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Digital Revolution in the energy sector – just a consulting headline?!
“The digital revolution is hitting the energy sector”; “Digital economy is disrupting the industry”; and “The utility-death-spiral has emerged” are some of the headlines which everyone active within the energy sector knows best.
Distributed Generation – Smart Grid – Big Data and my favorite “Internet-of-Things” are just a few of (in my opinion) the most over-used terms within the energy industry these days. But what exactly is the background of these definitions? Is something behind these definitions or is it just a popular marketing methodology for consulting companies to get new consulting assignments of unsuspecting, somehow old-fashioned utility companies?
Personally, I think it could potentially be both of it. But let’s go a little bit into detail by explaining these terms and adding practical issues to it. To my experience, Distributed Generation, Smart Grid as well as Big Data are topics which are very closely related and are major implications for utility business models in the short-run.
The rise of distributed generation is primarily based on the favorable evolution of technical and economic development of renewable energy technologies as Solar PV, storage-technology or Microwind-Turbines, and Small Hydropower Plants. These technologies enable each customer to produce a portion of electricity by themselves, shifting the supply from former centralized structures to more fragmented structures. Analyzing from a worst-case scenario, this could lead to decreasing utility-revenues, as demand will be reduced by own-consumption of this so called “Prosumers”.
In the past decades, primarily characterized by centrally executed utility planning, distributed generation consisted of a small amount of off-grid generation sources, industrial grid-connected generation and strategically located central generation for grid reliability, resulting that decentralized generation was quite predictable and not a threat for the utilities.
In my opinion, the core of the Smart Grid Topic is a result of the rising path of decentralized and renewable electricity generation. Officially defined as “an electricity supply network that uses digital communications technology to detect and react to local changes in usage”, I would add my personal definition of “necessary evil” to it. When focusing on European Energy Markets (especially Germany), it clearly shows that the development of a large amount of intermitting renewable energy technologies has a major impact on national transmission and distribution grids, leading to a huge need of reinvestment. Investments which have funnily to be executed by utility companies with (as mentioned before) decreasing power sales revenues. Thus, intelligent Smart Grids are necessity to control the increasing bi-directional load flows to minimize the need for re-investment in the grid.
Some would define this causality as “the utility death spiral”. And now, Big Data and the “Internet of Things” joins the game. Boosted by the deployment of digital measurement instruments positioned at the customer’s site, called Smart Meter, Big Data is currently interpreted as the holy grail in the (energy) business. The ultimate tool to optimize sales, develop new products, and gain superior knowledge about the customer needs, and thus also the perfect tool to stop the downward spiral. Officially defined as “extreme large data sets that may be analyzed computationally to reveal patterns, trends, and associations, especially relating to human behavior and interactions”, Big Data offers companies within the energy sector the unique possibility to offer new products branded with fancy names as “Vario-Tariffs”, “Smart Home” etc., including washing machines only operating when the electricity prices are as low as possible, and so forth, in order to retain their customers and react to potentially analyzed user behavior.
Now what’s the conclusion to take from this?
Firstly, I think that distributed generation is not just a trend, but rather a substantial evolution of the energy system, superseding old and central structures through the evolvement of new and more compact technologies. Furthermore, I think that rising decentralized generation (and I am not talking of off-grid diesel engines) with an intelligent grid capable to control variable load flows could be one important puzzle (beside storage technologies) for a more sustainable energy industry. Especially the Smart Grid, which I described as “necessary evil” could also be viewed as an enabler for the further deployment of distributed generation capacities.
Secondly, the role of the classical utility will change dramatically, shifting from the role of a large infrastructure provider to more service-orientated businesses, with more flexible structures, steered by a more innovative approach to market. When talking about Big Data and Internet of Things -especially from the customer’s perspective- I’m not sure whether it is the holy grail or the potential door-opener to the end of the ultimate privacy of every customer, as data provides the basis for the company’s insight into our daily lives. In fact, with superior data analytics, companies will be able to develop new products and adapt their services to fulfill best our needs, which per every economics theory is the essential job of every business.
About the Author: Philipp Lobnig is Managing Director of E-nable+ and spent more than two years with researching the development of decentralized electricity generation in Austria and its impact to utility business models.