The Microgrid Revolution: What Business Models Will Prevail on the New Grid?

April 17, 2017
Mahesh Bhave offers a glimpse of future business models for the electric grid in edited excerpts from his book,”The Microgrid Revolution: Business Strategies for Next Generation Electricity.”

Mahesh Bhave offers a glimpse of future business models for the electric grid in edited excerpts from his book, The Microgrid Revolution: Business Strategies for Next Generation Electricity, Praeger, 2016.

Overview: The book argues that the electricity grid of today needs to split up into a cluster of microgrids, interacting with each other, and also capable of standalone operations. Further, the grid will split up into specialized, vertical market segments – product-markets – offering such services as street lighting, water pumping, traffic lights, overlay DC networks for home electronics or appliance charging, and so on. Entrepreneurs will drive the transformation. In electricity, the historical industry boundaries no longer hold, ‘natural’ monopoly is dead, and regulations are increasingly obsolete. Electric utilities need to enter the broadband ISP business to compensate for demand loss and grid defection.

Electricity most glamorous – The Enernet

The Internet of Things – IoT – makes news constantly, mostly as opportunity worth tens of trillions of dollars. It includes machine-to-machine (M2M) communications – Bluetooth headsets for phones, phones-to-car connectivity, car to home communications, and hands-free talking for safety while driving or walking. Other scenarios include connected thermostats, refrigerators, and industrial equipment controlled remotely and via smartphone applications. My interest is IoT’s impact on next generation electricity infrastructure.

My hypothesis: Whereas IoT generally does not challenge the structure of existing industries, the combination of electricity with the Internet does. A concept newly discussed in this regard is the Enernet.

Enernet points to the transformative changes unfolding before our eyes. It shakes up and re-organizes the topology of the grid; alters the existing business model, and encourages us to embed some electricity functions in infrastructure. Eventually, it might eliminate selling kilowatt hours (kWh) to selling electricity’s uses – illumination, heating, cooling and motion – like buckets of minutes or GB bundles in phone services.

Pioneering in Chattanooga, TN

EPB, a municipal electric utility in Chattanooga, Tennessee, entered the ISP business, and through EPB Fiber Optics offers one gigabit per second symmetric Internet connectivity to their customers for ~ $ 70/month. That’s fast, well-priced, and an accomplishment worthy of recognition, emulation, and celebration. … And the important part is: Instead of replicating the asymmetric broadband deployments of incumbent phone or cable companies, they deployed symmetric, 1 gbps bandwidth for customers. This is revolutionary; it layers electricity services, and the Internet on the geography of a municipality. It raises the issue: What are the relationships among municipalities, electricity providers, and ISPs?

Barriers to entry in infrastructural industries – cable, telephony, and until recently, electricity – are typically prohibitively high; the companies are de facto monopolies. Yet suddenly, EPB built its quantum leap of a broadband system. The market signaling value of this event is enormous. The electric utilities may be slow but they get the idea that their telecom assets can be leveraged for retail telecom and entertainment services.

Electric utilities of all kinds – cooperative, municipal, investor owned — are ideally poised to offer bundled electricity, broadband and entertainment services on next generation platforms. The basic infrastructure – cables and right of ways – is there. To realize the growth possibilities from combined electricity and Internet service requires breaking down traditional industry and jurisdictional boundaries; re-purposing network architectures and topologies; and even re-structuring the ownership structure of utilities.

Author Mahesh Bhave

Zero-based business reorganization

During times of fundamental change, when the business model itself needs revision, Clayton Christensen recommends a ‘zero-based‘ assessment of the business. “If we didn’t have an existing business, how could we best build a new one?” he asks. How might we answer this question for electricity?

Answer: If we start from basics, the new business might comprise of a federation of microgrids, working cooperatively with each other to offset each others’ limitations, offering electricity and broadband access, including telephone and entertainment services, and using a variety of non-fossil fuel based “renewable” sources and storage in their generation mix. Cellular towers and the electricity sub-stations may host the solar panels, batteries, and other generation sources and equipment, and be the focal point for services.

What then should electric utilities do? The first part of the answer is: join the solar and batteries-based electricity delivery business – be the change maker.  This will shore up falling revenues, but will not be enough. The second part of the answer is: augment revenues. How? The best way might be to get into the broadband ISP business. In an industry where non- traditional service providers are expected to enter, playing defense is not enough.

