A NEW BUSINESS MODEL? THE UTILITY AS THE NETWORK ORCHESTRATOR:
You’ve probably noticed that a lot of articles and blogs these days begin with the now-obvious observation that the grid is moving from a centralized model to a decentralized one. Often, these pronouncements are offered in a tone that seems like the speaker is wrinkling his brow with worry, wringing his hands … and probably sweating a little, too. Such anxiety is likely over doing it.
In reality, the opportunities presented by distributed energy resources (DERs) far outweigh the challenges that ubiquitous adoption of them may bring. DERs are going to help us green up our grid with more renewables, clean up our atmosphere, improve reliability and form new alliances between power providers and customers.
To bring these benefits about, power providers will need to expand their business models a little. Instead of being asset builders who make their money off the generation they construct and energy they send whizzing down the power line, it’s time to look at making money from the role of orchestrators who direct the energy, storage and flexibility DERs can deliver.
A profitable business model
In October 2015, Public Utilities Fortnightly ran a great article produced by analysts from Navigant. In it, the authors mention findings from Wharton School of Business scholars who’ve determined that most businesses operate within one – sometimes more than one -- of four business models, which include:
- Asset builder (like utilities)
- Service provider
- Technology creator
- Network orchestrator
The Navigant team doesn’t exclude utilities from the orchestrator role. In fact, they mention that the State of New York has such a model in the works for utilities through their Reforming the Energy Vision (REV) initiative. It turns utilities into Distributed System Platform Providers (DSPPs) who coordinate behind-the-meter customer loads, generation and storage assets with the needs of both customers and the grid as a whole, including the New York Independent System Operator (NYISO).
How does this happen? At one point in the 2014 proposal on NY REV, state Department of Public Service staff wrote, “This will require the DSPP to use localized, automated systems to balance production and load in real time while integrating a variety of DERS, such as intermittent generation resources, and energy storage technologies. The DSPP would manage DER products and services in real time, using technologies that allow the flexible and instantaneous use of generation or demand response to meet customer and system needs.”
OK, we might be a little biased, but want to throw in a mention of our own Symphony by Enbala platform here because that's exactly what it was designed to do -- provide comprehensive control and optimization of grid-edge assets to deliver load-based ancillary services, renewable firming, regulation service and more. Using a platform like this, utilties and energy service providers are networking renewable generation, energy storage, demand response, substation capacitors and other grid devices to present a highly flexible and dispatchable resource. In tracking network states every two seconds, system operators have all the stats needed to optimize DER assets based on availability, capacity, ramp rate, output and consumption.
In other words, you now have what you need to automate that orchestrator role -- one that utilities should embrace. Why? Because it can address so many of the problems DERs are presenting utilities right now, and it’s a highly profitable approach to doing business.
After reading that article by the Navigant team mentioned earlier, we looked at the Wharton research on business models, too. An article in Harvard Business Review (HBR) succinctly spotlights the findings those B-school professors uncovered after parsing 40 years of data from S&P 500 companies to see how business models impacted financial performance.
What they found was that orchestrators receive market valuations that average two- to four-times higher than average valuations of companies with other business models.
Orchestrators outperform companies with the other business models in both revenue growth (CAGR) and profit margins. The numbers the researchers reported are startling. Asset builders had a CAGR of 8.4 percent from 2010 through 2012. Service providers came in at 6.3 percent, and technology creators chalked up a 12.6 percent rate. In contrast, the orchestrators achieved a CAGR of 17.5 percent.
On the profit margin front, asset builders did a little better. They weighed in at 15 percent in 2013. Service providers only reaped 9 percent. Technology creators brought in a healthy 23 percent. But, orchestrators still earned more: 24 percent.
Given the results of their study, the Wharton scholars counseled readers of their HBR article: “Divert at least 5 percent to 10 percent of investment capital to activating your networks,” they wrote.
LEARN FROM OTHERS:
Again, we might be biased here, but belive this is excellent advice for utilities and grid operators. By leveraging the DERs connected to your power-system networks, you can strengthen relationships, derive many benefits and provide value back to customers, who could now participate in wholesale markets through your aggregation programs.
And, putting such programs in place won’t be all that difficult. After all, you already have the platform you need to get customer-sited DERS and your systems working together in harmony. All you need to do is leverage it and direct the orchestra.
Isn’t it time you think about picking up the baton and putting together your own proof of concept around network orchestration to see how this new way of thinking can benefit your organization?
For information on how Symphony by Enbala helps utilities and grid operators orchesterate distributed energy resources, take a look at our brochure.