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Broadband-driven smart energy developments will change the market

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Technology is not only making our cities smarter, but opening new opportunities for electricity companies (Image via Pixabay)

The business model for most electricity suppliers is becoming outdated with advancements in smart technology, writes Paul Budde.

THERE IS NO DOUBT that we are in the midst of an energy revolution. Not only is the nature of energy changing from fossil-generated energy to renewable, but there is also a total change in the distribution structure occurring with less focus on centralisation and more on distributed energy.

Concerns about issues such as energy security, environmental sustainability and economic competitiveness are triggering a shift in energy policy, technology and consumer focus. This, in turn, is making it necessary to move on from the traditional energy business models.

By making the electricity grid “intelligent” and adding telecoms to it, the power will eventually shift away from the electricity companies and to the customers, who will be able to control their energy consumption through sensors, M2M devices and the Internet of Things (IoT).

Europe and North America are rated as the most advanced adopters of smart grid and smart metering technology, but the market is now shifting more and more towards Asia and the developing world. Without any forward-thinking long term energy policies, developments are floundering in Australia, now for more than a decade.

“Smart” means communication and since many countries are addressing their broadband networks, the smart thing to do would be to roll out fast broadband infrastructure in combination with smart grids and, wherever applicable, other smart infrastructure. In that way, energy efficiency measures can be implemented throughout society and throughout the economy (buildings, transport, cities) with a minimum of extra infrastructure, as a trans-sector approach is based on sharing the infrastructure.

With all the knowledge we now have, it would amount to a criminal offence if this generation were to allow vested interests to prevent us from developing trans-sector policies and holistic initiatives to address energy and environmental concerns. We need to break down those silos and force co-operation between the sectors wherever possible. Perhaps the current bushfire crisis allows us to break down some of the politically motivated barriers.

With energy consumption expected to grow worldwide by more than 40 per cent over the next 25 years, demand in some parts of the world could exceed 100 per cent in that time. This will produce an increase in competition for resources, resulting in higher costs. In an environment such as this, energy efficiency will become even more important. The value of the global smart grid market was forecasted to be over $118 billion in 2019. Energy is now at the heart of the G20’s agenda and G20 Energy Ministers are now holding regular meetings to address global energy concerns.

Radical changes for electricity utilities

There is no doubt that the current business model of most electricity utilities around the world is under enormous pressure.

From many different directions – political, environmental and economical – the industry is under pressure and it has no choice but to change. This, of course, is far more easily said than done. Unlike the telecoms industry, which faced significant changes a few decades ago, there is no new product on its way for the electricity companies to tap into. The telcos developed mobile, broadband and ICT services, but it is much harder for the utilities to come up with replacement services.

While one obvious direction is to develop new businesses around renewable energy, microgrids, smart street lights and electric vehicles (EV), the problem will be that once such models become successful the question will arise as to whether they should be delivered through the monopoly model of the utilities or through the market. We already see in some of the European countries that the regulator has stepped in on the request of other market parties and ruled that, for example, the operation of EV loading stations should be left to the market.

An option is to look at the utilities in a totally different way. If we look at the current business model it is hard to see the traditional electricity companies surviving in their current form and perhaps as early as the next decade, serious structural industry failures will start to occur. Sure, the current models can be propped up through government regulations (such as forced price increases for consumers), but this will be unpopular and unsustainable moving ahead.

There is no doubt that the current value of the utilities for their shareholders is diminishing. Over the last decades, many reports have been written in Australia providing excellent solutions going forward, however, the Coalition Government has failed to implement any of them.

On the other hand, the utilities are well-positioned to build new energy companies along the lines mentioned above, but for regulatory reasons, these new ventures will need to be developed separately from their monopoly business and they will need different shareholding constructions.

However, the overall total value of these new businesses could easily surpass the value of the dwindling incumbent business.

Both the social and economic benefits will be very significant as these new businesses will add new jobs, will save consumers money (energy efficiency), will be environmentally friendly and will be far more sustainable longer-term. This future energy model will also be a key driver for much broader innovation and will be a key infrastructure element for the emerging smart cities.

The future of the electricity industry

New opportunities do exist for the electricity companies but the reality is that they are difficult to realise. There are several reasons for this.

As in Australia, in most countries – either directly through ownership or indirectly through regulations – governments have a dominant influence on the sector. A lack of political vision and leadership and an inability of regulators to step in are a serious hindrance to settling on the direction of the industry. Political indecisiveness and lack of bipartisanship is perhaps the worst thing that can happen in this situation as it paralyses the industry.

At the same time, based on the industry practices and very long-term investment cycles that have dominated the industry for decades, the industry of today is risk-averse and led by management that in most cases is unable to seize the new opportunities that are becoming available within an increasingly disruptive environment.

Furthermore, the transition from the old silo-based energy economy to the new open-ended, interconnected one is very complex and this transition will be messy. However, the industry has no choice but to tackle this and increase its pace of change. This applies both to the industry and to its policymakers.

Most governments and incumbent industry players around the world are grappling with these issues. Where we do see leadership and innovation is in places where cities are still operating their own electricity networks. There are many great examples in the USA, where over 60 cities are involved in using their electricity networks to build smart cities. This is strongly supported by the communications regulator in America, the FCC. There are also some good initiatives from the local DSO within the Amsterdam Smart City project.

Therefore, considering all of the above, changes will happen. It is hard to predict exactly how it will work out, but there are several trends and developments taking place which will have a profound impact on the shaping of the industry.

These include:

  • disruptive (often unexpected) developments from outside the industry, based on innovations coming from companies – and their customers – operating in the digital/sharing/networking economy. This can result in rather rapid and massive changes that cannot be controlled by the industry and, most of the time, not by governments either;
  • in cases where there is a continual lack of national political leadership, the electricity industry will be forced to step up its role in new developments. We are already seeing examples of some State and local governments which are showing more and better leadership than their national counterparts; and
  • smart energy developments will increasingly be community/city-driven, with developments such as microgrids, community storage, solar and wind farms (smart/wi-fi-driven), LED street lighting.

Disruption is happening and the challenge for the industry is to run with it. However, as mentioned in some cases, it is hard for the industry to take a leadership role because of current government policies, regulations and its own outdated business models. So changes, innovation, new business models and new value-added business opportunities will arrive from outside the industry. Some of the electricity companies will be able to break through this and participate and thrive in the new digital sharing and networking economy.

That is not to say that there will be a total demise of the traditional electricity industry, but the value chains will be totally different.

It is interesting to draw a parallel with the telecoms industry here. Twenty years ago, companies such as Telstra and AT&T (USA) warned their governments that allowing the ISPs/internet market to develop would lead to a meltdown of the telecoms network. The telcos still exist, but in relation to market capitalisation, companies such as Google, Apple, Microsoft, Amazon and Facebook are many times larger, with most of the value-added revenue flowing to these companies, while the telcos simply operate the underlying networks.

Paul Budde is managing director of Paul Budde Consulting, an independent telecommunications research and consultancy organisation. You can follow Paul on Twitter @PaulBudde.

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