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Currently, there’s a fascinating game of 3D chess playing out in the energy industry as utilities are under siege from tech giants like Amazon and Google, oil and gas behemoths like Shell and BP, and startups.  The attacks from these new entrants are coming on multiple fronts – Amazon and Google want to own the customer, Shell and BP want to be the electricity provider and startups are attacking the business model with new technology.

This leaves utilities with a choice – do they become strictly the poles and wires company? Or do they pivot into the services industry in the same way e.On has in Germany and how telecom companies did post the Telecom Act?

Any founder that has met with me this year has most likely heard me rave about Hamilton Helmer’s 7 Powers: The Foundations of Business Strategy.  The book has provided me and countless others with a “simple, but not simplistic” framework to evaluate businesses and the markets they participate in.

My favorite power of the seven is counter-positioning which applies when the expected damage to the existing business prevents incumbents from challenging a disruptor in their market. The most basic concepts are:

  1. Newcomers adopt a superior business model or technology which the incumbent does not mimic due to anticipated risk to the existing business
  2. New product/business model has a high degree of substitutability for the products from the incumbent
  3. Risk-adjusted expected collateral damage to the incumbent is high due to the uncertainty of a new approach
  4. Addressing the new entrant requires upending the existing business and the turmoil risks destroying value as understood by public markets
  5. Incentives put in place for executive compensation are often tied to performance defined by stock price/market cap

Image result for counter positioning 7 powers

Historical examples of counter-positioning include:

Kodak and the digital camera: I used to believe Kodak inventing the digital camera and not capitalizing on it was one of the biggest blunders in business.  However, at the time digital photography as a stand-alone business was not interesting to Kodak because it would cannibalize the business where they had the most power (film), and they did not have the necessary resources to create power in the new market (image storage).  The negative NPV of creating that power in combination with no one understanding the impact of the semiconductor and it becomes easier to see why Kodak passed on the digital camera opportunity.

Netflix and Blockbuster: Blockbuster might have potentially competed with Netflix on a DVD subscription business, but once Netflix went to streaming, Blockbuster was done. By the time the realized what was going on, Netflix had too much share and too much power in a substitute good with a better business model.

Where does this leave utilities?

From a strictly growth and relevance perspective, utilities should absolutely start thinking about how they can add more value to the network than just the infrastructure or risk eventually getting left out of the growth that is ahead.  As smart-home devices continue to penetrate the market and EV’s gain share, “service providers” for consumers will become necessary and likely valuable, but it’s unclear if utilities will be able to make the transition, if regulators will allow it, or if the NPV trade-off makes sense since the opportunity cost might be giving up lucrative business units like transmission or generation.  e.On made a similar decision in 2018 when it swamped generation assets for the retail and transmission business with Innogy to focus on being a service provider so we’ll see how the new landscape begins to take place in the coming years.

It’ll be fascinating to see if the same regulations that have made utilities a monopoly for decades will be the regulations that prevent them from competing in a modernized energy system or if utilities can avoid the same fate as Kodak and Blockbuster by deploying strategies similar to AT&T and Verizon post de-regulation.

 

 

Often, when we’re talking about our thesis at Intelis we describe it as “the digitization of analog industries” or “the digital revolution for analog industries”. But what does that look like in practice?

For simplicity’s sake, we think of analog as not using software or technology to improve outcomes.  The pen and paper industries still rely heavily on older systems and intuition to drive results, but external forces like increased complexity and consumer expectations combined with internal forces like aging workforce and infrastructure are pushing them into the information economy.

The digital age has brought several business model innovations, but most have centered primarily on two new types of economic forces:

1. Information goods: anything that can be digitized where the value is determined by the information it contains.

2. Network effects: the multiplying force of the power information goods because they allow instantaneous consumption and distribution. That is they catalyze the distribution of a free, perfect copy from one to one or one to many.

History has shown that if companies are able to build/leverage these two economic powers the results can be transformative.  Uber and AirBnB are the prime examples for this, they both took excess capacity (information) and applied the network effect of a marketplace to multiply the power.

We’re finally seeing these forces permeate the energy industry via the following trends:

– Endpoints are growing exponentially: The data produced by sensors, drones, EV’s and smart home devices are turning various parts of the energy value chain into information goods.

