Electricity Network Transformation Roadmap Executive ... · Electricity Network Transformation...

Electricity Network Transformation Roadmap

- Executive Summary -

Insights from Global Jurisdictions,

New Market Actors &

Evolving Business Models

August 2016

The Accenture contribution to the Energy Networks Australia and CSIRO, Electricity Network

Transformation Roadmap.

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Copyright © 2016 Accenture All Rights Reserved.

August 2016 3

Audience & Purpose

This report seeks to derive insights and potential lessons from events and trends around the world, especially for electricity distribution network operators. Its broad aim is to inform energy market stakeholders across the value chain, with findings and insights for transmission and distribution businesses, energy retailers (established new entrants &), regulatory bodies and policy makers. Its findings will be particularly relevant for utility executives. The report intends to inform and provide insights. It does not make specific recommendations for electricity market reform.

The report sets out to answer the key question in three parts

This report takes an in-depth look at seven global jurisdictions and seven diverse ‘New Market Actors’ (NMAs) to help

inform the future of electricity markets.

KEY

QUESTION

What & where are

the most relevant &

innovative

electricity business

models and market

constructs that can

inform the future of

electricity markets

to 2027?

Which global jurisdictions have

commenced major transformations

in response to disruptive trends?

Q1

Which New Market Actors have

the potential to drive industry

disruption?

Q2

How do the learnings and insights

inform the evolution of business

models out to 2027?

Q3

7 jurisdictions assessed based on their ambitions, drivers, motivation and capabilities

7 diverse New Market Actors reviewed for their disruption to the status quo electricity business models


August 2016 4

Lessons and recommendations

From our research into the jurisdictions and new market actors globally, we saw broad trends towards open markets

and mechanisms to incentivise new entrants, customer choice and Distributed Energy Resources (DER) integration,

which New Market Actors (NMAs) are eager to fill and exploit. These can be summarised into seven key insights:

1. Evolving network operator business models would benefit more from longer term visions and pragmatic

roadmaps rather than large ambitious or just incremental programs that do not adequately consider existing

levels of capability.

o It is important to balance the scale and pace of reform with the capability base of the existing utilities

and market structure.

o Risks and delays could jeopardise the ability of the regulatory bodies to sustain the momentum and

address stakeholder concerns.

o Lessons from New York REV program and the achievements to date from California and the Netherlands

underline these points

2. A vibrant and competitive retail sector aids third party investment, innovation and could help align to overall

customer outcomes.

o Jurisdictions that have strong retail competition facilitate innovation and ‘market animation’

o New regulatory process and incentives to succeed and promote partnerships help to advance

innovation.

o The UK and the Netherlands demonstrate this.

3. Visionary electricity rate making reform that incorporates new revenue streams helps to align network

operators with enhanced customer outcomes.

o New and replacement revenue streams are required to facilitate alignment between consumers, new

market actors and network operators.

o Ratemaking reform needs to address the burden of investing in new capabilities and technologies by the

incumbents.

o New York is a standout example, but there are interesting developments in California and the

Netherlands too.

4. A focus on DER interconnection standards and protocols enhances certainty and helps facilitate DER uptake

and business model evolution.

o Progressive regions have focussed a lot of attention on standards and protocols for DERs.

o California’s AB 327 requires a ‘plug and play’ approach to connecting distributed energy resources to

the grid which has proved to be an effective model in stimulating investment.

5. Wholesale market participation as well as grid services could open up new value streams for DERs and

enhance grid reliability.

o DER uptake could be facilitated by wholesale market access by opening up new revenue opportunities

for aggregators.

o California is the most progressive US state in this regard.

6. Government aided ‘experimental room’ and innovation could drive infrastructure development and encourage

network operators to partner to build new business models.

o Unlock the value of the entire energy ecosystem by stimulating Innovation, enhancing retail

competition, creating network incentives and revenue streams and overall alignment of all parties

o The Netherlands like a number of other jurisdictions shows the importance of regulatory and economic

dispensation.

