Utility Business Model Jiu-Jitsu

Josh Gould, Advanced Research Projects Agency – Energy (ARPA-E)August 25, 2014

Agenda

• Introduction• The Need• Problems and Recommendations

2

Introduction

3

ARPA-E Mission

4

ARPA-E invests in transformational, disruptive technology development

5

cost

/ pe

rform

ance

existing learning curve

new learning curve

tippingpoint

transformational

transformational & disruptive

Steam-powered Cugnot (1769)

Benz Motorwagen (1885)

Ford Model T (1914)

Highly competitive but open, collaborative process

6

Markets and Techno-economics

Stakeholder Engagement

Skills and Resources

(value) (people)(implementation)

Technology-to-Market

Identify White Space

Create Programs

Select Projects

Manage Development

Advanced Technology

Utilities often a close collaborator

7

Over 50 research projects with utilities as partners, co-funders, end-customers, or advisors

Representing over $300M in total research spending

Technologies ranging from carbon capture, to energy storage, to power flow control, software, optimization, even DG

Results from utility collaborations

8

Nevertheless…vast potential, and even greater need, to improve engagement with disruptive technologies

20+ pilot projects$625M in total private sector

investment

30+ companies formed

Hundreds of patents

Wide variety of technologies

deployed, right now, to address real utility

needs

The Need

9

Technology adoption follows patterns

Ado

ptio

n

10

Time

• radio• TV• cable• refrigerator• home

ownership

• telephone• cellular

phone• PC• Internet

1: Michael Raynor, “The Innovator’s Manifesto,” adopted from Everett Rogers, “Diffusion of Innovation”

1

“S-Curve” Adoption:

Example: UK Smartphone Market

11 2: The Guardian, “The Death of the Featurephone in the UK and What’s Next”, April 30, 2014

2

Incumbents follow patternsA

dopt

ion

Time

Dismissal

“There is no reason for any

individual to have a computer in his

home.”

-Ken Olsen, Founder, DEC

Differentiation

PC vs. Operating System: “IBM never imagined Bill Gates would sell DOS to

anyone else”

-CBS 60 Minutes, Triumph of the Nerds

DisplacementDiscount vs. Full Service Retail:

“Sears let arrogance blind it to basic

changes taking place in the American marketplace”

-Forbes

12

DERs resembling familiar pattern

13

Source: Technical Report - NREL/TP-6A20-56290 June 2013

Cumulative U.S. Grid-Connected PV Installations

DERs may reach 33% of US installed capacity by 2020; EIA, DOE, FERC

Source: IREC: 2013 Annual Updates and Trends, October 2013

DG not the only disruptive force

14 5: California Independent System Operator (CAISO)

5

DG not the only disruptive force (cont)

15

DG not the only disruptive force (cont)

16

DG not the only disruptive force (cont)

17

‘All Of The Above’

Scale of challenges in CA alone

18

~50 GW System Peak

GHG requirements to

1990 levels

16+ GWs of load center generation shutdown due to

retirements

Zero Net Energy Building Codes

12 GWs of Distributed Generation

2+ GWs of Storage

3 GWs of Demand

Response

1.5 million Zero Emission Vehicles

But predictability has limits

19

Ado

ptio

n

Time

Traditional (Predicted) S-Curve

First Technology

Second Technology

Third Technology

6: Clayton M. Christensen, ‘Exploring the Limits of the Technology S-Curve. Part I: Component Technologies,’ ‘Production and Operations Management 1, no. 4 (Fall 1992): 340.’

6

Not everything resembles S-Curve

20

Predicts infrastructure adoption less well

Is it a “first”, “second” or “third” technology? (see previous slide)

Does not predict where or if technical improvements intersect with market needs

Fooling with axes can make anything look like an S-Curve

Therefore, we do not know whether – or where – we are on a S-Curve

List of other things we don’t know: Long

21

Therefore, let’s develop a strategy that does not depend on us knowing much!

Mix of centralized vs. decentralized

generation

How much PV will cost in X years

Whether competitive technologies (e.g.,

small CHP, fuel cells, cheap storage, etc.) will

displace incumbents

Who wins elections and the policies/ regulations

winners implement

Good strategies & business models enable optionality

22

Principles Do not rely on clairvoyance or predictions about the future

Minimize costs of adjustment to multiple future scenarios

Maximize potential “upside”

Minimize risk by being well-positioned for rapid adjustment and multiple scenarios

What follows

23

Buying “calls” and “puts” on the future is less expensive and more effective than betting the whole balance sheet

Not a business model or strategy for a specific vision of the future

Rather an attempt to minimize risk by creating structure and processes capable of adapting to multiple visions

Problems & Recommendations

24

Problem #1: Organizational Silos

Corporate

Generation Transmission Distribution Planning

Scope of Technology Benefits

Innovator has contacts in and approaches only

one group

Technology deemed not relevant or not discussed

with other groups

Result: Organizational silos kill

valuable technology

25

Recommendation #1: Assign Responsibility

Corporate

Generation Transmission Distribution Planning

Innovation/New Technology Team

Comprised of, or closely tied to, each part of the organization. Team mandate and metrics based on locating, screening, and evaluating

technologies. NOT “volunteers”

26

Problem #2: Unclear Processes

27

SourcingWhatever walks in

Evaluation

Ask around if time permits; evaluate on limited information and

unclear criteria; unclear who makes final decision

EngageDiscussions in “free time”; involve others in their “free

time”Establish

If budget/pilot site/public funding, is available, establish a pilot project (often w/ different employees or

departments)

ExecuteIssue a press release on the pilot

Incorporate

Adopt the technology if the device doesn’t fail and someone likes it

Recommendation #2: Establish Stage-Gate Process

28

SourcingCross-functional team incented to find the best technologies pro-actively (e.g.,

tradeshows, govt, technical conferences, etc.)

Evaluation

Rigorous evaluation process involving clear metrics established beforehand by technology “wish list”, roadmap, or strategic plan

EngageAppropriate functions and

expertise in front of innovator(s)Establish

Clear pilot establishment criteria; pilot objectives communicated and

agreed to by all before pilot

Execute

Rigorous and consistent measurement against objectives; sourcing/engagement/evaluation team involved

Incorporate

Clear criteria and processes for pilot technologies to enter procurement (if successful)

Problem #3: Lack of Transparency

29

Guidelines for evaluating technologies not communicated externally

Key organizational or technical challenges not communicated externally (it might signal weakness)

Regulators not aware of – and therefore cannot reward – utility efforts to source/evaluate external technology

Recommendation #3: Transparency in Utilities’ Self-interest

30

Tell the world what you want – you’re more likely to get it!

• Builds pipeline of relevant technology• Best/first looks at technology• Regulatory goodwill (provided words are backed by

action)

Transparency can be a competitive advantage: