New Electricity Business Models: The Heavy, The Light, And The Ghost
- Aug 17, 2019 5:45 am GMT
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In a thought provoking Policy Brief released in June 2019, Nicolò Rossetto, Piero Carlo Dos Reis and Jean-Michel Glachant of the Florence School of Regulation (FSR) describe how the regulated transmission and distribution networks are caught between radical changes transforming both the upstream and downstream of the electric power sector and – more important – the critical role of regulations in sorting things out, hopefully for the better.
On the upstream side, generation is rapidly becoming decarbonized in many places where ambitious targets have been set as in the UK or California. This means that massive investments in renewable resources, primarily solar and wind, which are now competitive with fossil fuel options. This phenomenon is well known and needs little elaboration.
The heavy, the light & the ghost?
Source: New Business Models in Electricity: the Heavy, the Light, and the Ghost, Nicolò Rossetto, Piero Carlo Dos Reis & Jean-Michel Glachant, June 2019, Florence School of Regulation
What may be less well-known is the equally significant transformation that is taking place at the grid’s edge – where the distribution network meets the customers, and beyond. Arguably the most exciting changes are likely to happen behind-the-meter (BTM), on the customer side of the meter where massive investments are being made by consumers, prosumers and prosumagers in all sorts of new devices and technologies including rooftop solar PV panels, electric vehicles (EVs) as well as other forms of distributed storage, not just batteries. As Jon Wellinghoff, the former head of the US Federal Energy Regulatory Commission (FERC), famously put it, “PVs + EVs + storage = game over” – alluding to the end of the traditional distribution and retailing business.
The FSR policy brief focuses on the impact of these developments on the grid – both transmission and distribution (T&D) – which lie in between the upstream and the downstream. As the authors point out, the grid “… stands in the middle, not just in a physical sense, but also because their business is directly affected by what is happening upstream and downstream.” They refer to these 3 components as the heavy, the light and the ghost as in the accompanying illustration. It is a clever way to put it.
Generation decentralized and moving behind-the-meter
In many new neighborhoods, solar panels are appearing on virtually all roofs
“Digitalization is driving the emergence of new business models in the electricity sector. Unlike the case of green generators, these new models tend to be ‘asset light’, and the offering of innovative services that target particular groups of customers represents their essence.”
Rossetto, Dos Reis & Glachant point out that
“The power sector ‘delivery loop’ was traditionally rather static. Retail-size customers, like households and small and medium enterprises, were used to withdraw electricity from the grid according to their own will and pay a fixed tariff for each kWh to their supplier. The product delivered was a commodity and interactions with the rest of the electricity system were extremely basic.”
This, however, is changing,
“The digitalization of the electricity sector alters this situation profoundly. Digital technologies improve the availability, usability, storability and transmissibility of information, thereby allowing a reduction of transaction costs and more efficient use of resources.”
The authors identify “at least 3 new types of actors” offering “new types of services to retail-size customers,”
- First, aggregators of distributed energy resources (DERs), targeting consumers and prosumers who used to be excluded from direct participation in wholesale markets;
- Second, platforms for direct trade targeting consumers, prosumers and prosumagers by offering them the option to participate in a decentralized community of buyers and sellers, not necessarily spatially close to each other; and
- Third, is what the authors call “smart managers of autonomous territories” located behind-the-meter (BTM). In this case, the target is not necessarily “… the consumers, prosumers or prosumagers themselves, but rather the devices inside their homes, offices and everyday life.”
In the second category, the platform operators offer direct bilateral exchanges enabling customers to engage in peer-to-peer (P2P) interactions.
In the last category, what the players are likely to offer is essentially the management of “vast networks of interconnected smart devices that operate beyond the electricity delivery loop controlled by the distribution system operator (DSO) and the energy regulator. In this space, located at the grid’s edge, the internet of things (IOT) and artificial intelligence (AI) pledge to gather huge amounts of data and exploit them to benefit the consumer.”
In such an environment, consumers who are not necessarily “active” will nevertheless “be able to access the service through interactive and user-friendly digital interfaces.” This is rather critical, since most, if not nearly all, consumers probably fall in the category of not being particularly active or engaged with the distribution network, or sufficiently motivated to follow prices at the wholesale level or be bothered by congestion on the local grid.
The authors identify 3 types of applications by such smart managers:
- Large fleets of smart electric vehicles (EVs);
- Smart homes where appliances and devices can be monitored and managed through sensors and control devices; and
- Smart energy communities, smart cities and/or micro-grids.
The key issue highlighted in the FSR policy brief is that the ghost – the grid – is caught in between the heavy – the business model of the green generators – and the light – the business models of digitalized retail-size aggregators – while the regulators are frequently handicapped to respond quickly enough to the rapid pace of change. Consequently, the emerging business model for the grid remains uncertain or fuzzy, hence labeled the ghost.
“Electricity grids – both transmission and distribution – are caught in between the greening of electricity and the digitalization of retail-size units.”
“On the one hand, the rapid expansion of renewables in the generation mix, in particular wind and solar PV, calls for a quick adaptation of the electricity network and its operation.”
“On the other hand, the activation of smaller network users enabled by digitalization still rely on the use of a physical delivery loop, again the distribution grid.”
Future is behind-the-meter
Source: LCOE: Renewable energy technologies, Fraunhofer Inst., Mar 2018
And this goes to the core of the dilemmas facing the regulators, who are the ultimate arbitrators of policies on what can and cannot be delivered by whom and at what price.
“The development, maintenance and operation of electricity grids typically constitute a set of regulated activities. Grid companies must connect network users and ensure that they have access to electricity continuously and securely.”
“To do that, they (network operators) invest in long-lived physical assets, whose cost-recovery is then ensured, up to a certain extent, by the regulatory framework and the tariffs defined by the regulator.”
The traditional business model of grid companies is, by and large, dominated by the assets employed and the revenue streams secured under antiquated rate-of-return regulation.
“Unfortunately, current regulatory changes are slow and tentative. This is not surprising, given the political sensitivity of certain choices and their distributive implications, not to mention the concerns over unbundling and the preservation of a level playing field for all market players.”
The authors conclude by observing that,
“Thanks to aggregators, new centralizing intermediaries are disrupting the trade arrangements in the existing wholesale markets. A combination of decentralized digital platforms and new algorithms dis-intermediating trading are creating previously non-existing communities. Finally, artificial intelligence and the internet of things are extending the possibility of trading up to the devices realm and unleashing new sources of value.”
How the future may evolve remains highly uncertain,
“In particular, it is yet unclear whether these models will be able to sustain a pricing of the delivery loop that more closely reflects actual costs and does not allow anymore for an inefficient bypassing of network charge, taxes and levies.”
“The choices of the regulatory authorities will then be as relevant as those of the companies’ top management in determining whether grids will lead the change or follow it. Whether they will turn from dumb pipes into platforms or, on the contrary, be disrupted by digital companies and innovative actors playing at the grid’s edge.”
It must be noted that many of the ideas leading to this policy brief were first presented in a working paper by Jean-Michel Glachant, which may be found at: http://cadmus.eui.eu//handle/1814/63445.
This policy brief, like others from the FSR, is worth closer examination. Developments at the grid’s edge and behind-the-meter are likely to alter the electricity business as much as – if not more than – those taking place on the generation side of the business. n