TODAY’S STUDY: THE OPPORTUNITY IN THE ENERGY CLOUD

The Energy Cloud; Emerging Opportunities on the Decentralized Grid

Mackinnon Lawrence and Eric Woods, 2Q 2015 (Navigant Research)

Executive Summary

Emerging Energy Cloud

The power sector is undergoing a fundamental transformation, shifting from a centralized hub-and-spoke grid architecture based on large centralized generation assets like fossil fuel, hydro, or nuclear power plants toward an increasingly decentralized electrical grid that makes use of distributed energy resources (DER). The growth of DER is being accelerated by broad discussions and evolving regulation on carbon emissions, a more proactive consumer or prosumer, and increased financial viability compared to traditional generation because of continuous lower price points to produce and install DER. This shift away from traditional power plants encompasses a diverse suite of technologies that go beyond DER. Energy storage, energy efficiency, demand response (DR), and the advanced software and hardware that enable greater control and interoperability across heterogeneous grid elements are all key components of the emerging energy cloud.

Organized to help manage supply and demand across the grid, the energy cloud shares many characteristics with cloud computing. As with the IT cloud, these dynamic networks can enhance the efficient allocation of DER—including solar, wind, and energy storage systems— across a broad customer base. Greater stakeholder collaboration and maximizing the potential of decentralized power generation are among the energy cloud’s important benefits as efforts to modernize an aging grid continues to gain momentum.

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Four key trends underpin the evolution toward the energy cloud:

» Increased broad discussion, development, and implementation of new regulations to reduce carbon emissions (e.g., Environmental Protection Agency [EPA] 111d and European Union [EU] Carbon Emissions ruling).

» The transition toward an increasingly decentralized grid architecture as a result of a dramatic rise in DER.

» Greater customer choice—more clients want control over their electricity usage and spend, as well as when and what type of power they buy or, in more extreme cases, the ability to self-generate and sell onsite power back to the grid.

» Increasing availability of data related to the edge of the electrical grid, enabled by healthy growth in smart grid infrastructure.

The end result of this transformation is a reimagining of how we generate, store, and consume energy in the next 20 years. More specifically, the energy cloud represents a transition from one-way power flow to a dynamic network of networks supporting two-way energy flows at the periphery of the grid.

This paper offers a perspective on the emerging energy cloud, describing its basic elements and examining its likely impact on the power utility sector. The growth in the deployment of key technologies like distributed solar PV, energy storage, and virtual power plants (VPPs) is profiled in order to demonstrate both the velocity and scale of an evolutionary shift toward the energy cloud. A discussion around how this paradigm shift will affect the traditional utilityconsumer relationship offers insight into challenges facing utilities as their customers embrace distributed generation (DG) and opportunities provided by new entrants to engage more proactively in the market. Finally, this paper explores the emerging strategies that utilities are taking to both embrace change and thrive in this evolving environment.

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The Energy Cloud

The energy cloud is both the result of a fundamental shift in the way electricity is generated and distributed as well as an evolution of the traditional relationship among stakeholders across the electrical grid, particularly between utilities and their customers. As a concept, the energy cloud represents a wide range of strategic, operational, technological, commercial, environmental, and regulatory changes that are transforming the traditional utility model for energy provision. More practically, the energy cloud is an emerging platform on which advanced technologies and solutions may be integrated and compete for market share in a dynamic marketplace.

Four key trends underpin the evolution toward the energy cloud. First, regulations that tighten restrictions on carbon emissions are accelerating a shift toward renewables and efficiency and away from fossil-based centralized generation. In June 2014, as the centerpiece of President Obama’s Climate Action Plan, the Environmental Protection Agency (EPA) released the Clean Power Plan, a proposal to regulate CO2 emissions from existing fossil fuel power plants under section 111(d) of the Clean Air Act. Compliance options that are expected to be included in state implementation plans include energy efficiency programs and low or zero carbon generation, including distributed renewables. The regulation is certain to face litigation after it is finalized. However, many states and utilities are moving forward with low carbon plans that include both energy efficiency and distributed renewables despite the uncertainty surrounding the final regulation. Across the Atlantic, the European Union (EU) is on track to meet its target of reducing greenhouse gas emissions by 20% compared to 1990 levels by 2020. This target has driven a variety of policy actions taken by European countries to reduce emissions, many of which have spurred an increasing penetration of energy efficiency and distributed renewables, particularly distributed PV.

