The Energy Exchange Bazaar

Eric Raymond’s book “The Cathedral and the Bazaar” describes top-down vs. bottom-up software design philosophies using a potent metaphor ...

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by Stephen Johnson, Itron

Eric Raymond’s book “The Cathedral and the Bazaar” describes top-down vs. bottom-up software design philosophies using a potent metaphor: The cathedral represents the top-down approach in which developers create a software product that is released to the public, whereas the bazaar represents an environment of constant feedback from many stakeholders, resulting in rapid product evolution.

The same metaphor applies to the smart grid, in which the top-down approach of generators’ supplying consumers in a one-way transaction brokered by utilities is being replaced by a complex web of two-way interactions that change how utilities operate and interact with customers (see Figure 1).

The colors, sights and sounds of the bazaar might be exhilarating, but they also are daunting to those whose timid feet first bring them into such an unfamiliar environment.

How can utilities cope with the fast-paced world of the energy exchange bazaar in which consumers and third-party aggregators may buy and sell energy at will without centralized planning? What investments should utilities pursue to provide the infrastructure to facilitate such transactions? Perhaps most important, how can utilities identify opportunities to survive and thrive in such an environment?

The key to finding opportunities lies in establishing a dialog between utilities and their customers, the electricity end consumers.

This dialog is two-way because utilities must educate and engage customers and learn from them to manage evolving energy needs effectively.

Disruptive Innovations

To understand the importance of utilities’ learning from their customers, consider how electricity consumers’ behaviors can change, often without any utility collaboration:

■ Renewable portfolio standards and technology evolution of photovoltaics are expanding the adoption of residential solar panels and changing consumers’ electricity consumption behaviors. In some cases this is happening without utility involvement because solar systems are leased to consumers by third parties.

■ As more auto manufacturers bring electric vehicles (EVs) to market, 240-volt charging stations are being installed in homes. This radically changes the load profiles of typical residential electricity customers and could challenge aging distribution assets.

■ Home automation and energy management solutions are being added to the product portfolios of giants such as ADT, Ingersoll Rand and Verizon. These companies are expanding into energy management services offered to broad bases of consumers, independent of utilities.

■ In Tokyo, Nissan Motor Co. is making vehicle-to-home adapters to enable Nissan Leaf batteries to discharge stored energy to power homes, presenting an attractive alternative to brownouts.

Each of these trends can be labeled a disruptive innovation because it challenges the traditional energy delivery paradigm. Given the massive infrastructure investment and long depreciation cycles of electricity generation, transmission and distribution assets, any change to customer behavior might have long-term ramifications that invalidate the assumptions on which those investments were made.

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A utility cannot respond to changes quickly under the best circumstances because regulatory policy, shareholder incentives and investment strategies must be aligned prior to any course correction. The challenge for utilities is to understand how consumer behaviors evolve and rationalize those changes with their investment strategies to provide accurate signals to shareholders, regulators and consumers. This knowledge can be gained only if smart grid initiatives and technologies provide utilities with feedback mechanisms that provide timely access to information about their customers’ evolving energy habits.

Traditional Utility Feedback: the Cathedral

Before the Public Utility Regulatory Policy Act (PURPA) changed the competitive paradigm for generation, regulated utility investment was modeled on the assumption that investment in generation and transmission capacity was a necessary component of a utility’s natural monopoly. The role of residential electricity consumers in a traditional model was strictly passive; use only energy supplied by the utility, and pay the bill for the energy and delivery. For more than a century, the typical consumer has had no insight into components of his bill or how electricity is generated and delivered to his home.

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Distributed generation has challenged this model for utility investment and operation. Until smart meters, consumers were relatively unaffected by these trends. The expectation of unlimited electricity supply has become a sacrosanct ideal in many minds, and the idea of consumers as active participants in energy management has not taken hold.

