The final module of Squared Online sees Squares work in groups to create a whitepaper that sells their ideas on how a major digital trend will affect an industry. From the whitepapers submitted, three are identified as the most viable, persuasive and creative.
Here's one of those top-performing whitepapers from Group 14 of the August 2015 cohort. It takes a look at the impact of the Internet of Things on energy and utilties, offering a strategy and recommendations that are both forward-looking and sensitive to commercial considerations of the sector.
The Internet of Things (IoT) is transforming the way we live and work. It is reshaping an industry that has been at the heart of economic development for nearly 200 years: PowerUtilities. In this paper we will examine the strategies Power Utilities can adopt to stay relevant in the new IoT-enabled Smart Energy world.
The IoT - fuelled by falling technology costs and advances in sensor technology, cloud computing and ‘software-enabled-everything’ - has driven tremendous efficiencies in recent years at every step of the Electricity value chain (Fig. 1). It has allowed Renewables to become more reliable participants in the Grid (40% of UK electricity will come from low-carbon sources by 2020 1), improved grid agility and flexibility (IoT technology could meet the UK’s Grid Balancing needs faster than a power station 2), enabled the reduction of power losses along the transmission lines, and is helping reduce energy consumption via smart meters and connected smart appliances.
The economic value generated by these new efficiencies will continue to be signifcant. The UK Government estimates that the Smart Grid, of which the IoT is a key enabler, could save £19bn by 2020.3
Globally IoT investments, largely focused on operational efficiency, boosted Utilities’ revenue growth by 11.3% in 2014 vs 2013 5. By 2030, between 25-1004,6 billion devices will be connected - of which ⅔ within the Utility sector by 2023 7. But the next phase of economic value creation will no longer just come from efficiency gains: Accenture8 predicts that 'the IoT’s full economic potential will only be achieved if companies move beyond using digital technology to make efficiency gains alone and unlock the value of data to create new markets and revenue streams.' No longer will it come from within the industry — of the 15 most powerful IoT companies today, none are Utilities 9.
As consumption reduction and low-carbon distributed-power sources become a focus of the fight against climate change and of future IoT deployments, Utilities’ revenues and prots are under increasing pressure - and with it their capital investment capacity. The pace of IoT innovation is at odds with Utilities’ typical 15-20 year planning cycles and core expertise. It is clear that for the industry to stay relevant and profitable, its ability to decouple profits from the energy sold; and monetise an increasingly small-scale distributed energy system - will be critical.
'Without digital technology, renewables rely upon a large amount of infrastructure to make them work either by larger grids or energy storage. The IoT will dramatically change the way people interact with energy systems.'13
Head of Energy, Innovate UK
A utilities landscape in flux
IoT-led innovation is reshaping the industry and its value chain. It is turning a typically slow-paced, inward-looking and vertically integrated industry into a dynamic, diverse and distributed system. It is happening today, and fast-driving Utilities’ revenues and profits down.
With every new IoT breakthrough comes new consumer expectations, products, services, business models, competitors and new ecosystems that operate increasingly independently from Utilities.
IoT drives small, renewable-based distributed systems
The IoT helps produce, distribute and retail renewable energy more effectively: renewables already accounted for 25% of the UK’s electricity generated in Q2 2015 10. Combined with the falling cost of technology (solar PV costs have fallen 40% in the past year alone 11) and advances in energy storage, the IoT is also driving micro-grid adoption. The global market for these small autonomous networks powered primarily by renewables will grow 18% by 2019 12. Micro-grid deployments today are largely driven, funded and operated by non-Utility entities, ranging from universities to remote communities. While they give
Utilities the opportunity to add capacity at lower capital costs if connected to the grid, the revenues they generate stay largely outside Utilities’ reach.
The IoT-empowered smart prosumer
Within the home, security and energy-focused applications are leading the way. Smart meters are the most widely adopted connected device after computers, games consoles, smartphones and tablets. Some
28% of the total respondents said they already own a connected utility meter. KRC Survey 14
The trend towards micro-generation, combined with IoT-connected smart devices that are penetrating our homes at a growing pace , is already changing the way we consume energy. Sleek cloud-based interfaces enable users to choose - increasingly in realtime - how much energy they use; at what price; and soon, how much they sell it for. With Peer-to-Peer models penetrating all industries, it won’t be long before an increasingly larger share of energy transactions bypasses the Utilities entirely, unless they nd a way to integrate the prosumer into their business models.