– New data transparency/architecture: The groundwork is being laid by several companies looking to make information more readily available and easier to navigate.  These startups are working on new data architectures, API platforms, and real-time demand solutions that leverage the continuously growing number of data sources to drive reliability for grid operators and affordability for consumers.

The great thing about energy is that a lot of the hard groundwork has been done as a result of the 2007 boom in cleantech, similar to how the groundwork was laid for the internet before the bubble burst in 2000 or – if you prefer to go back centuries – how the railroad boom laid the foundation for the first Industrial Revolution.  Just because the first pass doesn’t end well, doesn’t mean the enormous amount of progress disappeared.

While we see energy as the industry most ready for this transformation, it is not the only “atoms” industry that fits the criteria above – transportation, agriculture, and manufacturing are also unlocking their potential by becoming more connected and data-driven than ever. We often hear about how “connected” our world is, but the truth remains we still have a massive opportunity to leverage digitization in the industries that contribute the most to global GDP.

Like most, I figured I would write some form of recap or prediction post(s) at year’s end and this one is the first of what might be a few different articles to come over the next few days.  They’ll be a mix of industry, regional, and personal reflections that should be set up a great framework for growth and focus in 2019.

This one focuses on the themes I see taking hold in the power sector over the next 12 months. New technology-related trends like electric vehicles and cybersecurity have combined with on-going challenges surrounding aging assets, extreme weather, and regulatory uncertainty to create innovation opportunities in one of the world’s largest and most important industries.  As a result, here are the themes I’m particularly interested in next year as the utility business model continues to evolve.

Which network takes the lead in connecting the grid?

Utilities, along with the largest energy consuming industries (manufacturing and transportation), are in the middle of a transformation which includes connecting virtually everything to a network.  In total, these three verticals alone are projected to spend $132B related to the internet of things.

Yet, the available networks (3G, 5G, Bluetooth, and WiFi) all have shortcomings that keep them from becoming the industry standard. Verizon and AT&T are working on 5G IoT specific networks, but it is still incredibly difficult to get 3G coverage in some rural parts of the country where key assets are located, much less 5G and it is often cost-prohibitive at the enterprise level.

The answer is likely a combination of networks that are built on the tradeoffs for latency, computing power, battery life, and of course, cost. Where latency isn’t an issue and battery life matters, protocols like LoRWAN could begin to see wide adoption, especially at the computation and control layers.

How will the industry close the skill gaps in the workforce?

The energy workforce will look increasingly different in the coming years.  Today, 1/3 of the workforce is compromised of manual work rather it be administrative like accounting and data entry or physical labor in the field.  That number is expected to reduce to 1/4 in just the next few years.

With the continued rise of IIoT, it’s no surprise that the jobs most in demand require the data science and software skills the industry is sorely missing, especially given most utilities are HQ’d outside of traditional tech hubs.

However, the chart below from the World Economic Forum highlights a major hurdle for startups looking to grow within the sector- 64% of companies still don’t understand the opportunities for implementing new technologies.  As a result,  founding teams that have industry expertise or have developed go-to-market strategies tailored to helping customers in the industry uncover use cases are likely to have distinct advantages.

Source: WeForum.org

Will machine learning finally begin to reduce operational costs?

Regardless of demand growth or stagnation, operational costs will continue to move to the forefront.  If demand grows, the need for grid management will rise too and ML presents an interesting solution to load balancing and predictive asset maintenance.  If demand shrinks and/or power prices decline, operational efficiency will become even more important in preventing subsequent deterioration.

C3IoT and Uptake Technologies, both of which raised over $100M in the last year, are leveraging this trend for growth. However, the energy industry still has a large number of endpoints that are yet to be moved online and data fidelity remains a problem.

The efficacy of predictive analytics should continue to increase with the continued deployment of distributed assets (meters, lighting, thermostats etc..) while the data processing costs decline in large part due to edge computing and cheaper networks.

Can utilities begin taking steps to merge EV’s onto the grid?

EV’s present the most interesting dichotomy when it comes to the consumption of electricity in the next decade. On one hand, they will dramatically change the demand and shift the time of peak usage.  On the other, they can eventually be used at storage, demand response, and provide leading indicators into future power consumption (i.e. a utility tracks EV density and predicts consumption from that information).

Facing bold predictions of EV availability and adoption in the near future, utilities must begin thinking about how to serve this demand. However, if utility grids are not updated and expanded soon to support networks of widely available charging stations, EV adoption might become impaired or a drain on our already aging infrastructure.

