Amidst a near-constant stream of headlines about corporate renewable energy procurement, another megatrend inescapably driving the energy transition - digitalization - has come onto the scene with similarly impressive speed and potential impact, both cost savings and other.For example, the application of data analytics in power plants and networks alone could save up to $80 billion annually through 2040 according to the International Energy Agency (IEA).
This is certainly one driver for energy utilities, where we see digitalization influencing investment strategies. Since 2014, global investment in digital solutions by utilities has grown 20% annually, according to the 2017 report Digitalization & Energy from the IEA, reaching $47 billion in 2016. That year, such digitalization investment was 40% greater than worldwide investment in gas-fired power generation.
This growing investment in all things digitalization - including Big Data, artificial intelligence (AI), and blockchain - is reaching into every corner of the energy sector. For example, in an October 2017 report, accounting and business advisory firm BDO Global noted that mergers and acquisitions between energy/renewables enterprises and technology companies active in Big Data, artificial intelligence, etc. have been steadily increasing. Moreover, average deal size has jumped up significantly, from $500 million pre-2016 to $3.5 billion in Q2 2017.
The trend is similar and no less striking in the energy blockchain space as well. At EventHorizon 2018 earlier this year, Jules Besnainou of Cleantech Group noted that investments in energy-related blockchain projects had skyrocketed from less than $10 million in 2016 to $739 million across 53 deals in 2017. Q1 2018 alone saw $359 million, with record average deal size.
Although energy sector - and especially utility - investment in digitalization has been growing, it has not grown equally. For many, investment in digitalization has so far translated into investment in hardware, rather than software. According to IEA numbers for 2016, hardware such as smart meters, smart grid infrastructure, and electric vehicle charging stations accounted for the majority of the nearly $50 billion invested. Meanwhile, electricity systems software and industrial energy management software accounted for just a tiny sliver of the overall digitalization investment pie.
To a degree, this investment lag is understandable. With energy sector digitalization still in its relative infancy, investment has first focused on enabling infrastructure—the hardware—which provides the basis for software and digital applications. But just as countries such as the United States saw a major wave of electricity grid infrastructure investment in the late-middle 20th century, it is now time to usher in a new wave of investment in digitalization, especially software.
Bloomberg New Energy Finance (BNEF) in fact expects that to be the case, with the energy sector digitalization market growing to $64 billion by 2025. BNEF expects the greatest growth in relation to energy management systems and customer-sited distributed energy resources (DERs).
So how do utilities, corporates, and others bridge the energy digitalization investment divide ahead of them? And how do they surmount the learning curve that follows that investment?
Rolling out new digitally connected assets like smart meters, intelligent transformer stations, networks of EV charging stations, or even transactive DERs that provide grid services to utilities and revenue to C&I companies comes with the requirement of learning how to incorporate and make use of these new technologies, which is a challenging task on its own. But the real challenge ahead is the development of digital business models that focus on the data itself and not the asset that is used to collect the data.
Many utilities have internal innovation teams and programs to develop from within. Certainly, some utilities around the globe have initiated their own accelerator programs (e.g., innogy’s Innovation Hub, the Free Electrons program) or joined existing accelerators (e.g., rockstart, startupbootcamp, TechStars) to get in contact and learn from start-ups how digital business models in the energy sector could look like. And many - including global energy companies, utilities, and grid operators - have become affiliates of organizations that strive to accelerate technology across the energy sector.
Likewise, corporates should also take note, as - for example - blockchain-based platforms for increasingly digitalized services such as renewable energy certificate tracking and carbon accounting could streamline and automate processes that currently plague corporate sustainability directors. As corporate energy strategies get ever more sophisticated alongside evolving climate, renewable energy, and sustainability strategies, digitalization if properly harnessed promises to unlock a new era of possibility.
By Marius Buchmann, Strategic Advisor, Energy Web Foundation
