The countdown to digital reinvention for utilities

It is now clear that the way electricity is generated and consumed is changing fast and irreversibly towards a more distributed model. Renewables are being connected to the grid faster than any time before. Solar panels are increasing in popularity as costs continue to plummet and grid delivered electricity continues to rise. Smart meters are being rolled out giving unique insight into consumer behaviour. Consumers are connecting devices that allow for greater control of energy consumption in the home, and allowing them to become prosumers. Electric vehicles (EVs) are increasingly becoming a common sight on our roads.

This distributed model requires a significant level of digitization in order to work efficiently and effectively, as it relies much more on many-to-many transactions. The shared digital architecture of the industry needs to be reconfigured and businesses will need to transition to a more inclusive and far reaching digital infrastructure, capable of far deeper levels of asset inclusion. The Internet of Things (IoT), the proliferation of sensors, distributed energy resources (DERs), behind the meter connected devices and EVs will generate vast quantities of unstructured data. Technologies like artificial intelligence (AI) will act as the ‘brain’ to deliver the active management required for the future digital grid.

This distributed model creates opportunities throughout the energy value chain for consumers, retailers, grid operators and new entrants. It allows for better resilience on the network from storms and catastrophic events. But it also creates significant risks:

• The need for a simultaneous increase in system flexibility (grid reinforcement and interconnections, storage, demand-side response and other flexible supply).
• Regulatory or rate changes impacting cost recovery of assets.
• Shrinking revenues as energy consumers leave or consume off grid.
• Increased regulatory scrutiny as the cost of operating the network is socialized over a smaller base, sending tariffs higher.
• Business interruption from cyber-attacks.

Up to now, the biggest unknown has been time

The one dimension that is often missing when assessing the impact of technological-driven disruption is time. How quickly will change happen? Or more precisely, what will happen when and in what order? Are there any critical tipping points that may signal a change in market dynamics irrevocably? Do utilities have enough time to prepare and get ready? Which technologies will co-exist?

Addressing the unknown

To help answer these questions, we have teamed up with one of the world’s leading global analyst firms, to calculate the interaction and amplification of a number of convergent technological trends including battery storage, solar PV, AI and grid edge technology.

The analysis, which we will publish later in November, has identified three tipping points, which we believe signal when these technologies will conspire to fundamentally alter the dynamic of the market forever.

To our surprise, while the timing of these tipping points varies across different regions of the world, the variations are not that significant and more importantly, this reinvention is coming sooner than most of us expect:

• Tipping point 1 (“Grid cost parity”…in the next 5 years): this is the period when we will see “Grid cost parity” of non-utility solar plus storage systems. This is the point when the cost of locally generated and stored electricity equals the retail price of grid-delivered electricity.
• Tipping point 2 (“EV Parity”…in the next 10 years): this marks the time when the price and performance of battery electric vehicles (BEVs) reaches parity with combustion engine vehicles. More importantly, this is the time when mass “behind the meter” storage will become available to most consumers
• Tipping point 3 (“Grid parity”…in the next 20 years): this marks the point when the pure cost of transporting electricity exceeds the cost of generating and storing it locally.

The timing of these tipping points is critical and the implications of these tipping points could be vast. Will we see a surge in the adoption rate of distributed electricity? Will we see a sharp rise in the number of consumers – both residential and commercial – exiting the grid, or at least significantly reducing their consumption from the grid? What will be the financial impact of these lost customers to the utilities? Which new business models will we see utilities adopting? Will investors start to value energy companies differently? Will the grid become economically unsustainable in its current model?

These implications will demand that consumers, energy companies, regulators and governments alike make choices that will shape the future energy landscape. These choices are starting to become clearer, but the acceleration that we predict suggests that many of the decisions required could already be late. I will consider the implications of these tipping points in my next blog and what they mean for utilities.

Fundamentally, I believe the way electricity is generated and consumed is changing irreversibly toward a more distributed model. The future of our system is decarbonized, decentralized, digitized and democratized. And that change is happening faster than we think.

Please continue to let me know your thoughts and take part in the debate @EY_PowerUtility/#EYEnergy.

For more of my perspectives on the energy future, visit Energy Reimagined. For more EY insights on the power and utilities sector, visit ey.com/connected.