In offering ISP services, electric utilities likely enjoy competitive advantages; incumbent ISPs might not easily match the built-from-scratch, yet incremental cost infrastructure. One outcome might be that the beleaguered electric distribution companies will become among the growth companies of the future.

Significance of EPB’s revolution

 It is a commonplace that revolutions often come unannounced or are not promptly acknowledged as such. Two issues are particularly salient regarding EPB’s broadband. One, significance of symmetric broadband service, and two, the optimum size of operations for an electric utility combined with an ISP.

 Symmetric broadband: Already, Internet access has been a liberating force worldwide; it can be more. Today we live with the constraints of limited file sizes with email systems, and make do with Drop Box like services when in fact we can easily have our personal and private, edge-hosted solution on our laptops, given Chattanooga-type access. EPB presents the world with a test bed for next generation technology. They have also democratized the Internet. How?

A: “We built our fiber optic network through 600 square miles, to every home and business. The fiber optic network did not just include the gig services. It also includes a ‘smart grid’  (a home meter on steroids that sends data every 15 minutes about home energy usage.) Our total was roughly $320million. We paid for it through one–third stimulus dollars and two-third bonding.” All electric utilities could do what EPB has done – offer symmetric broadband to homes, small and large businesses, schools and colleges.

 Optimum Size of Operations for Electricity and ISP: EPB raises the question: should a ‘municipality’ be the unit of study for future electricity or ISP services? After all, EPB serves a relatively small geography. Do economies of scale not matter anymore for unit price reduction? Can services under a small municipality be economical? In the age of solar panels and batteries, what is the smallest meaningful geographical unit for optimum economics?

In the US the mid-1990s, the nation was divided for wireless auctions into over 500 BTAs (Basic Trading Areas), and the rights to service them was distributed among winners – spectrum mapped to geography. This is one way of dividing geography for electricity 2.0. Can a supermarket or a cellular tower serve as a hub for solar panels, batteries, and more?

[clickToTweet tweet=”The electricity grid of today needs to split up into a cluster of #microgrids” quote=”The electricity grid of today needs to split up into a cluster of microgrids”]

The interplay among municipalities, ISPs and electricity providers

Boulder, Colorado, has been trying to seize control of its electric utilities from Xcel for months. Hamburg, Germany, plans to buy back the energy grids it sold to Vattenfall 20 years ago. But Hamburg is only one of dozens of municipalities trying to regain control of their grid from private companies; we have an epidemic of municipalities seeking control of their utility and ISP operations.

Can a municipality offer either electricity or broadband, or both? Is a municipality the right size for offering such services, or can the unit for deploying electricity and broadband be smaller, say, the size of an office building or campus? Even when municipalities are not fully into the ISP business, many offer Wi-Fi hot spots in key locations. Clearly, the Internet is a public good, useful for attracting businesses, and encouraging economic activity.

The municipality has a choice regarding what to do and in what sequence. It may a) do little, that is, let the market decide who offers electricity and who broadband, b) first become an electric utility, or an ISP, and c) then the other. This “municipalization” trend is a part of the larger industrial restructuring among electricity, the Internet, and ICT companies.

Investor owned utilities today wholesale their fiber optic infrastructure; little stops them from extending into residential and business services, especially as ISPs, builders, and others enter into electricity space, and snip away at their revenues.  More, the industry is fragmenting into niche though large product-markets – street lighting, traffic lights, agricultural water pumps companies. A home of the future may have both a DC microgrid powered by solar panels and batteries for electronic appliances, and a regular AC grid with solar panels and inverters for washing machines and refrigerators.  Local generation, local consumption allows for smaller yet economical service territories, at the level of an individual home, street, building, or campus – in other words, microgrids.

What business are electric utilities in?

It is clear that electric utilities will lose demand, and thereby revenue, in mature economies due to appliance efficiencies, some substitution due to solar deployment, and some due to defection. Sure, electric automobile charging will offset some of this loss. Nevertheless, it is unclear whether the new demand will offset all losses. It is thus important for electric utilities to revisit the question: “What business are we in?” and answer, “In the ISP business too.”

Besides offering ISP services, and connecting their network to a cluster of microgrids, should electric utilities get into the home and building energy management business? Electric vehicle charging? Security services? Charge by value delivered – comfort, heating, cooling, motion … and not by kWh? The answer is “Yes;” the timing of market entry remains an issue.