IoT-driven policy changes impact utilities’ revenues and profits
The UK government is driving a supplier-led smart meter rollout; 53 million meters are to be fitted in households and small businesses by 2020 — paid for by the energy industry at a cost of £11bn 15. The scheme will help cut energy bills - and inevitably Utilities' revenues. It will also make switching suppliers
smoother and faster (over 6 million households switched supplier in 2015, a 15% increase on 2014)16 -consequently increasing the cost of customer acquisition and retention; eating further into Utilities’ profits.
IoT accelerates products, services and business competition
With over 30 suppliers in the UK market, Juliet Davenport, Founder and CEO of Good Energy said: 'loyal consumers are ditching those big, old-fashioned utilities which have been taking them for granted for far too long.'16 But new services and business models are also emerging: Click Energy, was created just 6
years ago in Australia. It aims to unlock a group-discounted energy offer for households. It launched
the OneBigSwitch campaign in 2011 in Australia, and has now extended it to Scotland, Ireland
and the US, with over 700,000 already registered 17. Mojo offers a subscription-based model, enabling households to buy electricity at wholesale prices. This new breed of competitors have a key advantage: they don’t own capital-intensive legacy assets. So unlike Utilities, they can focus 100% on the customer experience and service innovation — based on valuable data. They push prices down, eroding Utilities’ profits and investment capacity, breaking up the traditional relationship between Utilities and consumers.
IoT unlocks data-based value
The IoT will produce vast amounts of data to tell us more about human behaviour and provide us with systems to better predict and control energy usage. This data is already being put to good use by Utilities to help improve grid stability, responsiveness and supply/demand fluctuations. Although 'better data and online platforms have the potential to create smarter and more democratic options'13 - Utilities are not yet fully leveraging the data’s potential to respond to consumers’ evolving demands, through the creation of new products, services, customer engagements and retention models.
Outlook and recommendations
With IoT-driven disruption comes challenges but also opportunities. Ultimately, Utilities need to make strategic choices on their role and the scope of products and services they offer (fig. 3). They also need to protect revenues in the current model, and invest in key capabilities for their chosen future model.
Resist and wither
The depth and breadth of disruption driven by IoT is too great for Utilities to ignore. Unless Utilities take action, they may well be relegated to a mere powerbackup role. This is already happening, from zero-carbon hotels to self-sufficient data centres like Apple’s18, who rely on the grid as emergency backup. Apple’s largest data centre is powered entirely by renewable energy. The project is part of a larger push by Apple to switch torenewable energy sources, an effort which has resulted in 75% of Apple’s offices worldwide being powered by clean energy18.
Adapt and support
This is potentially the most appealing option for Utilities and can make a shortterm impact. Demand spikes at peak times are one of grids’ biggest challenges. As more power devices are added, it is key that these spikes aren’t accentuated. Utilities can continue their network optimisation investments, while building
big data and analytics capabilities to predict and match demand and supply. This approach would enable Utilities to re-establish themselves as reliable grid management experts, and remain prominent in the Smart Energy landscape. It brings lower financial and technological risks and is comfortably close to their
current business model.
Focus on established digitalisation and optimisation technologies - This will help keep risks low. The risks can be reduced further through strategic partnerships with technology leaders.
Secure the network - To boost real cyber security developments, common industry security standards should be developed. Utilities could help bridge the divide of a currently fragmented market landscape of competing technologies and standards.
Improve 'behind-the-meter' experience - Sleek user interfaces and selfserviceplatforms are becoming the norm, and should be key elements of all Utilities’ customer retention strategies.
Tap into the non-residential sector - The sector accounts for 73% of the UK’s consumption 19. From the public sector to large enterprises, all are pushed by regulations and business imperatives to reduce energy consumption and costs. This is an opportunity for Utilities to move into adjacent services and bring in their expertise in managing more complex infrastructure. A quick win option could be to help drive solar PV adoption.
Lead and thrive
However, Utilities in the long term will continue to face downward pressure on revenues and network costs (60% of the US grid will need replacing in the next 10 years 20), while other players reap benefits from decentralised systems and high-margin services. A fundamental strategic shift is inevitable.
