The Energy Sector’s Digitalization Must Reach Beyond Hardware into Software

Yet many utilities have been slow to move; the time to do so is now

By Marius Buchmann

Of the various megatrends inescapably driving the energy transition, one in particular-digitalization-has come onto the scene with impressive potential to cut costs in the power sector. For example, the application of data analytics in power plants and networks alone could save up to $80 billion annually through 2040 according to the International Energy Agency ( IEA).

This is certainly one driver for energy utilities, where we see digitalization influencing investment strategies. Since 2014, global investment in digital solutions by utilities has grown 20% annually, according to the 2017 report Digitalization & Energy from the IEA, reaching $47 billion in 2016. That year, such digitalization investment was 40% greater than worldwide investment in gas-fired power generation.

Investment in Big Data, artificial intelligence, and energy blockchain startups on the rise

This growing investment in all things digitalization-including Big Data, artificial intelligence (AI), and blockchain-is reaching into every corner of the energy sector. For example, in an October 2017 report, accounting and business advisory firm BDO Global noted that mergers and acquisitions between energy / renewables enterprises and technology companies active in Big Data, artificial intelligence, etc. have been steadily increasing. Moreover, average deal size has jumped up significantly, from $500 million pre-2016 to $3.5 billion in Q2 2017.

The trend is similar and no less striking in the energy blockchain space as well. At EventHorizon 2018 earlier this year, Jules Besnainou of Cleantech Group noted that investments in energy-related blockchain projects had skyrocketed from less than $10 million in 2016 to $739 million across 53 deals in 2017. Q1 2018 alone saw $359 million, with record average deal size. And although initial coin offerings (ICOs) accounted for more than 90% of 2017 investment, equity investments actually accounted for the majority of total deals. In 2018 and beyond, such equity investments may become more the norm as initial ICO momentum slows.

Yet for many utilities, digitalization = hardware, rather than software

Although utility investment in digitalization has been growing, it has not grown equally. For many utilities-at least to date-investment in digitalization has translated into investment in hardware, rather than software. According to IEA numbers for 2016, hardware such as smart meters, smart grid infrastructure, and electric vehicle charging stations accounted for the majority of the nearly $50 billion invested. Meanwhile, electricity systems software and industrial energy management software accounted for just a tiny sliver of the overall digitalization investment pie. Further, such software investment remained relatively stable across the three-year period 2014–2016, while hardware investments accounted for most of the 20% annual investment growth.

International management consulting firm Oliver Wyman underscored this point in the May 2017 issue of Energy Journal in an article on digitalization and German utilities. On a scale from zero (basic) to 100 (advanced), German utilities averaged a modest 31. “Utilities must embrace digitization, rather than ignore it,” the authors noted. “It’s time for utilities to digitally speed up.”

To a degree, this investment lag is understandable. With energy sector digitalization still in its relative infancy, utilities have focused first on investment in enabling infrastructure-the hardware-which provides the basis for software and digital applications. But as Oliver Wyman so pointedly said, it is arguably time for the pace of software-side investment to accelerate: “As has already been demonstrated in other industries, companies cannot afford to be complacent. If German utilities continue to digitize at their current rate, they face certain disruption by emerging digitized competitors.”

Just as countries such as the United States saw a major wave of electricity grid infrastructure investment in the late-middle 20thcentury, it is now time to usher in a new wave of investment in digitalization, especially software.

Making faster progress together, not apart

So how do utilities bridge the digitalization investment divide ahead of them? And how do they surmount the learning curve that follows that investment?

Rolling out new digitally connected assets like smart meters, intelligent transformer stations, or networks of EV charging stations comes with the requirement to learn how to incorporate and make use of these new technologies, which is a challenging task on its own. But the real challenge ahead is the development of digital business models that focus on the data itself and not the asset that is used to collect the data.

Can energy companies-many not yet familiar with the status-quo of digital solutions, let alone the bleeding edge of such solutions-innovate and develop the “next big thing” themselves? And even if they could, would “going it alone” be the best and fastest way?

Many utilities have internal innovation teams and programs to develop from within. Certainly, some utilities around the globe have initiated their own accelerator programs (e.g., innogy’s Innovation Hub, the Free Electrons program) or joined existing accelerators (e.g., rockstart, startupbootcamp, TechStars) to get in contact and learn from start-ups how digital business models in the energy sector could look like. And many-including global energy companies, utilities, and grid operators-have become Affiliates of organizations such as Energy Web Foundation.

All these different approaches indicate that some utilities have realized that they need to understand what digitalization means beyond the roll-out of digital infrastructure and that they need help from outside to develop this knowledge. Once utilities understand digital technologies and the possibilities for new business models that come with increasing data availability, they can become driving forces of the digitalization itself, rather than watching from the outside how digitalization transforms or even disrupts their current business model.

Marius Buchmann, Ph.D., is an energy economist working at Jacobs University Bremen, Germany. He is consulting governments and utilities on regulation and governance issues related to the digitalization of the energy transition, smart grids, and renewable energy integration. On www.enerquire.com he blogs his private views on the interdependences between the energy transition and digitalization, regulation, market design, and future business models for utilities.

Originally published at https://www.energyweb.org on September 20, 2018.