Second, fueled in part by the rapidly declining cost of distributed energy resources (DER) technologies like solar PV and energy storage, a rapid increase in the deployment of DER is driving a shift toward distributed generation (DG). Navigant Research estimates that between 2014 and 2023, DG will displace the need for more than 320 GW of new large-scale power plants globally. 1 Navigant Research’s Global Distributed Generation Deployment Forecast report estimates that new DG capacity additions will exceed new centralized generation capacity additions by as early as 2018.

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Third, evolving energy consumer demands and enablement of customer choice are also accelerating a shift toward the energy cloud. Customers are increasingly focused on engaging in both the purchase and sale of energy, and if appropriately incentivized, can provide other services such as balancing, voltage support, and voluntary load management that address broad industry goals of greater efficiency and resilience. Efforts to transition the distribution grid away from a commodity business to one focused on service through improved rate design, liberalization of net metering rules, and other initiatives will drive greater innovation across the electrical grid.

Fourth, smart grid infrastructure is beginning to reach a threshold sufficient to drive increasing digitalization of the electrical grid. A significant rise in spending by utilities to replace and upgrade infrastructure supports this long-term growth trend. Increased grid automation and demand response (DR) spending across the advanced energy economy, for example, reached a combined $70 billion in annual revenue globally in 2014, according to Navigant Research estimates. 3 Advanced distribution management systems (ADMSs), for example, have seen an explosion in investment as utilities increasingly grapple with complex challenges associated with integrating smart grid IT/operations technology (OT) deployments. Navigant Research’s Smart Meters report, for instance, estimates that smart meter penetration has approached 50% in North America and is expected to reach 70% by 2020. 4 Similar saturation trajectories are observed in Europe and Asia Pacific, as well.

The emergence of the energy cloud—and the underlying trends and technologies that are enabling its operation—provide an early peek into a broader paradigm shift in the electric utility industry. Not unlike disruptive challenges that led to dynamic change in the telecom industry, for example, the energy cloud requires incumbent players to be considerably more flexible than today’s business models allow in order to both accommodate the degree of technological change transforming the grid and thrive in an increasingly competitive marketplace. Ultimately, the emerging energy cloud will be far more dynamic, responsive, and democratized than what current infrastructure can support…

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Energy Cloud Enabling Technologies

The energy cloud sits at the confluence of broad technology trends influencing the power generation, grid infrastructure, built environment, and transportation environments. Renewable and fossil fuel DG, energy storage, and technology configurations such as microgrids and virtual power plants (VPPs) are the workhorses within the energy cloud landscape. Yet, embedded hardware (such as smart meters and smart inverters interconnected through advanced supervisory control and data acquisition [SCADA] and ADMS capabilities) and software form the glue that binds the energy cloud together (see Figure 2.3) and enables its operability. Greater penetration of these hardware and software solutions leads to enhanced DR opportunities and more robust energy efficiency capabilities, such as advanced building energy management systems (BEMSs). Drawing from examples spanning Navigant Research’s Energy Technologies, Utility Transformations, Building Innovations, and Transportation Efficiencies research programs, this white paper explores two key questions as they relate to the energy cloud across four technology categories:

» What is the scale of the opportunity? How transformational will the impact of the technology be on the traditional grid? What is the scale of the investment opportunity?

» What is the velocity of change? What is the rate of change in which the energy cloud will evolve? When will key technologies reach a level of critical penetration?

The four technology categories profiled below include:

» Solar PV

» Energy storage

» BEMSs

» VPPs

Representing just a small piece of the energy cloud landscape, these technologies, along with the services they enable, demonstrate that the scale of the investment opportunity in the energy cloud is substantial and the rate of change or evolution is occurring rapidly. Each is deployed at scale today. Viewed together, they represent nearly $1 trillion in potential cumulative investment over the next decade.

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