A short discussion about the Energy sector
With the advent of domestic batteries and efficiency improvements in solar and other means of clean power generation, the energy sector, as a whole, will face enormous changes. Distributed grids will change the role of households and businesses in power and resources distribution.
This transition to a distributed world faces the contradictions of current stakeholders. When attending conferences such as SmartCity expo or Utility week, you can see that major companies envision a future where anything anywhere will be smart / big / open. Short-termist media are super-excited about the last trendy “blockchain opportunities” while they barely understand what it is for and why it is relevant or not. It seems energy is more and more related to new “IoT toys” or “gamify applications” (to understand your billing for example) rather than meaningful solutions. More generally, it’s confusing to have the feeling of a technology explosions without any new vision to sustain it. Tesla is today the one example that offers both a sustainable economical solution and a new coherent narrative.
Actually a lot of people have a tendency to reduce the energy issue to the technological aspects. Bill Gates launched a global coalition with an investment plan in its direction. But, it’s only one component on many. Energy has to be approached within an infrastructure implying also financial, political (comprising of but not limited to legislation), social … and technological aspects. Taking the example of solar PV, decades of research have been employed to develop dozens of different technologies that could be applied to a large range of situations. The PV efficiency chart of NREL is a good illustration of that. Nevertheless, can you see PV panels on every roof around you? No, because it’s more a matter of regulation and finance. Of course, technologies have to go further but it could have also been more straightforward from the beginning by taking into account social aspects. Today, the solar race is not anymore based on the pure efficiency of the devices but more on the cost per kWh of which it produces, and on the way to integrate the panels in a unified urban environment.
The same conclusions can be deduced anywhere in the field: its inherent limitations lie somewhere else than only on technology. More generally, history teaches us that technology has never been the main driver in industrial revolutions but an enabler supporting political and social changes. That is why the notion of infrastructure is the only way to highlight the underlying opportunities and build a coherent vision of the future of energy.
The electrical infrastructure (in short)
The infrastructure as we know it, is a product of former technical, political and financial choices that evolved since. The origin of this centralized organization is partly due to the “war of current” that took place at the end of the 19th century.
The war confronted the alternative-current (AC) “of” George Westinghouse and the direct-current (DC) “of” Thomas Edison. It was a struggle to force the adoption of one standard on another, taking place during the rapid expansion of the electrical network in America. The AC technology implies to build big power plants only at some strategic nodes of the country, while the DC technology supposes to establish small power plants everywhere in the country. The confrontation was emphasized by an open competition involving large companies never seen before, a public debate and a propaganda about the safety and regulation of such a technologies, and the behind-the-scene maneuvers associated with the introduction of the electric chair. It’s a good example of the impact of political & economical reasons on the adoption of common standards, even if they are not directly connected to the technical facts. Today, the AC by making it possible to step up / back the voltage in order to carry power over long distances, is a pillar of our electrical infrastructure. However, DC systems are still being used in cars and a lot of electronic devices.
This centralized grid was driven by the access of cheap non-renewable energy in few points of the grid. In addition, crucial political considerations reinforced this vision with military interests. For instance, after WW2, the U.S. pushed a specific nuclear technology for these purposes: pressurized water reactor (PWR) utilizing solid fuel assemblies within a reactor vessel. The solution was more risky than a molten salt nuclear reactor, for instance, and created more waste. It enabled the US to produce bombes and increased the military capacity of US at the beginning of Cold War. Thus, it was not made and optimized to produce cheaper, easier and more renewable energy solutions. Nevertheless, in the early 1950’s, the technology was extended to civilian energy application and the PWR reactor technology was adopted for the vast majority of nuclear power plants in the world (under Westinghouse patents). Due to obvious technical and safety reasons, such a system was not meant to be distributed and then promoted a centralized network. It’s a good example than social component can prevail over pure technical performances in the choice of a type of organization on another.
As a consequence, more than one century of political and industrial struggles end up with the current infrastructure that aggregates different elements, including:
- The generation or the power stations, meaning the production of energy with coal, oil, solar panels, wind farms, hydraulic plans, etc.
- The transmission or the transportation of electric power from generating site to electrical substation;
- The distribution system carrying electricity from the transmission system to individual consumers;
- The metering and the billing, comprising today a vast range of actions and devices from sensors to related devices but also management and communication tools to gather and understand data, plus match dynamically producers and consumers.
It is completed by a regulatory framework depending on the legislation of the country itself and stems from local and global political and economical issues. So everything is strongly interconnected. That is why the current big companies of the sector, the Utilities, are based most of the time on limited geographical monopolies heavily regulated by government. It usually supposes that when an inhabitant of a city buy or rent a house, s.he will be in contract with the local utility. In addition, the regulator at the state level sets rates, evaluates performance and enforces mandates. As a consequence, the main issue is that utilities don’t have the right to make money on electricity in itself but only to recover their costs. Their main profits come to a rate of return on investments in grid infrastructure. It turns into charges usually bundled on the consumer’s power bill: a single per-kWh “volumetric” charge. It implies that any inhabitant in a developed country is most of the time connected to the grid and has to pay for it, no matter its energy consumption or its possible personal installation (PV, wind, solar, etc.).