7. New Market Actors

o NMAs provide an opportunity to partner and co-create value.

o But Distribution Network Operators (DNOs) also face the risk of losing revenue through zero sum innovation by NMAs.


August 2016 5

Report Summary

In response to disruptive forces accelerating and driving seismic shifts in how we generate, buy, sell and share

energy; markets across the globe are rapidly transforming their energy ecosystems. New York has implemented a

‘Reforming the Energy Vision’ program, Hawaii has a target of 100 per cent renewables by 2035 and The Netherlands’

peer-to-peer community models show significant ambition. Accenture research, in partnership with the Energy

Networks Association and CSIRO in Australia, reveals that these are not incremental reforms – but rather, they are

driven by a clear vision of the future.

While some regions have pressing drivers for change (including a disaggregated/privatised market, high competition,

high prices and high solar, e.g. in Australia), many have traditionally taken a more ‘incremental’ approach to reforms;

devising one intervention or rule change at a time. Yet, with technology and disruptive forces rapidly gaining

strength, incremental reforms risk inconsistency and sub-optimal outcomes.

• .

Why is this? Globally we see six ‘Fault Lines’ that have come rapidly into ‘play’ to drive change and engender

opportunities for new energy players.

The reviews indicate 6 Global ‘Fault Lines’ around which reform is taking place


August 2016 6

To remain competitive and relevant, the energy sector should learn from global leaders leapfrogging traditional

approaches and focus on defining new visions and establishing ambitious targets to inform the development of new

market models.

• Evolving network business models will benefit more from longer term visions and pragmatic roadmaps that

also address rates and revenue streams.

o Lessons from New York REV and successes from California and the Netherlands show that it is important to

balance the scale and pace of reform with the capability base of the existing structures.

• A vibrant and competitive retail sector aids third party investment, innovation by New Market Actors (NMA)

and can help align to customer outcomes.

o Jurisdictions that have strong retail competition facilitate innovation and ‘market animation’.

o New regulatory process and incentives to succeed in these circumstances and promotes partnership.

• Wholesale market participation can open up new value streams for DERs and enhance grid reliability.

o DER uptake can be facilitated by wholesale market access by opening up new revenue opportunities for

aggregators.

o DER interconnection standards and protocols accelerate DER uptake and business model evolution

While the issues being dealt with across the various jurisdictions show similarities, the responses are very different.

We have observed responses along two major spectrums: Visionary versus incremental plans for transition and

market versus mandate based approaches to effect the required changes. These are further discussed below.


August 2016 7

Jurisdictions

This report covers seven jurisdictions which were chosen based on their objectives, drivers, motivations and current

capabilities. In all jurisdictions we see broad trends towards open markets and mechanisms to incentivise new

entrants, customer choice and DER integration

Region Jurisdiction Relevance

US New York Whole of market transformation approach. Unique in scope, vision and ambition.

California Highly progressive state with the greatest solar uptake in the US. High AMI coverage

Texas Only fully competitive market in the US. Low prices, smart meters. Low DER incentives

Hawaii Innovative environment borne from very high prices and unique geography

Europe Netherlands Spawning of innovative new business models. Liberalised market, evolving regulations

UK DNOs focussed on asset efficiency due to RIIO. Retailers leading innovation

APAC Australia Disaggregated / privatised market. High competition, high prices and high solar

These changes are being implemented across two dimensions: incremental versus visionary programs and mandates

versus markets based reforms. In some areas, for example California, regulators are mandating DER interconnections

and grid storage. Others, such as New York, are highly visionary and rushing to establish new open and competitive

markets.

The visionary undertakings of jurisdictions like New York with its ‘Reforming the Energy Vision’ program, Hawaii’s

target of 100percent renewables by 2035 and The Netherlands’ peer-to-peer community models show significant

ambition. These are not incremental reforms – they are driven by a clear vision of the future.