Will a winner in the cybersecurity space emerge?

Source: Utility Dive

This year, Utility Dive’s annual state of the union had cybersecurity has the number one issue of concern according to executives with over 80% naming it a “very important” issue.

While power grid stakeholders will spend over $5 billion globally on securing infrastructure in 2018, only a small portion of that will be dedicated to operational technologies and smart systems.

These grid modernization efforts are an ideal time to design and implement digital security protocols and provide an opportunity for adapting existing mechanisms and processes to the OT space – from industrial control systems to smart meters. While the industry is still heavily service oriented, we’re starting to see hints of software companies gaining ground and expect that trend to continue into the new year.

Overall, I expect the industry to continue its evolution from a rate-based revenue model to one that is rewarded for efficiency and performance. If regulators begin to set those policies in-motion, the trends above will accelerate and tomorrow’s utility model will look very different than today’s.

Like many, I listen to podcasts on my commute to and from work.  Yesterday, I came across this podcast from Greentech Media featuring Shayle Kann, SVP of Research and Strategy at Energy Impact Partners.  Shayle had written an article about the future of energy and tied it to the life events of his colleague’s soon-to-be daughter which is due at the end of the year.

The podcast and article are worth your time – and not just for those interested in the future of energy.  Given that we just had a newborn, I thought it would be fun to duplicate the exercise using my son Ian and my thoughts on the “bets” Shayle puts forward.

Bet #1: Ian will control machines with his voice more than with his keyboard.  My answer: False*

My answer comes with a caveat, what’s the timeline?  In the podcast, Shayle discusses the growth in AI-enabled voice assistants over the last 3 years.  While the number of devices being sold is impressive, voice still has a real user-engagement problem.  These devices are primarily used for timers, audio, weather, and news.  I also think voice has a UX issue that most aren’t talking about, it’s hard to remember what all a device can do (your phone has apps you see every day and do not use).  Until voice-enabled devices do almost everything, I think the path to engagement will remain tough.

Bet #2: Ian will never personally drive a car. My answer: False

While there are several converging technologies and business model innovations in the automobile space, I believe purely out of curiosity Ian will drive a car at some point in his life.  AV’s, ride-sharing, and scooters are all disrupting the way we think about transportation, but pure curiosity gets the best of all of us.

Bet #3: By the time Ian buys his first home, especially if he’s in an urban environment, his surroundings will be transformed. My answer: True

A few of the major trends already impacting cities: WeWork, AirBnB, and EV’s.  Up next: drones (robotics), repurposed parking lots, and vertical farming.

Bet #4: By the time Ian shops for his own groceries, >20% of his produce will be grown indoors, up from virtually none today.  My answer: True

Given the current population growth, the impact farming has on climate change, and vice versa this is a given.  We’ll need more food and the way we grow it today isn’t sustainable for the three major reasons listed.  We need more food, it impacts our climate to grow it, and our climate is changing the way we will have to grow it.

Bet #5: Let’s turn to Ian’s house. I bet that in Ian’s first home of his own, more than half of his electricity load will dynamically respond to grid or price signals. My answer: True

I loved Shayle’s answer here because it was concise and spot on.  Control HVAC plus 1 or 2 additional devices and this goal is achieved.  It must happen in the background, consumers don’t know nor care what the impact could be.

Bet #6: By the time Ian reaches 30 (in the year 2048), electricity’s market share of final energy consumption will more than double. My answer: True

Another fairly simple answer, EV’s should change the demand significantly especially if they hit long-haul trucking in the near future.  The industrial applications of storage and efficiency should also play a large role in increasing electricity’s market-share.

Bet #7: More than 50% of Ian’s electricity, as represented by the national breakdown, will come from renewables by the time he’s a sophomore in high school.  My answer: False

It will be close, but I say we fall just short of this goal primarily due to the availability of natural gas.

Bet #8: Ian will live over 200 years, and for most of his life, electricity will be his only food.  My answer: False

So many ethical questions here, though companies are working on products that allow them to download your loved ones’ text (email, text messaging, social media) then build bots that mimic the physical manifestation of them.  Kann makes a compelling case by listing the major inventions of the last 85 years, but the regulatory and ethical hurdles might defeat this one.

There you have it, my take Ian’s future as it pertains to energy and innovation.  Thank you Shayle for writing this piece, it was a neat way to think about the future and possibly gives Ian something to look back on while having a laugh at his old man’s expense.

