Brattle Principal William Zarakas has authored an article published in The Electricity Journal that discusses how the evolving utility business will be defined by the shape and structure of services and transactions taking place over the utility platform.
The utility platform is at the core of most views of the utility of the future (UoF). For one, to be realized as an effective resource, distributed energy resources (DERs) will need both access to the electricity grid as well as a way to interact and settle accounts with customers. The infrastructure needed to facilitate the resulting transactions has been referred to as the distribution or utility platform.
In the article, Mr. Zarakas explains that a platform, in everyday parlance, typically refers to a set of systems and/or processes over which services can be provided. However, it has a slightly different meaning in economics, and also in the context of the utility of the future. There, a platform is rooted in the concept of two-sided markets, or the situation in which buyers and sellers are brought together through an intermediary that operates an ecosystem enabling them to efficiently transact.
The utility platform can be thought of having two layers: the first layer consisting of the physical infrastructure including the wires and associated functionality that connect customers to the distribution grid; and the second layer being the functionality needed to enable a large number of market participants to financially engage in peer-to-peer transactions and the systems keeping track of their exchange and settlements.
Mr. Zarakas notes that most successful platforms, the same ones that are cited in many UoF vision statements, have facilitated market growth, making consumers better off – either through the realization of lower prices, by allowing for new and valued products and services, or both. The importance of value-added services has not been lost on utility executives, but despite significant efforts, few have come to light – although a few bright spots, such as electrification applications, may be on the horizon.
The outlook for value-added services and market growth via the platform is important to consider as utilities and policymakers weigh how and how quickly to deploy the utility platform. A widely applicable baseline path might involve a two-pronged approach: increased piloting of transactive platform functionality combined with leveraging the digital communications and smart functionality already deployed via utility investment in automated metering infrastructure (AMI).
It will be difficult, if not impossible, to generate sufficient revenues to offset the traditional utility revenue requirements with transaction-based fees from services based on bill reductions as their primary value propositions. And so, having the platform business model completely overturn the traditional utility business model is a tall order in the near term. It may be quite different in the longer term if peer to peer transactions involving electricity and energy-related services become the norm. Even then, though, it may be a stretch to turn the traditional utility business model on its head, but a more transactive platform arena will undoubtedly bring its own set of new regulatory issues, including more robust debates concerning access and competition issues.
The article, “Two-sided Markets and the Utility of the Future: How Services and Transactions Can Shape the Utility Platform,” is available here.