Even if they get into microgrids and new electricity-related businesses, the new revenues may not be enough to avoid overall decline, share erosion, and customer defection. Entry into new businesses is necessary but not sufficient.

Are microgrids necessary, for delivering a combined electricity and ISP solution? … To the extent a cellular tower fed by fiber optic cable is co-located with the corresponding substation, the substation’s serving area represents a microgrid for both Internet access and electricity. My expectation is that microgrids will be a reality for reasons of electricity infrastructure optimization alone.

My expectation is that microgrids will be a reality for reasons of electricity infrastructure optimization alone.

What might be the economics of a solution that includes both electricity supply and ISP services? Let us assume a take rate of 30 percent in three years. The aggregate economics of both electricity services plus ISP services would make for compelling financial results.

Choices: Business as usual, microgrids, ISPs

Electric utilities may no longer define their business based on generation technologies – coal, nuclear, diesel, hydro, even wind or solar or fuel cells – as is historically done. When solar panels are utility-scale and feed the grid, they may be regarded as just another fuel equivalent, within the existing paradigm.  Rooftop solar panels, on the customer side of the meter challenge the utilities’ business model. Utilities typically have limited exposure to, and no control over, operations on customer premises for historical and regulatory reasons. And yet the competitive threat originates from the other side of the meter, from traditional customers, who in effect bypass the electricity infrastructure of today, in kW sized chunks, one home at a time. This is qualitatively the equivalent of wireless telephone and Internet services in electricity.

To the strategy question, “What business are we in?” utilities may not only answer “electricity;” they are equally, at least in the next generation ISP business. For electric utilities, the choices may be mapped along three dimensions – toward microgrids, toward ISP services, or Business As Usual (BAU). My conjecture is that the pursuit of ISP services by dividing the service territory into microgrid-sized chunks, centered at sub-stations, might be optimum.

At least three forces are at work. One, integration – backward and forward, that is, services extending forward into customer premises, beyond the meter, and also the backward integration of renewable energy technologies on the generation side. The electric meter may no longer be the point of demarcation between utility services and the customer. Two, substitution, from fossil-fuel based generation to solar panel-based generation, batteries, wind turbines, … working collaboratively, and integrated into microgrids. One form of generation is being replaced by another; cleaner, smaller, and cheaper. Three, differentiation – instead of selling a commodity product, the utility can now fractionate, and offer a host of services, unbounded by geography or service territories, and represented by a Product-Market-Location matrix.

Perhaps most important, diversification is an option for incumbent utilities, who are at an inflection point; strategic choices have to be made to avoid value erosion. Offering broadband with symmetric speeds appears a good first step, better than consolidation, mergers and acquisitions, and cost cutting, as Exelon – Pepco have done. At best, consolidation buys time.

ICTTE: Convergence of ICT, transport, and electricity

We are familiar with the UN created acronym ICT – Information and Communications Technologies – describing both computing and telecommunications. The emphasis on ‘technologies’ is unfortunate because it focuses on the physical layer. It might have been better to use ICU – Information and Communications Uses, or Applications, or Services, ICU, or ICS.

In recent years came the ‘smart grid’ – ICT deployed as an overlay on the grid. Further, with electric cars, GPS navigation, satellite radio, …  got blended with ICT. A better acronym for the future might be ICTTE, where the latter T and E are Transport, including Mobility and Portability, and E for Electricity or Energy. The smartphone combines all the ICTTE elements, as does a Tesla car. We may call this convergence of ICT, Electricity, and Transport infrastructures. Classic industry boundaries are becoming porous. We face industry structure change on a grand scale, resulting in awe-inspiring industrial mutation.

Partners for electric utilities as ISPs

Who might partner with an electric utility getting into the ISP business? Might it be Skype, who needs bi-directional but not much bandwidth? Netflix? In today’s incarnation, it needs asymmetric, mostly downward bandwidth. Might it be Amazon?

As illustrated by EPB, utilities are in the broadband ISP business, but the converse may equally be true. For IT and telecom services businesses, it might be proper to ask: Are we also in the electricity business? Over time, do electric utilities buy telecom companies, or Internet companies buy electric utilities? Do electric utilities collaborate or compete with telecom carriers like Comcast, AT&T, Google and entertainment companies?  Will the energy industry drive broadband or broadband drive Electricity 2.0? Will over-the-top and application layer companies buy physical layer companies, or the other way around? We do not have a good grip on what might happen with any clarity – the Enernet is a brave new world.

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