Industry Innovation Strategy – Utilities
As part of my teaching of industry Innovation strategy, I frequently received questions like
- What is an innovation driven strategic disruption of an industry?
- How can technologies *actually* change the business model of an industry?”
I like answering these questions with examples, sharing various industry innovation strategies that have been conceived, discussed, validated, and/or co-innovated with industry insiders. Some of these are quite close to being realized, while others are still being brewed and waiting for the catalyst to ignite the spark.
One of the more commonly used examples is the Utility industry, in which I had the honour to help many SAP Customers transform their businesses. Combined with Industry Innovation Strategy, what we will discuss here, is several steps ahead of what has been implemented in the past.
Disclaimer: SAP reserves all right unless expressly granted to the reader.
Energy distribution had been an essential need of a modern society, the Utility industry had been proudly performing this function for their customers for decades. Most common Utility distribution includes delivery of electricity, natural gas, oil, water, or even garbage collection to business and consumers, usually at their plant, office, or home.
We will focus on electricity in this discussion, as it is likely to be the ever more important form of energy consumption of the foreseeable future.
Traditional delivery business model is relatively mature, most critical assets like grid, or pipelines are commonly (semi) regulated, and the operator’s first and foremost responsibility is to ensure the availability, performance, and safety of these regulated assets. Billing usually are performed from an energy provider perspective, by charging for delivery and selling energy to business (or household). Common business processes like Move in/out, Dunning are built around such business model.
Energy production had been typically a centralized function. These large energy suppliers generate the electricity so the Utility companies can deliver such to their customers.
While this arrangement is pretty intuitive for many people to conceive, there are several key drawbacks that can be improved — large power generation plants are typically the largest polluter in the region, traditional renewable energy generation are not only expensive, but also less “green” then they typically sound like (the demand of land, bird-killing turbine, etc), and the biggest issue was the inflexible generation capacity (the fact that you can’t simply fire up a power generation plant during peak ours, and turn it down after peak, and you can’t call up the sun when you need more electricity during certain hours).
But not far down the horizon, a more socially responsible yet financially lucrative opportunity is emerging. A new business model of Utility (electricity distribution) could be one of the best thing for electricity since it was invented. Several changes already happened gradually to enable such paradigm shift.
First, renewable energy production has been picking up momentum, things like solar roof, solar window, or even solar bricks have been mass produced in the past years. Solar panel efficiency has grown from less than 20% at the beginning of the century, to over 45% last year (that’s more than double the electricity generation per SqFt).
Innovative vertical wind turbines have been changing the image of wind energy generation from birds-killing eye-sours to backyard decorations (or even for balconies).
These innovations made “micro generation” possible, and even desirable for many households.
Second, some jurisdictions had already offered purchasing of electricity from household, the grid will pay a premium to buy clean energy like solar/wind generated electricity. So far, the Utility companies typically lose money for doing so because there was no easy ways to predict electricity generation and consumption at a given time, hence the solar electricity bought are not always used productively, despite paying a premium.
Such programs are often highly politics driven, and associated with high policy risks for both the household and utility companies, especially in jurisdictions where government changes are likely.
Third, the popularization of electric vehicle brought down battery price and increase its capacity (a Tesla P100d can store 3 days worth of average American household consumption, 10 days worth for an average global household).
There are actually huge potential we yet to tap into especially in communities where such EV are widely adopted. Storing energy for later used was not such a priority before EV – we have “always-on” wires, why bother storing energy? It is expensive, and inefficient (old battery technology won’t be able to store much anyways).
But EV is different — it *has* to store energy, it can’t drag an electric wire connected back to home. So the EV gave a much needed R&D boost to higher efficiency and lower price batteries, which were never available to the grid before. We know energy storage could be the holy grail for the flexible generation capacity issue.
Forth, a somewhat recent realization was that most of the renewable energy like sunshine and wind are actually vastly spread across the land, building large solar farm is not as green as it sounds unless there are large areas of desert that had no better plan to revive. The great emphasis on renewable energy actually demands a more distributed system, the environmental cost for houses to be built with solar roof, or a couple of vertical wind turbines is nearly negligible — sun falls on every roof, even if there is no solar panel, and every building is already connected to the grid. (Of course, water falls or sea tide are still good source of centralized power generation, but they are geographically limited, and not available to all communities.)
While each of these technological advance did not produce an industry revolution by its own, collectively they paved the way for what a new environment-friendly business model that is likely more profitable than what we have today. A new 21st century grid, should be designed to facilitate renewable energy generation and consumption, yet do not require people to reduce their quality fo life significantly.
This new type of Utility business model is already technically possible. Leveraging the technology innovation already available — purchasing electricity from solar panel owners, large capacity energy storage and distributed renewable energy generation, the future of Utility grid can be transformed into an Electricity Exchange.
In this new business model, all “customer” (business, residential) will be treated as *both* a seller and a buyer at the same time. And electricity will be treated as commodity on the grid, with market driven price.
Each household will be equipped with realtime meters, and a Machine Learning agent representing the family (or the business) will negotiate price with the grid at real time based on its monitoring of the household (or the business) energy usage pattern and its generation patter. The ML agent will decide in real time if it’s best to sell some of the energy to the grid if the price justifies (or buy if the price is low). It might decide storing some energy in the local battery is a better strategy (i.e. during stay-at-home vacation, to avoid buying electricity at higher prices during the day).
The grid will operate quite like a Commodity Exchange, it charges a premium for the buy and sell (as compensation to delivery cost, and operating the exchange), but the price would be determined by supply-demand. However, there will not be future or option contracts, all contracts are associated with actual energy transmission. Because there are likely to be more transmissions on the grid, the Utility companies are actually more active in the energy distribution process, and have a higher participation/activity rate.
The fact that each building (or house) has their own space that exposed to sun or wind means it is much more environmentally friendly than taking dedicated land for solar/wind energy, and also the promotion of using batteries either in vehicle or battery wall is going to significantly alleviate the biggest electricity generation dilemma — inflexible supply and dynamic demand discrepancy can be better addressed.
Now, of course due to the nature of real-time exchange and automated Machine Learning agent making decisions, it will be impossible to rely on “monthly bills” or “trading slips” like old exchanges. It makes perfect sense to have a public open ledger to record all the transactions, the price of the time, and amount bought/sold. A closed Blockchain network would offer secure, open traceability of the exchange that allows all nodes (the gird, the customers, the suppliers) to check who bought/sold how much and when.
The blockchain will also help pricing clean energy at different price, or set residential price lower than commercial price.
Of course, some of the business processes will need to be changed, for example, those who have an EV can charge at home overnight, and once arrive at work, sell some of the charge during the peak hours to the grid, this will not only offset some of their charging cost, but also help the grid to maintain resilience in peak usage hours. This will require recognizing the EV properly, which needs a new process of Mov-in. Billing would also need to be updated – but with the closed network Blockchain, dunning will be much easier, and reduce disputes.
Most Utility companies are already renewable energy advocate, this new Exchange business model will elevate the industry to a fierce force of market innovation to boost renewable energy generation, storage, and responsible consumption, which not only will increase its financial flexibility, but also better align people’s financial interest, their energy manipulation behaviour and the best interest of the environment.
There are already utility companies exploring more detailed discussion with my team, most of the technology needed for this transformation into a Utility Exchange are already available. But, it is the business conceptualization of this new model that will help the world to be a better place.