Expand into behind-the-meter products and services - Over half of consumers are interested in buying products to make simple home energy-saving improvements and roof solar panels from their energy provider22,23. By offering energy-saving products and services, perhaps combined with financing plans or maintenance services, Utilities could create new revenue streams (e.g. British Gas’ Hive 24) and build long-term customer relationships. It would also help them decouple profitability from energy consumption.
Acquire or incubate innovation - With start-ups emerging at every point othe energy value chain – from nuclear generation25 to energy storage and data analytics, Utilities have an opportunity to accelerate their innovation and analytics capability, and cash in on the next technology or service breakthroughs - boosting their own attractiveness to investors.
Google recently spent $3.2 billion acquiring smart-home system Nest which has allowed the company to enter the smart energy market. In addition, Google is already an investor in power generation of clean energy with a value of $1.4 billion and holds a wholesale power license in the US21.
Partner to drive the smart energy infrastructure - Involvement in smart city, smart home and smart community infrastructure will be key26 for Utilities going forward. With 62% of consumers interested in home energy generation products 22/23, and with the majority of micro-grid deployments driven by communities or big businesses, the Utilities have an opportunity to bring (and sell) grid operational expertise and services. Utilities should also start building new partnerships across sectors, to help drive a new IoT platform approach crossing traditional boundaries – currently driven by ICT companies.
By 'aiming for Gold' Utilities can remain relevant, not just as key players in our economies, but as key contributors to positive social and environmental changes: helping to accelerate decarbonisation; and supporting clean, affordable and reliable energy for all.
Find out more about Squared Online: you can give us a ring on +44 (0) 20 7173 5938, or download the brochure to read about the course and the Squared experience.
- Cisco & BT White Paper: The Butterfly Effect, how smart technology is going to completely transform Utilities, April 2015
- Open Energi, The IoT Technology Meeting the UK’s Grid balancing needs faster than a power station, blog post 21 October 2015.
- The Internet of Things: making the most of the SecondDigital Revolution, UK Government Office for Science Report, December 2014
- BI Intelligence Estimates, BII The Internet of Everything 2015, slideshare.com, 30 December 2014
- Consultancy UK, Embracing Internet of Things boosts revenue growth, 10 August 2015
- Gartner, The Internet of Things Is a Revolution Waiting to Happen, April 2015
- Analysys Mason, research forecast report, M2M device connections and revenue: worldwide forecast 2013–2023, August 2013
- Accenture, Winning with the Industrial Internet of Things, January 2015
- Computer World UK, 15 most powerful Internet of Things companies 2016, 16 December 2015
- UK Government, UK Energy Statistics, Press Notice September 2015
- thegreenage.co.uk, The cost of a Solar PV system, accessed 25 February 2016
- PR Newswire, Microgrid Market Growing at 18% CAGR to 2019 in Terms of Revenue, 23 April 2015
- Theguardian.com, Five ways the Internet of Things could transform renewable energy, November 2015
- KRC Research, March 2015. Online quantitative research among 2,000 technology enthusiasts in Germany, Japan, the UK and the US
- BBCnews.com: What’s so smart about smart meters? 17 November 2015
- Thisismoney.co.uk, More than 6 million households switched energy firm in 2015, as 15% more hunt out a better deal on bills, 22 February 2016
- onebigswitch.com.au, onebigswitch.co.uk Inhabitat.com, Apple’s Largest Data Center is Powered by 100% Renewable Energy, 22 March 2013
- Department of Energy and Climate Change, Energy Consumption in the UK (2015), Chapter 1
- EY, Living on Borrowed Time, October 2013
- Connelly, T. (2016). Google’s Internet of Things company, Nest, announces the launch of its online store, The Drum, accessed 22 Feb. 2016
- The New Energy Consumer: Unleashing Business Value in a Digital World, Accenture, 2015.
- The New Energy Consumer Architecting for the Future, Accenture, 2014
- independent.co.uk, More Brits signing up for British Gas 'smart' heating app as Google enters the field, 20January 2014
- fortune.com, How startups can save nuclear tech, 6 July 2015
- 14th pwc global power utilities survey, May 2015