Digital transformation and the energy platforms of the future
The business impact of digital transformation in the energy sector is that it allows for distributed energy resources to be aggregated and shaped to provide reliable electricity, free from fossil-fuel, and at zero marginal costs. This is a game-changer. Similar to other industries that have undergone digital transformation, these new opportunities will inevitably give rise to “platform thinking”, which HBR defines as “a digital platform, [where] other businesses can easily connect their business with yours, build products and services on top of it, and co-create value. This ability to “plug-and-play” is a defining characteristic of Platform Thinking”.
The digital energy platform will herald the advent of a new age for electricity that will be organized around highly flexible and heterogeneous ecosystems. Right now, while we are far from plug and play, the history of open source shows that shared digital “plumbing” holds the key to interoperability. For example, if you look at the scaling of the Internet, it is clear that operating systems, like the Linux OS made hardware agnostic and enabled the abstraction of complexity. The Linux OS ships with 10,000 drivers! That’s how we have made the digital world possible. We need something like this in electricity if we are to meet global challenges.
Platform thinking and digital transformation will enable new entrants and incumbent utilities and transmission operators to integrate into the energy mix a highly distributed and potentially fragmented electricity market composed of variable energy sources and geographically moveable storage composed of millions of electric vehicles. The complexity of this cannot be managed with top-down control, but will require highly sophisticated and self-aware digital intelligence spanning previously distinct sectors such as transportation, telecommunications, banking, and built environments.
If utilities do not develop the internal talent to manage their own digital transformation, they will eventually be relegated to the business of “poles and wires”; the inability of incumbents to become digitally driven, will open the door to new digitally native businesses who will own the customer by providing the relevant products and services even if they themselves are not making electricity, because they will remake the market in the image of platforms and ecosystems.
Digital transformation assumes new business models and opens the door to new entrants from different sectors to enter the energy marketplace. Digital transformation will give rise to a new age when a monopoly or energy provider does not exercise power through control over physical resources but instead through the orchestration of digital and physical resources using data and communication technology. The strength of a digital platform is that it is supported by a host of smaller companies that co-exist, often transparent to the customer but always digitally integrated, and who provide complementary products and services that extend the value proposition of the platform.
What must change?
Meeting the future has not come easily for utilities and system/transmission operators. The culture of electricity and energy is generally rigid and not enthusiastic about change. Therefore, the first step for incumbent utilities and system operators will be cultural. In the current environment ICT has been outsourced and sole sourced, based on proprietary software. Incumbents who wish to move towards the platform need to create a digital culture organized around customer focus, network awareness, resilience, and repeatability. The electricity sector has a culture of control and safety and it has been incentivized accordingly. The result is that they have not been incentivized to change or innovate. While the fundamentals of physics will not change, to become a digital platform and responsive to the opportunities presented by distributed energy, the sector will need to develop a networked culture that mines and values data, organized around the customer who may represent both a load and a resource. Platform based businesses – whether LinkedIn, Facebook, eBay, Amazon, Uber, Airbnb, Google, or Apple – demonstrate, that the more data you acquire, the more ways you can make money. And, that represents a fundamental cultural shift for utilities.
The second change that incumbent energy companies need to create is infrastructural. They need to completely restructure their entire approach to ICT. In today’s world, energy companies pick a vendor and then invariably suffer through an acrimonious relationship ruled by vendor lock-in. In tomorrow’s world, 70-80% of their systems will be open source and collaboratively built through initiatives like those housed at the Linux Foundation. The remainder of their digital stack will be their “secret sauce”. This future requires ICT competency and the ability to build and support internal systems that are data-porous. Today, utilities and system operators use ICT, but they work in silos limited by various internal and external IT arrangements that do not enable data sharing.
This leads us to the third most important change. The energy sector needs to move towards adopting open source components and APIs that allow for network function virtualization and the exchange of data and information between parts of the business. That is what other sectors who have undergone digital transformation and moved towards platforms have found. The transformation of the electricity system is being hampered by proprietary software, that while standards based, does not provide the flexibility to manage the complexity of the emergent environment. Vendor “black boxes” that do not offer open APIs and open code, slow systems integration, which adds tremendous cost and time to projects. Rather than helping to abstract the complexity of hardware, the black boxes create new interoperability problems.
Only open source has demonstrated the ability to support global scaling of digital innovation. Look at media, banking, telecommunication, transportation, or retail to understand the diffusion patterns of digital technology. There are nearly a thousand companies working on over 75 projects at the Linux Foundation. These are the greatest companies of our time and they are building open source in a pre-competitive, collaborative manner that supports their core shared infrastructure, because it makes business sense! For digital platforms, the value is in data acquisition and data intelligence, not the digital plumbing – that’s a commodity.
The three most important steps for utilities and system operators to move towards a platform model and digital transformation are a combination of: 1) cultural transformation, 2) building internal ICT capacity, and 3) utilizing open source and APIs to facilitate systems integration, virtualization of functions, data acquisition, and data porosity.
Energy sector companies that can manage their ICT infrastructure utilizing open source and open APIs, and are able to acquire and use data well, will find new ways of understanding their customers that will allow them to participate in new distributed business models. At its foundation, the future of the business of electricity is about becoming data-acquiring and data-using companies.
The digital plumbing or code are the commodities of platform businesses – the LEGOS around which applications are built. This is why a stack composed of proprietary third-party software not only doesn’t make sense, but it is slowing our progress to 100% renewable energy. Moving beyond proprietary software is why most platform businesses are built on open source that is not copyrighted or exclusive; it’s the data and how it is used that creates value. Electricity customers and distributed producers constantly stream data about availability and usage. Being data savvy and platform ready will enable better quality of service and allow the monetization of this data by selling new products and services. That is the future of electricity.