Last week Apple became the first company to hit a $1T market-cap.  Lost in the hype of hitting that milestone and their Q2 earnings call was the announcement that they are also launching a $300M cleantech fund in China to “give fund participants greater purchasing power to pivot toward clean energy.”  

 

This looks eerily similar to a strategy Amazon has used for AWS, except applied to energy. Apple can be the first and best customer for new products and technologies as they’re incredibly large consumers of energy much in the way Amazon was for both data and deliveries.  It’s now a well-worn playbook and it would enable Apple to gain stability in energy consumption while being less exposed to the price volatility of the market… all while subsidizing development via their own purchasing power.

 

For consumers and startups, this development could be game-changing. In the same way healthcare needs Amazon as a major player because Amazon excels in efficiency and logistics, cleantech needs Apple to help it beat the economics of the alternative, and connect its evangelists to the mass market.  If Apple had superpowers, they would be the ability to create a luxury perception of their products, and the ability to create an ecosystem effect that makes their services sticky.

 

“It Just Works”
Apple’s DNA, dating all the way back to 1977 when Steve Jobs demanded the Apple II be as easy-to-use as any household appliance, is creating a product consumers can easily interact with on a daily basis.  Much like today’s early cleantech adopters, the tech evangelists of the 1970’s understood the potential impact of the technology to our every day lives, but could not actually figure out how to convince others of this fact until the Apple II was released.  Apple repeated this feat again when it released the iPhone in 2007.  These kinds of innovations add up over time and have created a bond between Apple and it’s consumers. With Apple you can feel safe trying the unknown, and in energy, as with all regulated industries, trust matters…A LOT.

 

Cheaper, but still expensive
The cost of chips and computer parts began their decline in the 1980’s and the same can be said for cleantech components today.  Solar panels, storage and the sensors are all experiencing some of the steepest price declines since their invention.  Yet, they are still more expensive than their alternatives which includes the status quo.  As it stands, there must be something stronger than economics to serve as the catalyst for massive adoption.  Who better to solve this problem than Apple? Case in point, Apple owns only 18% of the smartphone market and yet earns 87% of all profits and has done so by leveraging usability and lifestyle (i.e. community) to convince customers their most commoditized product is worthy of a price premium.

 

Tesla: The EV Elephant in the Room
Could a company that will repatriate over $200B in cash be interested in acquiring one that has a market cap of $60B and over $10B in debt?  Tesla is one of the first companies (the other being Nest) that has made an environmentally friendly product “cool.”  At the very least, they’ve provided Apple with a playbook to enter the market from the consumer side if they so choose, but an acquisition begins to make a lot of sense if current trends hold. 

 

Despite it’s success, Apple has been under increasing pressure to “do something innovative” as most of its hits post-iPhone have been comparatively minor.  AppleTV, Apple Watch, and AirPods are all best-in-class devices, but none of them triggered a major innovation cycle in the way the Apple II and iPhone did.  Could energy be the next step for the first $1T company to become the first $2T company?  Time will tell.

 

 

Last week, the Council on Foreign Relations released a report on the ways in which blockchain could impact the future of our power grid.

Until recently, access to data on blockchain experiments in the energy sector has been fairly limited.  However, things are starting to change.  Last year, startups raised $300M through both traditional venture capital and ICO’s.  Two of the most heralded fundings came from Drift (consumer-to-generation) and LO3 Energy (peer-to-peer), both of whom are looking to connect consumers to the energy provider of their choice with distributed ledgers.

 

As I explained in a post earlier this year,  electricity trading transactions are still tracked in Excel or databases that rarely are connected but owned by large corporations.  This system adds millions in additional transaction costs and makes full transparency between market actors almost impossible.

 

A de-centralized ledger solves almost all of these errors and would empower new entrants (i.e. consumers with excess power capacity due to solar panels)  to enter the market.

Other than the power trading market, we see three major use cases for blockchain technology to impact the grid.

 

Grid Security and Generation Balancing- According to McKinsey, the connected-home market is growing at a rate of 31% year-over-year with ~30M homes having some form of IoT device installed.  The long-term result will be unparalleled access to data for grid operators and utilities.  Blockchain has the opportunity to help solve the problems of cybersecurity and data management that will come with this new paradigm. Without access to software talent, these service providers will need help from startups to build the capabilities that allow them to take full advantage of technologies like blockchain.  This transition is already underway in Europe where regulators and utilities are generally more forward thinking than their US counterparts.