In contrast, Australia, while having some of the most pressing drivers for change, has undertaken reform at a more

incremental pace on the back of major reforms in the late 1990’s with the establishment of the National Electricity

Market NEM, followed by disaggregation, privatisation and full retail contestability. More recently with the Power of

Choice reforms and other smaller rule changes we seem to mirror many of the proposed changes in other

jurisdictions.

But the disruptive forces we are seeing are becoming stronger. Incremental reforms risk inconsistency and sub-

optimal outcomes.

Level of capability including AMI / DMS / SCADA Frontrunners in market reform

Markets

Mandates

Re

form

Ap

pro

ac

h

Drivers for Change

Declining consumption / Prevalence of DER’sTraditional Supply / low prices

UK

New York

HawaiiTexas

Netherlands

Australia

Illustrative

California

Jurisdictions Comparison

APAC AMERICA EUROPE

Australia NY CA TX HI UK NL

Ambition Low High High Low High Medium High

Drivers High Medium High Low High Medium Medium

Motivation Medium High High Low High Medium High

Capability Medium Low High High Low Medium High


August 2016 8

New Market Actors

Many New Market Actors (NMAs) have started to appear in the market. Many of them are in either pilot or early

commercial stages but others have a strong core business that provides a platform for extended and rapid growth.

New Market Actors are encroaching on network operators as well as established retailers disrupting demand and

opening up competing relationships with customers.

Seven ‘New Market Actors’ (NMAs) were chosen based on their industry-disrupting business model and value

proposition. Each of them had made deliberate decisions to be ‘disruptive’ and to consciously create the opportunity.

We see their value propositions fall into 3 non-exclusive categories:

A central theme of our findings from NMA analysis and interviews was the co-creation of value. In some cases, value

is being created by the NMA to share only between themselves and customers. However, many others are ‘co-

creating value’ by potentially offering valuable services to network operators. It is this balance of co-creation of value

and disruption to existing models that is the main challenge for network operators from NMAs.

Our research and interviews of these NMAs highlighted nine themes that nearly all said were issues that needed to

be addressed to enable and facilitate their new business models.

# Theme Examples

1 New tariff/ pricing models E.g. balancing the proportions of fixed charges and locational pricing for localised energy supply and consumption

2 Wholesale market interactions

E.g. trading of distributed generation in wholesale markets

3 Facilitating open access to the grid

E.g. allowing and encouraging greater DER connections and providing transparency on network connections and standards for DERs

4 Ring-fencing E.g. providing clarity about ownership, operation, control, and accrual of revenues for DER and edge of grid revenue opportunities

5 Consumer Protections E.g. allowing innovative new energy supply and consumption models while always protecting consumer interests

6 Grid Automation E.g. having the capabilities and technologies to monitor and control third-party distributed generation and/ or storage

7 Communities and Microgrids

E.g. providing a clear pathway for community owned microgrids so that value could be captured by the local community while ensuring back-up power is still supplied

8 Enabling new retail models E.g. allowing new models of energy sharing without involving retail licensing obligations

9 Enabling data sharing E.g. increasing the access to consumption, network and technical information to allow optimisation of the grid and provide value back to consumers


August 2016 9

Changing Business Models

Globally there is now a recognition that the traditional network centric model is no longer ‘fit for purpose’.

To move into a new way of operating, several key constraints need to be overcome. Today, in many countries,

customer programs and tariffs do not fully consider the true costs and benefits to the grid. Many energy solutions

fail to address specific locational and temporal grid needs, while shifting costs to non-participating electricity

consumers.

Physical and operational grid constraints and insufficient wholesale and distribution market opportunities prevent

network operators, its customers, and third parties from maximising the potential value of DERs.