In other words, the main business model of utilities is clear: invest in few strategic nodes and an heavy infrastructure and, due to regulation, get a revenue stream by charging customers for the cost of these installations. Their primer interest is therefore to justify and to charge for their current electrical infrastructure.
Today, the paradigm is changing due to several forces. Local and global instability due to political and financial assets (without speaking non-renewable energy source depletion) reveal the weakness of our existing centralized network. We are in the good shape to embrace the shift to a more adapted network.
In its 1962 paper, Paul Baran, researcher at RAND, introduced the Network architecture diagrams and its study on network reliability. Applied first on the information network, it can be applied now on Energy to understand that there is no big change between a centralized network and a decentralized network — except, the precision of the mesh which increases with more nodes. However, a distributed network is an all different business. It was proved to be a more reliable network because it’s highly fault tolerance and can suffer from failures and still being stable. It also increases the scalability of the solution and its possibility of evolution as a tremendous rather than rigid network. This implies big challenges because it increases the points of failure and thus the need of maintenance. Plus, it increases the needs at the beginning by first working out the lower level details like resource sharing (trade) and communications (transport).
This paradigm is supported by a transition where the fordism economy, characterized by mass production and consumption, tends to disappear to make room for the digital economy. In the latter, the value is also established in the multitude of users who are empowered and connected to each other by digital platforms. Utilities, are still powerful but less adapted to the new paradigm where physical infrastructure is still mandatory but it’s moving closer to the citizens. They put their effort in optimizing their margin rather than creating more wealth because they fixate only on centralized network. Even if oil and gas are still the main drivers of our energy economy, they are little by little being replaced by renewable forms of energy. Since, they work mainly with DC, they shortcut AC transmission part, implying a distributed network, and thus increasing the social component. Moreover, since sun and wind are limitless, this network is based on another resource where the value is distributed: the data of the consumers. It can be seen both as an opportunity to propose new services and a whole new framework to design the future of energy: something really tailored to our way of life.
Third, to conclude, we can draw an interesting parallel with Internet that begun as a closed and centralized network called Arpanet that was slowly opened to civil applications. As it distributed itself, it gave space to third-party actors to develop a new-generation of network, as promoted today for example by Google Fiber or the recent efforts of Facebook. On the contrary of Internet, oil, coal and nuclear based energy solutions were too strategic and critical to let open the game to more civil actors. For instance, political and strategic agenda related to oil play a similar role by strongly limited the possibilities for third-party solutions. Now that renewable solutions are spreading, the safety issue is less and less a problem. Thus we can be sure than the regulatory framework will soften in many ways to tremendously promote new alternatives and actors (and associated business models) over the interests of current organizations.
Utilities were incredibly powerful to build our infrastructure and they are still today mandatory to maintain it. But they are facing too many pressures at too many levels to be able to propose new paradigms:
- They are hybrid organizations, private but heavily regulated which can imply conflicts in the way of processing and different goals. It can be defined by a “bundle principle”: more than any other sector, the interconnection and interdependence between private organization, public actors and final consumer is heavily strong. It limits itself from the change and encourage safety (either for power supply and dividends) without surprise;
- They are trapped in an infrastructure they need to pay (and justify). The centralized network is soon to be dead for utility providers because we reach the limits of the so called “economy of scale”. For major energy providers the building of a heavy network was a sinequanone condition to establish an unprecedented competitive advantage. With the increase of the scale comes the decrease of the cost per unit as fixed cost are spread out over more units of output. But at a certain limit, we reach a moment where the cost of maintenance decrease the interest of the large network. This is a logarithmic curve where it is no longer possible to reduce the losses (between 7% to 12% of the total production at the best case). In other words, beyond a limit, the cost of distribution increase with the complexity of the system. We reach this limit;
- They are culturally limited because, the more a company grows, the more it is risk averse and wants to preserve margin. It develop a mandatory management which existence is fundamentally related to keep the company safe from problems. In other words, the innovator’s dilemma is even more exacerbated in the energy sector because utility found their business on guarantees and incremental improvement. Not on disruption. Ultimately, they are looking for opportunities rather than for true vision to follow. A good illustration of that is the term “smart city” that makes no sense. Smart doesn’t mean better and we did not even qualified what it means. It a vision of the future purely align with private stakeholder wanting to sell new tech products.
The main problem is that, today these fordist companies are controlling two majors things: capital and political influence. They have the industrial capacity and the knowledge of market to launch solutions at scale. The leverages of such a companies are clear and direct and have to be taken into account in order to find a new kind of partnership for a more sustainable future. In the meantime, the entrepreneurial age is one of the most striking force or our era. Unfortunately the balance of power is still incommensurate between a startup and a big company. First, their goals are not aligned. Second the risk taken is for the startup. Most of the time, working with a utility implies to replicate its weakness and suffer from its limitations. What is the today strategy for both?
