business models for distributed energy resources: value ... · energy storage is proliferating...

Scott BurgerIberdrola Annual Meeting 2/22/17

Business models for distributed energy resources: value pricing and efficient tariff design Scott Burger

EPRG & CEEPR European Energy Policy Conference 7/7/17

What we will speak about today

2

1. The power sector is evolving…

2. What is a business model, anyway?

3. The structure of DER business models

4. Tariff design and the economics of distributed PV and storage

businesses

5. Q&A

The MIT Utility of the Future Study

The power sector is evolving…


Today, four trends are forcing the power sector to evolve once again…

Image source: NYISO, 2016. “Distributed Energy Resources Roadmap for New York’s Wholesale Electricity Markets”


1. The power sector is decentralizing…

Many emerging resources are inherently more distributed than incumbent resources

Germany’s non-renewable power capacity

Source: Carbon Brief, 2016. “Mapped: How Germany generates its electricity”

Germany’s complete power capacity


2. The power sector is digitizing…

Deployment of information and communication technologies is rising as costs plummet

Left image source: McKinsey, 2015. “The Internet of Things: Mapping the Value Beyond the Hype”; Right: MIT analysis of EIA data

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2007 2008 2009 2010 2011 2012 2013 2014 2015

Transport Industrial Commercial Residential Total

Average selling prices of various MEMS devices

AMI deployment as a % of metered sites in the U.S.


3. The resource mix is changing…

Renewable energy resources are on the rise globally

Renewable energy as a percent of electricity production

Source: MIT analysis; BP Statistical Review of World Energy data

0%

10%

20%

30%

40%

50%

60%

70%

US Japan Australia UK China Germany Spain Italy Denmark Canada

2004 2014


4. The power sector is increasingly interconnected…

The fate of the electricity sector is increasingly tied to transportation, heat, computing, and more


What is a business model,

anyways?

10The MIT Utility of the Future Study

These four trends are placing major pressure on utilities globally – This

financial pressure is spurring restructuring, new business models, and more

Stock price relative to May 24th, 2011

%

RWE

NRG Exelon

Source: Yahoo Finance

E.ON

S&P 500

+60.89%

-53.46%

-34.74%

-69.35%

-18.51%


“Regulators set rates; utilities get guaranteed returns; investors get

sure-thing dividends. It’s a model that hasn’t changed much since

Thomas Edison invented the light bulb. And it’s doomed to

obsolescence.” – David Crane

This pressure drives many to predict dramatic change to the business

structures used to deliver energy services – This change is often depicted as

being potentially disruptive or deadly

“It would be foolish to dismiss the potential for major changes in the

utility business model” – Theodore Craver, Jr.


Despite the focus on changing business models, there is still a lack of

clarity around what exactly is changing – in one review, 56% of studies did not

provide only a loose definition or no definition at all of a business model

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Business Model Definition Loose Definition No Definition

Percent of studies of business models that explicitly define the business model

%

Source: Zott et al., The Business Model: Recent Developments and Future Research,

Journal of Management, 2011


Using a simple business model framework can help us contextualize

ongoing changes – Business models are not monoliths

Source: Osterwalder & Pigneur, Business Model Generation, John Wiley and

Sons, 2010

Key

Partners

Key

Activities

Value

PropositionCustomer

Relations

Customer

Segments

ChannelsKey

Resources

Cost

Structure

Revenue

Streams


Distribution utility business models are fundamentally different than

competitive energy service businesses – Activities, resources, costs, revenues,

and, as a result, value propositions, are all regulated due to monopoly power

Source: Osterwalder & Pigneur, Business Model Generation, John Wiley and

Sons, 2010

Key

Partners

Key

Activities

Value

PropositionCustomer

Relations

Customer

Segments

ChannelsKey

Resources

Cost

Structure

Revenue

Streams


The structure of DER business

models

16The MIT Utility of the Future StudySource: MIT Utility of the Future Study AnalysisCustomer Segments

