5 minute read 18 Jun 2018
black handset hanging red telephone box

Why network utilities and energy retailers may face off for survival

By

Paul Micallef

EY Global Digital Grid Leader

Passionate about the future of energy. Outdoors lover. Avid traveller.

5 minute read 18 Jun 2018

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The extinction the utility has long been the subject of speculation – but the time has finally come for utilities to transform.

As more big consumers – and whole communities – go off-grid, utilities may have to fight amongst themselves for a role in a future energy world where consumers hold the power.

Will network utilities go the way of the telephone landline?

The theory of the death spiral goes like this: as prices of solar and battery storage reduce, so too does the threshold for consumers to switch to generate and store their own energy. And as more people and businesses abandon the grid, the value proposition – and revenue stream – for distributed networks is eroded.

Now the theory is fast becoming real, as evidenced by several game-changing initiatives:

  • Ta’u, an island in American Samoa (population 600) is almost entirely powered by a microgrid of solar energy panels and Tesla Powerpacks. Installed over just one year, the microgrid generates 1.4 megawatts of solar generation capacity using 5,328 solar panels, supplemented by six-megawatt hours of battery storage from 60 PowerPacks. The system can recharge on 7 hours of sunlight and offsets 109,500 gallons of diesel per year.
  • Trimet, Germany’s largest producer of aluminum, is testing technology to turn its smelters into a "virtual battery" capable of delivering 1.12 gigawatt-hours (GWh) of flexible capacity. Trimet’s system uses 120 electrolysis cells that can be dialed up or down by 25 percent in either direction, for up to several hours.
  •  US grocery chain Whole Foods is powering a New York City branch through self-generated electricity. The supermarket has solar panels on its carpark roofs, wind turbines on the lampposts and batteries to store power for those still and overcast days.

The technological value of these proof-of-concepts is exciting in its own right. However, these examples also introduce three dynamics that will have implications for a utility’s conventional business:

  1. Off-grid energy generation and storage solutions are scaling at a pace that is exceeding expectations
  2. An invasion of innovative disrupters are making grid defection easier and more cost-effective
  3. Customers realize that self-sufficiency yields long-term rewards – both in terms of cost savings and in reputational value – and are investing upfront.

This last point is crucial, especially in commodity-driven industries such as manufacturing and retailing where cost is king. If your competitor dramatically reduces their energy costs, and drops the price of their product, you’d better move fast to do the same. Failure to follow suit could cost you your customer base and erode market share.

Consider the Whole Foods’ initiative: A typical solar installation is capable of producing and saving more than 2.2 million kwh over 20 years. With the average US electricity price running at 12 cents a kwh, if Whole Foods scales up its off-grid initiative across all 400 stores, the lost revenue to utilities in just one year would top US$ 5.2 million . It’s feasible that going off grid will soon become an integral element of every company’s growth strategy. The resulting domino effect of industrial-sized grid defection could deliver devastating consequences to network utilities in an alarmingly short period of time.

When more consumers are off the grid than on it, the value of the traditional network erodes until it is almost irrelevant to our way of life. Taken to the extreme, the network begins to look like today’s telephone landline – reliable but largely inconsequential to most consumers.

The question is, how can networks transform their value proposition to reclaim their central role in society?

Who needs retailers in a peer-to-peer energy market?

Before I suggest a way forward, let’s consider the impact of the off-grid movement on the energy retailer. Much of the discussion around the impact of disruption on utilities overlooks this segment of the market but its fate may be even direr than that of the networks.

Retailers face an urgent need to redefine business models as disruptive technologies, particularly blockchain, tear down their traditional value proposition. Until retailers attain the much-discussed and sought after status of the “energy advisor’, their role is essentially a settlement function. But when consumers can generate their own energy – and use blockchain to trade and transact among themselves – who needs that middleman?

We’ve already seen the disruption to traditional retail models in industries such as vacation accommodation and taxi services. Energy retailers may be next. The trend to go off-grid is being adopted at community-scale, driven by advances in technology and the demands of today’s empowered and educated consumer.

The Brooklyn Microgrid (BMG) is perhaps the most exciting initiative of how peer-to-peer trading has created a democratized and “hyper-local” energy market. Part of New York’s ‘Reforming the Energy Vision’ program and run by LO3 Energy, BMG links the solar energy generated by 60 residences and businesses in a virtual trading platform where participants, who are still also connected to centralized generation, can sell excess energy to each other via blockchain.

Other initiatives are taking off in communities where many people still don’t have access to a central electricity grid. Bangladesh, a pioneer in micro finance and micro solar, has seen a boom in what is called “swarm electrification”. Local nanogrids and microgrids allow homeowners to sell surplus electricity to each other in small increments using their cellphones. When the consumer is empowered to buy and sell electricity with their peers, retailers increasingly look like a relic from a simpler time.

Will utilities play a game of Survivor?

As the landscape irrevocably shifts, electricity networks and retailers face disruption enabled by technology but powered by the consumer. Both players risk irrelevance unless radical changes are made now to seize a new role in the future energy world. But what if the salvation for one segment is secured only at the detriment of another?

For example, network utilities may step into the peer-to-peer trading space, providing the digital platform that facilitates energy trading and transacting. Similarly, energy retailers could become supply and demand aggregators, transacting in ancillary service markets – in essence, eroding some of the networks’ role in maintaining a stable grid.

What is certain is that the current model of networks and retailers will not exist in the very near future.

 

Follow on Twitter @EY_PowerUtility and visit the EY website for further sector insights at ey.com/connected.

Summary

It’s time for utilities to take a bolder approach to embracing technology to reinvent themselves – even if it is at the expense of another.

About this article

By

Paul Micallef

EY Global Digital Grid Leader

Passionate about the future of energy. Outdoors lover. Avid traveller.