Thursday, June 02, 2016

Energy needs a digital transformation

I've had a long involvement in the energy industry, having cofounded two startups in the sector, one that is now listed on the ASX.

Why energy, when my background is digital? Because the industries are extremely similar - far more similar than archaic regulations environments allow them to do.

Like the media, for most of the twentieth century the energy industry was dominated by a relatively small number of producers, who generated the 'content' (energy) that societies consumed.

Where humans had news agencies, cars had petrol stations, where humans had phone networks and broadcast TV and radio connecting them to their neighbors and the world, their household appliances had gas and electricity networks connecting them to the power they needed to operate.

With the arrival of the Internet, still facilitated by those human communication networks, suddenly anyone could become a producer - a content creator, editor, publisher and distributor building a global audience.

The most successful content services became peer-based networks where a central organisation provided the technical infrastructure while individuals - not large corporations - provided the content that flowed through the system, powering the minds of the world. Services such as YouTube, Facebook, Wikipedia and others became the facilitators for billions of minds to create, share, learn from and debate content - while the former dominant content producers increasingly had to open their work to community co-creation and adapt hoe they created and distributed content to remain relevant.

The energy industry has been slower to reach this state, with network and power suppliers remaining constrained to a few monopolistic operators, albeit with some loosening of user choice and more market-based competition for wholesale and retail power supply.

Increasingly as household adopt solar and large scale renewables become cost-effective the balance is shifting. We have seen situations where wholesale energy prices have fallen to zero, where renewables have supplied 'baseload power' (a concept long used to justify why nations had to continue to rely on burnable fuels - now being requestioned).

There's numerous case studies of households that with an investment in solar have seen their electricity bills fall to nothing (in fact I live in such a household), and with the household batteries already in production it becomes almost feasible to disconnect from the electricity grid.

However the real evolution, similar to digital, has been towards having a ubiquitous network that facilitation millions of small energy generators. Where any household, business or connected device could be generating electricity and having the grid distribute it to where it is needed.

This peer-to-peer style network reflects the impact of the Internet on content, on banking, on buying and selling goods, services and skilled labour, where a more pure capitalistic market with low entry barriers and low arbitrage opportunities exist.

This is the future that is possible for the energy market - just like the media market. Not a few large producers distributing to a large number of small consumers, but a market of big and small producers distributing on-demand when and where consumers need it.

In this world there are no artificial tariffs on supply which support artificial profits for large companies, there are no restrictions (beyond those required for safety) on generating or consuming power from the grid. Everyone is a generator to the extent desired, everyone is a consumer to the extent required, just like content on the Internet.

This type of thinking is hard for those immersed in the energy market - particularly for the incumbent players - government and privately owned power stations, distribution networks, energy markets and regulators.

However it should be slightly simpler for the industry given the example of the media industry that has gone before it, the transport industry which is rapidly heading that way and the manufacturing industry which isn't far behind.

How fast and how painful the transition will depend on governments being effective change managers - embracing, endorsing and supporting the process rather than resisting it actively (with steps to restrict involvement) or passively (by lagging on legislative change and policy).

in Australia we still have an opportunity for governments to defy history and get ahead of the curve, rather than painfully lag it. However I anticipate there's only a few years left for them to act to be leaders rather than laggards - and in transformations this profound there's no middle ground to be a follower without lagging.

The digitalisation of the energy market has already started. My household, like thousands of others, has an annual electricity bill of zero.

Once we have batteries in place (the first generation are on the market this year) we move to being a profitable generator of electricity that is also more network blackout resistant. The grid will no longer exist to provide us with all our 'content' (power), it will be our distribution network instead.

We're not early adopters - there's millions of solar installations on top of Australian households.

And it would be better for all Australia if governments are prepared and ready for the shift that is arriving before, rather than after it arrives.

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