- Utility are now aware that they need to innovate in order to stay at the top. They launch big challenges and giant “open innovation” campaigns to get the most promising startups. Their goals are clearly to commercialize the relevant solutions while their can operate external R&D at the cheapest cost. But by being structurally risk-averse, it leads to lowering the ambition of some projects and ultimately developing middling solutions instead of bold ones.
- For startups, the need of capital in energy sector is so big today and the financing system so maladjusted with their development that most of them actually try to get public grants for their R&D and to be bought by big companies which they will not be able to compete anyway.
Is there an alternative?
We need new models to develop innovative bold solutions with long-term capital able to make these projects more resilient. These legal models need to lower interconnections (see barriers) between current stakeholders while creating new ones with new actors and technologies. Here are four Energy actors that are already being developed or that could be. These four propositions can be seen as stand-alone alternatives as well as connected actions that could be unified in some way.
First, when it comes to comparing Energy sector and other industry, it interesting to see how close it is to the Telecom sector. More specifically, from the Opex / Capex in their respective network to the regulatory aspects. Similar to the Energy sector, the Telecom industry also has the capital and political influence required to put at scale big infrastructure projects. Most interestingly, some of them are digital-born and so accustomed with another way to test and iterate and eventually to push regulation. Thinking about Google and Free, we could imagine them developing new solutions in energy because they have similar stakes — an important capacity but inherent culture to innovate more. They have already several options. Downstream, they are service providers through residential gateway for example. Technologies exist today that could help to plug billing and metering options to it. Such a gateway are now real computers with enough performances to run also interesting protocole (who says blockchain?). And so, we can imagine this device has a central hub of the house to manage the exchange of energy. But upstream of the value chain, telecom can also play a key role. Projects are now running to use base stations as storage station and add flexibility to the energy network. Anyway, at every place of the value chain telecom operators have the ability to develop an innovative offer. Previous experiences have been set up, notably by Google, but remain to be sustain. The company is now developing a new approach like in the Project Sunroof.
Second, private venture capitalists are today the stakeholders that help the most the development of bold startups. But what if a VC firm could follow a real industrial vision rather than only financial ROI? To my knowledge such an organization doesn’t really exist in the field of energy. Utilities were first vertically integrated before the privatisation of the market. Now we face the paradox of smaller organizations with less room for maneuvering but equally burdensome to operate. But vertical integration remains interesting and has to be developed within a full stack approach. An industrial VC firm could invest in a network of startups that collectively could be vertically integrated. By keeping them independent, a resilient model could be imaginable. By keeping them connected, common fruitful synergies could be achievable. This strategy is hard and should follow a specific strategy: start from the bottom by targeting downstream the value chain and little by little investing to go upstream. Some colleagues in internet sectors are already testing that.
Third, the city councils can play a relevant role. After recent events (Brexit or Trump’s election), some people think now that cities could lead future initiatives over nations. While their agenda are different, and have no interest to replace the latter, they constitute a powerful entity to test new solutions and new ways of applying and using it. For instance they should now embrace a real vision of what is energy services and commons. There is room to develop a public ownership at their level that could centralize independent initiatives, proposing infrastructure-as-a-service and keeping common public data and services. More pragmatically, countries, like Spain, have not developed a friendly legislation for renewable energy solutions, limiting the capacity of self-consumption. So cities like Barcelona are taking the lead to being their own local energy operator in order to manage energy and project at a local level and overcoming national regulation.
Fourth, and last but not least, the cooperative system is now, more than ever, a relevant legal frame to develop sustainable energy solutions. It is based on the principle that, to unlock the full potential of a distributed network, we have to turn inhabitants into decision-making citizens. In a cooperative you can involve them, as well as public institutions and private sector. Basically, it helps to develop projects through local partnerships and secure investment via local share offers and matching debt finance, institutional investment and/or co-investment. Then the business plan is to secure income via the Feed in tariff and sales of electricity exported. Finally the goal is to operate and maintain its own assets in order to re-invest surplus profits in a Community Fund. The structure is flexible and has the huge advantage to be able to integrate current utility companies, private investors, city council (and other mechanisms) while establishing a transparent governance adapted to a local situation. So far, there are now about 2,800 energy cooperatives across Europe.
To be continued
Each of these propositions will be the topic of new articles, projects or actions in the coming month. I’m currently exploring better ways to support and develop energy infrastructure. The key will be in the synergies of different worlds to create the missing peace and connect society’s challenges, tech solutions and social commitment. All in one, it can lead to a global infrastructure and knowledge source for the radical transformation of the future. As a matter of fact I am involved in:
- BeyondLab, a non-profit I launched few years ago to create intersections between inventors from different worlds: science, entrepreneurship, design and take science a step further;
- FAB city, a new urban model for locally productive and globally connected self-sufficient cities;
Written for digitalsocial.eu by Toby Baker of Nesta’s Policy and Research team.blog.fab.city
- DAISEE, a open-source movement designing a secure decentralized autonomous energy organisation systems (from consumption monitoring and consensual management to smart-contract based energy production sharing).
The master plan of DAISEE for the next few years.medium.com