Analysis: Who Will Capture Value Behind-the-Meter

25 Sep 2018

By Fereidoon P. Sioshansi, Ph.D.

The evidence that the place to focus on in the future is mostly behind-the-meter (BTM) is gaining momentum. In early September, Energy Post published an extensive interview with Jan Vrins, managing director at Navigant, a consultancy. He said the much talked about energy transition, “… has already happened. We have entered a new world in which growth will come from distributed energy resources …” including BTM products and services such as:

  • Energy efficiency;
  • Rooftop solar PVs;
  • EVs;
  • Home storage; and
  • Microgrids.

Vrins added: “Over the next 10 years, distributed energy resources will grow 8 times faster than net central station generation globally. In North America and Europe, growth may be even higher.”

He described the rapid changes taking place in the energy market, focusing on what he calls the “Energy Cloud” – a “network of networks” which connects everything to everything else.

According to Vrins, “This development will change our entire energy system, how it’s operated, who are the producers, who are the consumers – the whole dynamics. We project that it will create an additional $1.1 trillion in value by 2030 globally.” If it sounds like consultant-speak, that is what Navigant is, a consultancy.

Clearly, new value is likely to be created – no one can be sure how much – and even more important, who will be able to capture it.

As the global electricity system is becoming more decentralized and more renewable, Vrins worries that, “… there seems insufficient awareness of how the system will change in its totality. Renewable energy is partly centralized generation. But the system will move to decentralization: distribution-level generation and a whole range of products and services behind-the-meter. The value will move downstream.”

Vrins said that when he talks to utilities in Europe, “… they often tell me, ‘we understand what you are saying, but we don’t see business in it.’” He says this is a big mistake – missing the enormous shift in value moving downstream of the meter.

In the case of EVs, Vrins points out, “If all cars in the U.K. were EVs, together they will have enough capacity to supply the U.K., France and Germany with electricity. It’s an enormous capacity for storage and even for generation. If I drive home from work with my EV, my battery may still be 90 percent full. Most EV owners will only need to charge once a week. So this becomes an enormously valuable resource.”

He is, of course, not the first to have discovered the enormous potential and perils of millions of EVs that are likely to be added to the distribution networks around the world over the next decade or two. Vrins sees opportunities for what he calls vehicle-to-home integration. “And this becomes even more interesting when you combine it with home energy management systems, including rooftop solar with storage, and demand response systems.”

Vrins, like everyone else looking at BTM space, is keen on the potential role of intermediaries, aggregators and enablers – he calls them “orchestrators” – and says this will be “the fastest growing and most profitable business model category across the utility value chain.” Few would disagree.

“The network orchestrator,” according to Vrins, “will have the key role of optimizing the use of all the assets in the system … including linking the platforms with the centralized generation and distribution system.”

As is generally agreed, Vrins notes that there will still be a role for centralized assets – the key is to integrate the centralized with decentralized assets in such a way that leads to optimal outcomes. This is particularly true in the developed economies where the existing centralized infrastructure, the gird, is functioning well and has already been paid for.

Who can best perform the crucial role of the orchestrator? Surprisingly, Vrins believes that the orchestrator role can be best performed by vertically integrated utility companies – virtually dead or dying species in Europe and many other competitive markets where regulators have split them apart.

Vrins says that in places where they still exist, as in many parts of the U.S., “The (vertically integrated) utility company is in the best position to decide, for example, where microgrids should be built and how best to connect them to the centralized system. If everyone makes their own decisions, the result will be suboptimal.”

While few disagree with the suboptimal part, not everyone agrees that vertically integrated regulated utilities are the best to perform the critical – and potentially highly lucrative – role of the orchestrator. There is no question that they could play this role, nor any arguments that they have access to lots of useful information on the customers and the intricacies of the distribution network, and that is precisely the reason why many would not necessarily want them to assume the role of the orchestrator.

Vertically integrated utilities are not generally known for being innovative or customer-focused, nor fast moving or technology savvy. Why would anyone want to give them a carte blanche to play the orchestrator’s role?

In the case of Europe, Vrins says this role could be played by distribution system operators (DSOs), who would also have to be allowed to be active in generation and storage.

What happens to competition? Vrins says that, “…  would take place in the products and services offered on the platforms”, adding, “You would get a different kind of unbundling: horizontal instead of vertical.” The strict unbundling rules in the EU, however, could hamper the development of an efficient “Energy Cloud” system in Europe, according to Vrins.

Vrins observes that over time, “distributed energy resources are becoming baseload and central generation is becoming backup” but says that is not how many are looking at it, nor do many “… recognize and capture the value of … ‘non-wire’ solutions – local flexibility solutions.”

—Fereidoon P. Sioshansi, Ph.D., is editor and publisher of EEnergy Informer and president of Menlo Energy Economics.

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