Recent technologies such as smart meters, microgeneration and EVs present bewildering choices to utilities and customers for achieving utility goals for energy efficiency, managing peak demand and integrating renewables. This need has grown as it has become more costly to continue to build traditional generation assets.

Disruptive innovations are raising consumer awareness of energy management strategies as smart meters are showing up on homes. Smart meters bring the potential for participation in utility-sponsored programs such as dynamic pricing and demand response. Customer awareness can be transformed into active participation if a utility leverages its greatest asset: the long-standing trust utilities have with customers. This incumbency allows utilities to begin customer dialog that will provide feedback to create a thriving marketplace for clean energy delivery.

Utility Feedback in the Energy Exchange Bazaar

Tremendous technical innovation has entered the customer space and altered expectations of access to information and control. Telecommunications and media have collided to unleash unprecedented choice and control. This trend is being extended into energy management. If utilities are not involved in this conversation, customers will be educated by parties that are unconcerned with the details of reliable energy delivery, resulting in a transformation of energy delivery that invalidates regulated utilities’ investment assumptions.

In the cathedral, the only mechanism utilities had to educate their customers was the meter display on the sides of homes and printed bills at the end of each month. Smart meter penetration has been accompanied by attempts to expand that conversation using smart meter communications into homes and Web portal access. The rapid innovation that has transformed the entertainment and telecommunications industries, however, is migrating into the smart grid space, but largely independent of utilities. Customers might have existing relationships with their utilities, but they become wary of attempts to adopt technologies that are selected, owned and operated by their utilities.

Figure 2 shows four scenarios for solution delivery and data access. In the first quadrant, the utility owns all devices, such as thermostats and controllable switches, and provides the consumer access to energy consumption data. This scenario is unlikely to be embraced by customers who demand choice and consider changes to their home environments highly personal.

The second and third quadrants show either the customer’s purchasing solutions directly or a third-party’s delivering solutions to the customer independent of utility involvement. These scenarios empower customers with choice but provide limited or no utility feedback into how the customer’s electricity consumption is changing, how that impacts the utility, or how their expanding energy consumption, control, generation and storage can create value for the utility and customer while maximizing the entire grid’s stability and efficiency.

In other words, the bazaar is not yet in place as long as the utility has no role in the market. Although vehicle electrification or home control might be attractive, their value is not maximized and societal benefits are not realized completely as long as these activities are isolated in silos. The utility is uniquely positioned to coordinate transactions efficiently, but only if they are granted access to data.

Scenario four illustrates this insight need not imply utility ownership of devices, rather it leverages built trust with customers to prompt the customer to allow data access using smart grid communications and open standards.

The Role of Utilities in the Energy Exchange Bazaar

The trust relationship between customers and utilities can be expanded if technology deployments maximize customer touch points to establish a conversation and build it. The watershed event is the installation of a smart meter, which makes possible only communication between the utility and the customer, but also granular energy measurement that makes customer access to data, dynamic rates and incented control possible.

It is critical to begin this dialog with customers before smart meter installations. Equally important, the conversation must focus on opportunities for customer participation and benefit and not technologies or utility objectives. Customers will be willing to continue this dialog if the following hold true:

The utility has established and maintains trust with customers.

  1. Customers are free to choose among products, technologies and distributors independent of utilities.
  2. Adoption of standards-based technologies enables information exchange between customers and utilities, in which customers remain in control of their data.
  3. The customer participation curve (see Figure 3) shows how technology events provide opportunities to increase customer trust and dialog.

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Utilities must establish this trust early with smart meters and data access, and as customers adopt more sophisticated solutions, utilities will advise customers of opportunities to connect control, generation and storage to utility programs. This dialog may be conducted by various channels, such as community group meetings and Web portals, but the key point is establishing a feedback loop in which utility outreach is continually matched with customer solutions to create mutual opportunities for maximum value.

Author

Stephen Johnson is a product line manager for Itron and is responsible for consumer energy management solutions. Reach him at stephen.johnson@itron.com.

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