Energy technology advancements and ambitious policy goals have outpaced the existing network operator business

model and regulatory processes. Existing business models promote infrastructure investment by providing a

regulated rate of return on capital expenditures, and are therefore perceived as discouraging alternative options

This report describes 5 business models which evolve towards the ‘Distribution Platform Optimiser’ - a model that

integrates distributed energy resources and facilitates the market for DER services. One of the market design

questions will be how DERs could be coordinated in a way that unlocks systemic efficiencies and which part would be

responsible to coordinate and optimise the interaction between wholesale and distribution markets.

The most disruptive model represents a possible future called the ‘Energy SupraNet’. This is the ultimate endpoint of

a fully connected society linking smart cities and all infrastructure components for an optimal and balanced outcome

for its citizens.

5 Business Models on the pathway to a New Energy Ecosystem

A global view of reforms highlights that the grid, while still an essential part of the industry, would need to change to

accommodate new forms of supply and consumption. The grid is increasingly becoming a platform for energy

exchange, facilitating new businesses and as yet unseen opportunities.

Microgrid Connector

Energy Services

“Obligation

to Serve”

“Commitment

to Optimise”

Commodity Delivery

BDSO

Decoupled integrated utility

Remove volume bias and disincentive to

optimise

Distribution platform optimiser

Provides optimal outcome for overall system

Platform access provider

Provides neutral access to network to independent

players

New technology in existing management

paradigm

Smart grid operator

Distribution Platform

1 2

3 4

Distribution PlatformIntegrator & Trader

A

5

Energy

SupraNet


August 2016 10

.

Interestingly, some jurisdictions with less sophisticated networks, lower energy prices and less developed market structures are the frontrunners in energy market reform.

Enter the visionaries – the time for incremental change has passed. Insights from the world’s most dynamic markets show that new directions are being

rapidly forged. Some jurisdictions are leapfrogging traditional market liberalisation

reforms or are in the progress of establishing radically new market structures. Others

are progressing through targets, mandates and cross industry convergence.

Plan for change – or risk being left behind. There are disruptive market actors springing up taking and creating new market

opportunities. Globalisation means disruption occurs quickly. Technology

developments and consumer trends take little notice of existing regulations, opening

the door to innovation and market forces providing a platform for new entrants. As

seen with Uber in the taxi industry, policy makers and regulators must act now or

risk having to play catch-up.

Set the Vision - start running in the same direction. DERs are creating major disruption. If not addressed in a comprehensive way –

facilitating the ecosystem to create value whilst optimising the grid, the industry

risks creating significant sub-optimal outcomes. New market actors are facilitating

and accelerating these changes. What is needed is a compelling industry vision and

a simple roadmap that aligns all parties. Where possible, take the learnings of other

jurisdictions to accelerate with renewed vigour.

The Distribution Optimiser Model – the new status quo. New business models for network operators are unfolding. These are not standing

still but are further evolving. It is clear that the Distribution Optimiser Model is

becoming a target model in most similar jurisdictions around the world. However,

this has a number of variants and is in many ways requires jurisdictional specific grid,

regulatory and customer interventions.

What this ultimately means is that a ‘wait and see’ strategy would inevitably fail and result in lost opportunities for both businesses and citizens.


August 2016 11

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August 2016 12

Copyright © 2016 Accenture All Rights Reserved

For more information, please contact:

Simon Vardy Managing Director – Accenture Strategy, Australia & New Zealand +61 405 182 051

Frank Ochel Senior Manager – Accenture Strategy, Australia & New Zealand +61 432 326 710

About Accenture Accenture is a leading global professional services company, providing a broad range of services and solutions in strategy, consulting, digital, technology and operations. Combining unmatched experience and specialized skills across more than 40 industries and all business functions – underpinned by the world’s largest delivery network – Accenture works at the intersection of business and technology to help clients improve their performance and create sustainable value for their stakeholders. With approximately 384,000 people serving clients in more than 120 countries, Accenture drives innovation to improve the way the world works and lives. Visit us at www.accenture.com.

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