraded to integrate distributed resources, and investments must be made in emerging technologies.
The white paper notes unregulated entities like NRG, which has been focused on new business models and the growth of renewables for the last year, have had the flexibility to move more aggressively than other utilities to integrate distributed resources and demand response.
"Meanwhile, vertically integrated utilities — partly hamstrung by an increasingly obsolete regulatory model — have been slower to embrace this change, but have also been increasingly receptive to the realities of a changing landscape," the white paper reads.
Investment in four key technologies — energy storage, solar PV generation, building energy management systems and virtual power plants — represent almost $1 trillion in potential cumulative investment over the next decade, Navigant predicts in the paper.
The firm is anticipating 1.1 TW of cumulative distributed capacity will be installed between 2014 and 2023, representing about 33% of the anticipated total generation capacity added worldwide over the same period. Of that, Navigant estimated that solar PV deployments will represent about a quarter of all the distributed capacity installed and would generate more than $700 billion in cumulative vendor revenue.
Getting into new markets
While technologies and environmental policies will drive the grid's evolution, Lawrence said how utilities react will be the most outward indicator of change.
"The threat varies, but the way utilities are responding, for the most part, you see this shift in the center of gravity, of focus," he said. "Utilities are shifting more towards the distribution grid. That's where a lot of third-party providers and vendors are seeing opportunity starting to open up."
That trend was on display just last week when Southern Co. CEO Thomas Fanning announced that the company's Georgia Power subsidiary would enter the rooftop solar market this summer when the state's Solar Free Market Financing Act goes into effect on July 1. Across the nation, utilities and regulators are working to develop ways to monetize the grid and define ownership structures for utilities and vendors around distributed energy.
“This is a very old-school industry, obviously,” Lawrence said. But as technologies evolves, “there are just all kinds of opportunities that open up from that. It's a no-brainer for a company like Google, which specialized in data algorithms, to come in and capitalize on some of the opportunities. But it's a pretty diverse mix looking at the space.”
Traditional tech companies are looking at opportunities in the energy space, cable providers are partnering with utilities, and Lawrence said there are synergies in health monitoring, security and communications which are also being explored.
“The threat is there,” he said of the industry's traditional revenue models, “and utilities are responding much more aggressively than they were just a couple of years ago.”
The white paper concludes that “for utilities, the end result of the evolution toward the energy cloud will be more integrated service offerings. … Leveraging existing relationships with consumers, utilities have the potential to play a key role in bundling services in the energy cloud.”
That sounds a lot like what Commonwealth Edison has done in Chicago. The utility this summer announced it was partnering with Nest Labs and Xfinity to offer $40 in incentives to customers who signed up for a demand response program in connection with a smart thermostat.
“From our perspective its a less-expensive way to develop demand response,” said Val Jensen, senior vice president of customer operations at ComEd.
Jensen said reducing peak demand was important to the utility, but they wanted to turn the program over to companies they felt were better at direct marketing. “Certainly, we don't want to outsource so we're invisible to the customer, but we want to do more. … We see our market changing, and our customers' expectations evolving.”
Steve Propper, who manages Greentech Research's grid edge program, said utilities are now offering surge protection above and beyond basic protections, wireless consulting and co-location, and even landscaping and tree-trimming services.
“You're slowly pushing the utility into being a platform provider, and if they become a platform provider they can provide a lot more services,” Propper said.