4 minute read 3 Jul 2018
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Why energy companies are investing in demand-response technologies

By

Matt Rennie

EY Oceania Power & Utilities Leader

Transactions partner in utilities and infrastructure. Focused on the wave of disruptive technologies and influences entering the sectors.

4 minute read 3 Jul 2018

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“Picking the turn” for when energy demand response will become a market reality is guess work. But will those who guess correctly win?

I confess to being increasingly preoccupied by “picking the turn” in energy retailing. By that, I mean, pinpointing the moment when a market emerges for a demand-response energy solution, accompanied by a viable technology to enable it.

This preoccupation stems, in some small part, from an intellectual curiosity in how quickly products that use a proven technology can service a disrupted market – particularly one in which newly enabled prosumers are keen to show their mettle in the face of incumbent suppliers’ rising prices.

Right now, the perfect storm is brewing. Across all markets, disruption, the next blockchain success story and the demise of electricity as we know it, coincide with the relentless march of digital and the pursuit of individual energy solutions.

Why demand-response is in demand

It turns out that I am not alone in my curiosity. Others are watching developments even more closely. In 2016, the Global Integrated Demand-Side Management (IDSM) market saw total spending of US$40 million. Activity is expected to reach US$1.2 billion by 2025. In gigawatt (GW) terms, that’s a hike from 39 to 144 GW over the period.

These statistics tell us that more businesses than ever before are investing in demand-response technologies and the companies that own them. They do this to:

  • Avoid the risk of obsolescence, by innovating in response to customer demands for energy efficiency.
  • Bolster their physical presence, develop a strong foothold or dominant position in new markets and grow their customer base.
  • Enhance their capabilities by anticipating changes ahead.

Where are the trail blazers in new energy?

Despite the acquisition trail, an interesting absence from this new energy market is the stand-alone disruptor.

This sector has few unicorns. It has no mass-market residential solution or platform that is absolutely critical to the way in which we buy power. Nothing really changes. Many of the conversations that were happening last year, and the year before, are happening this year. Finance is hard to find; contracts with established market players are less frequent; getting a market foothold is still difficult for new energy companies. There are no projects for financiers to invest in; only companies.

Even so, the “pull” factors remain. The markets for storage and peak management are more prescient than ever before. And the ever-increasing intermittency in electricity systems is a regular topic at industry events.

In fact, rank new technologies by likelihood to deliver most value and top of the list are:

  • Peak reduction for networks,
  • System stability for system operators
  • Pool-price arbitrate and customer traction for retailers.

Balancing act for network companies

The best arbitrage opportunities are in technologies designed to reduce the network peak. Currently, around half of network capital expenditure is directed at the “peakiest” 87 hours each year, proving that flattening peak demand will translate into lower prices for customers.

But removing the peak is not good news for network companies. Peaks mean capex; capex means asset base; and asset base means value. In doing their sums, network companies are having to strike a balance between the highest amount of capital expenditure that can be invested into a network and the highest price that customers will tolerate before switching supplier or generating their own.

With prices and values climbing, a new raft of peak-management technologies, accompanied by eager market players, are flooding the market.

A stab in the energy darkness

So why, despite the obvious market opportunity, has no clear winner emerged among the numerous companies developing and selling new technologies, platforms and methods to store and dispatch power?

It is an age-old problem for any business trying to get a unique solution off the ground. First you have to get someone to put a value on the problem being solved and then find someone else to pay you to solve it. Packaged together, the new technologies might make a comprehensive case for demand-response management and new-energy technologies. Individually, they do not. And that makes it even harder to “pick the turn” in the market.

Picking the turn is all about identifying the definitive point of impact of two opposing forces on a fairly speculative chart. On the X axis is the “cash burn” – the capital required to develop and market a new technological product, provided by investors with patience and willingness to believe the solution can be monetized. The Y axis maps the probability of achieving a contracted revenue stream from (a) system controllers that may or may not need the capacity, (b) network companies that may have no interest or incentive in reducing the peak, and (c) retailers with deep-enough cash reserves to roll out a call center model to educate and simultaneously win over prospective customers.

Put like that, pinpointing the intersection of demand and technological availability is about as clinical as a stab in the dark to win a multi-billion-dollar prize.

Anyone out there placing bets?

Summary

So far there are no clear winners in the new market opportunity for a viable demand-response energy solution. It remains an open bet for network companies.

About this article

By

Matt Rennie

EY Oceania Power & Utilities Leader

Transactions partner in utilities and infrastructure. Focused on the wave of disruptive technologies and influences entering the sectors.