Ele

ctr

icit

y S

erv

ice

sRevenue Streams

Solar PV and Solar-plus-storage business models rely heavily on value

pricing – These business models reflect differing degrees of market integration

17The MIT Utility of the Future StudySource: MIT Utility of the Future Study AnalysisCustomer Segments

Ele

ctr

icit

y S

erv

ice

sRevenue Streams

Solar PV and Solar-plus-storage business models rely heavily on value

pricing – These business models reflect differing degrees of market integration

Sunverge

SolarCity/

Tesla

Invenergy

Nexamp

Trina

18The MIT Utility of the Future StudyCustomer Segments

Ele

ctr

icit

y S

erv

ice

s

Reven

ue S

tream

s

Energy storage is proliferating across the value chain, from the utility to the

distributed scale – Similarly, energy storage business models reflect differing

degrees of market integration

Source: MIT Utility of the Future Study Analysis

19The MIT Utility of the Future StudyCustomer Segments

Ele

ctr

icit

y S

erv

ice

s

Energy storage is proliferating across the value chain, from the utility to the

distributed scale – Similarly, energy storage business models reflect differing

degrees of market integration

EDF Renewable

Energy

Source: MIT Utility of the Future Study Analysis

Reven

ue S

tream

s

Stem

Tesla

LG Chem


Tariff design and the

economics of distributed PV

and storage businesses


A critical feature of PV and storage business models is that their pricing is not structured to reflect underlying system costs, but to offer value relative to utility supplied power – Naturally, these systems are sensitive to utility tariff structures

38

Range of future utility

prices: PU, t

Power Price

¢/kWh

Years0 1 2 3… …N

Predefined future PV lease

or PPA price: PPV, t

PU, 0

PPV, 0

Source: MIT Analysis, United States Department of Energy, Company filings

Portfolio Average

Metrics:

- Generation: 1,391

kWh/kW

- PPA Price: $0.13/kWh

- PPA Escalator: 2.2%

“We believe that our primary competitors are traditional utilities that supply energy to our potential customers” – SolarCity 10k


These emerging business models require the creation of a level playing field for all resources

The best way to create a level playing field (and thus more affordable electricity) is to dramatically improve prices and regulated

charges for electricity services.


?

1. Ensure that all prices and charges are non-discriminatory, technology neutral, and symmetrical

Electricity rates should be based only on the injections and withdrawals of electric power – this requires the use of improved metering infrastructure

-4

-2

0

2

4

6

8

10

12

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Po

we

r C

on

sum

pti

on


2. Progressively improve the granularity of price signals with respect to both time and location

Sp

atia

l gra

nu

lari

ty

Temporal granularity

Distribution nodal LMPs(DLMPs, real & reactive)

Intermediate DLMPs(substation/zonal/other)

Wholesale LMPs +distribution losses

Wholesale nodal LMPs

Wholesale zonal LMPs

Real-timespot price

Day-aheadhourly price

Critical peakpricing

Time-of-usepricing


3. Implement forward-looking peak-coincident network charges and scarcity-coincident generation charges to align consumer decisions with system costs

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

$/

kW

h

Hour

Energy charge Generation capacity charge Network capacity charge


4. Recover “residual” network and policy costs without distorting marginal consumption or production incentives


5. Carefully consider which costs are included in fixed electricity tariffs to avoid inefficient grid defection

Grid defection savings

Grid defection costs

Ele

ctr

icity T

ariff

Com

ponents


6. Explore new methods for addressing distributional & implementation challenges without sacrificing efficient signals that reduce costs for all

1. Cross subsidies: Lump-sum bill credits or surcharges can restore desired cross-subsidies

2. Spatial and temporal variability: Pre-payments and hedging arrangements can address bill variability

3. Low income support: Assistance to those that can prove need can augment subsidies built into today’s tariffs


Scott BurgerIberdrola Annual Meeting 2/22/17

Thank you! Scott Burger – [email protected]

EPRG & CEEPR European Energy Policy Conference 7/7/17

business models for distributed energy resources: value ... · energy storage is proliferating...

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