 

TenneT, one of the Netherlands largest utilities, is working with Vandebron, a green energy supplier, to encourage owners of electric vehicles to participate in an EV-to-Grid (EV2G) pilot initiative.  Integration of power generation from renewable energy resources such as solar or wind power in combination with storage requires a more granular control to manage supply and demand. The project in the Netherlands is the latest in a long and growing series of technology initiatives to discover new ways of integrating new technologies such as EV and storage on to power grids.

 

Under this new program, TenneT will be able to store and dispatch power from consumer EV batteries in order to balance grid demand with supply. These EV2G transactions will be recorded and shared on a peer-to-peer (P2P) network using a permissioned Hyperledger blockchain. To encourage customer participation, TenneT and Vandebron will guarantee EV owners’ batteries aren’t victims of hacking in the process which is unlikely given the technology being deployed.

 

 

A permissioned distributed system based on the Hyperledger Fabric will allow grid operators real-time insights into distributed battery energy storage capacity across the network, as well as the ability to act on the information instantaneously and, perhaps in the future, automatically.  Eventually, collecting and recording distributed energy transaction data for use in the variety of utility-customer energy applications such as billing.

 

Infrastructure and Microgrid Financing- The US’ power grid is aging and well behind the rest of the developed world and our current political climate has prevented us from making large investments in infrastructure.  ICO’s could give both individuals and investors the opportunity to participate in the power grid like never before.

 

The use cases are wide ranging from peer-to-peer EV charging transactions to larger scale generation or transmission projects.  Blockchain could provide the ledger while ICO’s could easily be tied to the amount of power transmitted to the end-user (i.e. return based on output and efficiency).  It is important to note that this one is the most far-fetched of the three as it would require both consumers to become more educated and/or utilities to participate.  Both of which are far from guarantees.

 

Yet, this is the model that US-based LO3 Energy has experimented with in its Brooklyn Microgrid project without requiring too much engagement from local utilities. Customers can choose to power their homes via a range of local renewable energy sources while their neighbors can sell excess solar power back to them.  LO3 has opted to use a blockchain to keep the transaction record between its customer.  As is the case with all distributed ledger technology, the microgrid’s accounting is decentralised and shared by everyone on the network ensuring that tampering with these records is near impossible since everyone has their own, regularly updated copy of the ledger.

 

LO3 is now rapidly expanding with a series of other microgrid projects around the world where grid stability issues are a growing problem.  While it may be far fetched to believe the US could have grid stability issues, we should look no further than the recent disaster in Puerto Rico and subsequent landfalls of major hurricanes on the mainland to understand the loss of power for days / weeks is a very real possibility under the right circumstances.

A New REC – These market-based instruments represent the rights to renewable electricity generation.  They contain information such as generation source, the number of megawatt hours generated and delivered to the grid.  The immutable and transactional nature of REC’s makes them the perfect candidate to be placed on a distributed ledger.  Furthermore, the trading of RECs is currently highly specialized and opaque, a publicly available blockchain would open access to consumers and businesses alike.

 

Earlier this year, WePower, a blockchain-based green energy trading platform announced a successful $40M ICO, making it one of the most demanded projects of the year.

It helps renewable energy producers issuing their own energy “tokens” based on generation connecting consumers directly with the green energy generation and creating an opportunity to purchase energy upfront at below-market rates. This tokenization ensures liquidity and extends access to capital to finance new projects, but also gives the buyers a coin tied to a tangible asset, a fact that isn’t always true in the ICO world. The hope is that this access to a new capital infrastructure will be a bridge from renewable energy producers to new consumers thus making the grid a little greener.

Much like LO3, WePower’s technology creates an opportunity for a transparent accounting through a distributed open ledger, which records when and in what volumes green energy financed on the platform was produced and supplied into the grid. At the moment, such accounting is based on instruments as paper certificates in a similar fashion to RECs.

 

Of the three potential use cases highlighted here,  the ones that manage the increasing complexity (trading market, generation balancing, and cybersecurity) of the electric grid are the most likely to occur near term.  Utilities are under increasing pressure to better manage their costs and engage their consumers. In a world where devices are connecting to our grid at an exponential pace, it’s both as possible and difficult as ever.