David Bodde, Clemson University professor emeritus, joins Robert Gee, Gee Strategies Group president and Anthony Compofelice, Utegration solution executive, for a free one-hour webcast, Technology Jumpstarting Utility Financial Transformation, Wednesday, Oct. 24, 12 – 1 pm ET
Emerging technologies and market imperatives converge to bring an era of revolutionary change to electric energy. Such change can lead either to the disruption of the incumbent utility industry or to an historic service opportunity.
Which occurs will depend upon the strategic response of the industry and its regulators.
The case in point is the microgrid, a platform that combines technologies originating outside the electric sector to offer improved services to customers as well as benefits for the larger grid. These microgrids could disrupt the industry by allowing the best customers to reduce their grid service sharply.
On the other hand, microgrids could enable open-architecture, innovation ecosystems that bring to all participants improved service at lower cost. Such ecosystems could evolve from the venture capital investments currently supported by many utility companies.
Over the next decade, disruptive innovation—chiefly in the digital technologies—will change the way the world works and the way that the electric industry fits within that world. The disruptions caused by a new technology rarely come from that technology alone. Rather they spring from a combination of technologies packaged in a business model that empowers customers to do things that were impossible before. The new market entries rarely defeat the incumbents at their own game, but rather they change the rules of the game. The business model of the incumbents simply becomes irrelevant to providing customer value.
Three disruptive forces have arisen to confront the electric industry and its regulators with a dynamic and risk-filled business environment:
• Motivation for change. Consumer preference for “clean” energy and public concerns for the global climate will persist, albeit with varying degrees of urgency. At the same time, concern with the disruption of electric service, whether from natural events such as hurricanes or from the predations of hackers, will grow in urgency. These concerns motivate fundamental change to the electric system.
• Exponential technologies. The capabilities of the digital technologies grow exponentially to upset the familiar paradigms for the production and use of electricity. The most relevant—artificial intelligence algorithms, advanced GPU and TPU computer chips, advanced sensors, and large data sets—will reshape the world of the regulated utility.
• Alternative business models. The disruptive power of technology resides in alternative business models that customers could find more valuable than those of the incumbent companies. Experimental prototypes of such business models abound in many states: New York and Illinois for example.
Innovation ecosystems could offer a platform through which the incumbent industry can lead the change rather than become its victim.
“Innovation ecosystems could offer a platform through which the incumbent industry can lead the change rather than become its victim.”
Such platforms have shown value in other industries that also face disruptive, technology-driven change: automotive, for example. These ecosystems combine the customer access and financial power of the incumbent companies with the innovations of entrepreneurs.
They allow rapid and low-cost learning through the combined experience of the network participants. We suggest that utility-managed microgrids could evolve into open-architecture innovation ecosystems to become an industry-led model for constructive change.
A microgrid is a semi-autonomous, local energy system that connects to the larger utility grid—somewhat analogous to a miniature electric utility. A central controller serves as the brain of the system, dispatching the energy and controlling the diverse components.
A microgrid can include: generation, commonly solar photovoltaic, coupled with a combustion turbine or even fuel cell; energy storage, usually in the form of lithium-ion batteries; a controllable load, sometimes with additional services like combined heat and power; and a capability to connect with the larger grid as backup, or to disconnect in a grid emergency. Analogous to the smartphone, the microgrid platform combines exponential technologies to bring new services to electric energy customers and benefit to the grid.
The majority of microgrid projects reside “behind the meter”. These are usually owned by a single large customer—an industrial complex, a university, or a military base, for example—motivated chiefly by concerns for grid resilience, but also by cost savings and the direct use of renewable energy. The microgrid at Princeton University, for example, proved highly effective during Hurricane Sandy, serving as a staging area for police, firefighters, paramedics and emergency-services workers and a charging station for their phones and equipment.
Other microgrids are owned and operated by an electric utility. In part, this serves the operating needs of the regulated system in several ways:
• Reduced peak demand at substations.
• Relief of congestion, which can defer grid upgrades.
• Ancillary services through energy storage technologies, for which some markets (PJM, for example) allow compensation.
A utility-owned microgrid could also provide additional services that are attractive to customers:
• Storm resilience through hardened underground wires and isolation.
• Cost-effective procurement of distributed energy resources.
• Tailored, low-cost billing and financial services.
The ComEd facility at Bronzeville, a neighborhood on the South Side of Chicago, will test the practical operation of such a microgrid.
To be sure, significant issues remain. How greatly will customers value the enhanced resilience…and will they be willing to pay for it? Since the microgrid will require external partners to provide the services, how can the ownership and governance of these assets be structured to be fair to all parties? And most importantly for the regulated utility, how will the state commissions treat the value that a microgrid brings to the regulated system and the utility’s investment in and contribution to the microgrid?
As these issues are being resolved, utility companies should not lose sight of the larger value of the microgrid as a platform for cost-effective innovation. Just as the mobile phone became a platform to integrate diverse technologies and business models, so too might the microgrid serve the utility industry as a platform for building innovation ecosystems. The alternative is to watch load aggregators draw customers away from the grid as now occurs in California.
An open-architecture innovation ecosystem is a network through which diverse organizations co-evolve their capabilities within their distinct roles to create products and services that would not otherwise be possible. Innovation ecosystems resolve the practical impossibility of a single firm including within its corporate boundaries all the pathways needed for innovation in complex social-technical systems like the electric grid. When operated as open-architecture platforms, the ecosystem allows some participants to opt in or out as the competitive situation dictates—but all must observe the system rules.
The mobility ecosystem of General Motors, for example, illustrates the general untidiness that typically attends an open-architecture model. First, note the variety of arrangements: partnerships or alliances; investment; and outright acquisition. Second, note that some of these arrangements are made by the parent company and some by its venture capital arm, GM Ventures. Third, note that multiple aspects of the road mobility transition are addressed: autonomous driving; energy; vehicle sharing; and new materials.
All this leads to an important characteristic to innovation ecosystems: the unpredictability of the combined effects of the participants on the output of the system. Systems that perform this way are called emergent because their unforeseeable properties arise from the interactions among their components. The most productive among these interactions are termed generative because the interactions among the parties to the ecosystem produce new and valuable capabilities not found in any of the parties acting alone.
And so, the strength of open architecture innovation rests in its ability to continually evolve in response to external forces: especially technology opportunities and changing customer demand.
The ecosystem can absorb and benefit from unpredictable events better than any of its members acting either singly or through contractual arrangements in a tightly structured innovation system. The chief questions reside in the policy framework that will enable these to serve well: it must govern tightly enough to ensure continuity of service, but loosely enough to enable innovation in providing that service. Striking that balance will be the challenge to the utility companies and the regulatory commissions.