World Economic Forum
This article originally appeared on the World Economic Forum Global Agenda.
The electricity industry is in the midst of a transformation, as technology and innovation disrupt traditional models from generation to beyond the meter.
Three trends in particular are converging. First, electrification is taking place across large sectors of the economy such as transportation and residential heating. Second, decentralization of resources has increased, spurred by the sharp decrease in costs as well as by public support for distributed energy resources (DERs) like distributed generation, distributed storage, energy efficiency and demand response. Third, digitalization of the system is mounting, both before the meter with smart metering and digital network infrastructure, and beyond the meter with the advent of the Internet of Things and a surge of power-consuming connected devices.
Together, these trends at the “edge” of the electricity grid pave the way for an energy system where traditional boundaries among producers, distributors and consumers are blurred – and the complexity of system governance intensifies.
What’s the payoff? This smarter, more decentralized yet more connected electricity system has the potential to increase reliability, security, environmental sustainability and asset utilization, and create new opportunities for services and business.
What consumers want and expect from their energy providers has also evolved rapidly. A sizeable portion of today’s consumers (both residential and commercial) is increasingly focusing on reduced carbon emissions, increased choice, and higher reliability and security. While consumers may articulate a desire for these attributes and an appetite to engage in their energy usage, most of the grid-edge technologies are still in the very early stages of adoption, and even this early adoption requires a meaningful push from subsidies or regulation. In the past half century, reaching mass adoption for innovative products (penetration above 50%) has decreased to about 15 to 20 years and has relied on “rational adopters” who focus on cost and convenience.
Given this, how can adoption of these new grid edge technologies be accelerated in the coming years and done in a cost-effective way that meets what consumers describe as their new set of needs? The challenge for policy-makers, regulators and the private sector is to help make these technologies more economical and convenient, and thereby capitalize on consumer preferences and enable the transformation of the system.
To accelerate adoption, a combination of “push” from regulatory and policy action and a “pull” from private innovation, marketing and product development will be needed. For the vision of a grid edge to fully materialize, there needs to be a substantial effort made to overcome four key challenges in consumer engagement, regulation, infrastructure and business models.
1. Consumer engagement
A number of factors influence consumers and make it difficult to achieve high engagement in the current system. Today, electricity is perceived as a commodity, making consumer engagement with new technologies a costly and difficult endeavour. Electricity also has a low share of consumers’ wallets, costing about the same as a daily latte in the United States. Furthermore, consumers spend little time thinking about their electricity bill – likely due to the complexity and inconvenience. In practice, the majority of consumers do not adopt new technologies unless it is both economical and convenient.
The current regulatory paradigm hinders distributed resources from providing their full value to the system and often creates incentives that promote the inefficient development of DERs, which is not based on system efficiency and distorts their optimal use in the grid. New grid edge technologies and services are breaking through traditional boundaries and regulatory paradigms that have been successful for the past century. They need to advance, though, to further facilitate the adoption of technologies and keep pace with an evolving system.
Uncertainty around ownership and cost recovery is preventing key stakeholders from the public and private sectors from deploying enabling infrastructure – the infrastructure that complements the grid and will be the backbone of the future electricity system. This new infrastructure is crucial in order to increase consumer convenience, accelerate adoption, and capture the full value of technologies such as storage, demand response and electric vehicles. Charging stations for these, as well as smart meters, broadband communication infrastructure, network control and automation systems, are all fundamental elements. Setting up the appropriate regulations and laws for data ownership and transfer are also essential for the digital world of the future.
4. Business models
Based on changes happening at the grid edge, new consumer segments are emerging. The industry has traditionally treated consumers in a very standard, one-size-fits-all fashion, and has not gone through the same level of needs-based consumer segmentation as other industries. As consumers vary and combine different technologies, they open up opportunities for new, sophisticated segmentation. New segmentation models will find ways to maximize the value to consumers according to their preferences.
Regulation, infrastructure, consumer engagement and new business models are the keys to unlocking these sizeable opportunities and dealing with the challenges of this transformation. Through the Future of Electricity platform, the World Economic Forum is gathering and analysing practical examples and best practices within these four areas in order to develop recommendations for both the public and private sectors.