From smart meters to digital grid
By Paul Micallef and Rob Doepel
It's hard to believe that current energy systems were designed more than 100 years ago and have only undergone minimal changes since. These systems were entirely fit for purpose in a time of vertically integrated, centrally supplied generation models. But that's changing. Today's power-hungry world demands more resilience and flexibility from the grid. Future energy systems must be sustainable, affordable and reliable. And advanced technologies are driving that transformation now.
Digital grid - the digitization of electricity, gas and water networks - is opening the door to multidirectional communication between the utility, its network and customers. This connectivity is enabling greater reliability, availability and efficiency of the grid than ever before. According to the EY report Digital grid: powering the future of utilities, the vast majority of utilities are embracing this change, with 92% of executives indicating plans to invest in digital grid over the next 12 months. Forty-six percent of these same survey respondents also said digital grid was one of their top three strategic programs.
Smart meters are an important part of the digital grid evolution - the furthest edge of the network ability to link energy companies, investors, customers, communities and regulators. Research estimates that 700 million smart meters will be installed globally by 2020 and that US$500b will be spent on smart grids in the next five to seven years. In the UK alone, for example, the Government has mandated that every home should have a smart meter by 2020 - a project with a price tag of £12b.
Smart meter adoption is a positive shift forward for an industry facing disruption. But how do you define a successful smart metering program?
Utilities must look beyond the initial rollout phase. Of course, deploying smart meters on time, on budget and without destroying the business case is crucial. Real success, however, requires strategies that stretch beyond this phase to drive long-term sustainable growth and maximize the investment in smart.
Steep costs can make taking a long-term view of digital grid more difficult, however. Current business models are still primarily driven by volumes, in which a large fixed cost base to run the distribution network and retail business needs large numbers of customers to stay profitable. And now, with more governments around the world mandating smart meters, installations are set to intensify further and continue to pressure budgets.
The situation for new entrants is slightly different but no less challenging. These players, founded with more of a tech and data focus, aren't saddled with the same cost base, but must create value new propositions for customers and deliver them consistently. They, too, must keep pace with disruption.
New entrants are, however, unburdened by the business model constraints of traditional utilities and are quickly capitalizing on this flexibility to exploit the new digital grid world - and destroy the volume-based business model of the past two decades.
The EY report As smart meters get smarter, who gets the power? shows that the independent market in the UK (compared with the Big 6 players) grew from 1% in 2012 to 14% in 2016 and is projected to be as high as 30% by 2020. These numbers should be motivation enough for energy retailers not just to assess traditional approaches on cost and benefits but to rethink their business entirely.
If Smart 1.0 was the learning phase before mass rollout, and Smart 2.0 is the phase of deploying smart meters and related infrastructure that many are currently experiencing, then Smart 3.0 is the reshaping of business in a smart-enabled world. Embracing that evolution requires large retailers to think beyond cost efficiency and benefits realization, and focus on the following:
- Capital program rigor - news headlines reporting smart meter program cost overruns or installation issues are not uncommon. Most of the time, that comes down to a failure to identify and measure key cost drivers and report accurately on total cost deployment.
- Advancements in digital - new technologies such as machine learning, for instance, are an important part of a new energy system future. This kind of technology will make it easier to automate the processing of smart meter events.
- The new Smart 3.0 business model - Smart 3.0 is about commercializing and maximizing smart. That means pivoting to and embracing new technologies and the new customer agenda, and driving new business models for a world of marketplace economies, peer-to-peer economies and platform-based economies. This demands an evolution of the way companies are currently working and identifying how current processes and systems fit within a smart-enabled landscape.
The choices ahead may be difficult but energy companies must recognize that the industry will evolve - with or without them. Carving out a role in a new energy future requires companies to confront current challenges with an eye toward tomorrow. Smart meters may be the immediate concern but a digital grid program doesn't start and end there.
Digital grid can, with the right approach, transform utilities into resilient, responsive and innovative businesses able to withstand and evolve with future disruption. So, is your business strategy ready for a future digital grid?
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.