Platform business models have redefined the modern economy. From titans of personal computing and e-commerce like Apple and Amazon, to ubiquitous financial services that we use with hardly a second thought (think ATMs and credit cards), industries everywhere have reoriented from one-directional pipeline delivery systems to multisided platforms on which information and services flow in many directions between actors.
This platform concept has also been suggested for the electric utility sector—often under the title of a “distribution system operator,” or DSO. Concepts from platform markets hold tremendous promise for addressing many of the modern challenges on the grid, including the integration of distributed energy resources (DERs) and the business challenges associated with that. Yet despite the promise and seeming appropriateness of such concepts, the innovation and reimagining of producer/consumer relationships that platform markets can offer have been slow to be introduced on the grid.
There are reasons for this. The electricity system is immensely complex, and many roles, regulations, and physical systems need to be considered before a fully baked DSO or platform design can be realized. But it would be a mistake to conclude from this that DSO platforms are out of reach or too difficult to implement in the electricity industry. In fact, DSO innovation is already happening—in some cases in unexpected places—and suggests that what we imagine as the DSO may or may not be the DSO we get. And that’s okay.
Those and plenty of other insights came out of a discussion on this topic late last year at the eLab Summit, part of Rocky Mountain Institute’s Electricity Innovation Lab (eLab). For two days in Austin, Texas, eLab members dug into the topic of “DSO Models: Roles, Revenues, and Incentives.” Although the group did not “solve” the DSO question, some building blocks and beacons of light emerged that suggest where the industry could be headed.
DSO proposals abound
A bevy of opinions and proposals have been thrown about for what form a DSO system should take. Most notably, at least in the U.S., is the New York REV process, where regulators have decided to put the utility in the role of “distributed system platform” (DSP) provider—a variant on the DSO concept that emphasizes the role of integrating DERs to achieve system goals, including network efficiency, growth in new customer services, and greenhouse gas reductions. As outgoing New York Public Service Commission Chair Audrey Zibelman said recently:
If you’re a distribution utility, it’s not enough anymore to just supply the wires to the consumer; you need to be the platform: to interconnect consumers with suppliers, to reduce the cost of transactions, and to convert data to information to help consumers achieve their goods in a more efficient way. You have to be the integrator of distributed energy resources and the enabler of those markets.
On the other side of the country in California, utilities are required to file “distribution resource plans” (DRPs), in the Golden State’s own approach to modernizing utility and distribution systems to better integrate new DER technologies and capabilities. Meanwhile, at ComEd in Illinois, the utility has taken the lead in promoting the idea of transforming the utility to a platform business model. There, the CEO and senior utility management have publicly stated their desire to remake the utility business model into a smart energy platform model.
It is not only regulators and utilities that hold this vision. To achieve their full potential, many solar companies and other third-party service providers also see the opportunity afforded by more transactional platforms on which to sell services and reach customers. These include ideas for a more expansive role for utilities, as suggested by a recent Smart Electric Power Alliance article, which lays out the idea for utilities to leverage their platform role to provide the infrastructure backbone for smart city initiatives.
More questions than answers
As proposals and discussions pile up, and recognition of the need for some type of DSO system becomes more widely held, the complexities of building a DSO system are also revealed. Many Internet businesses and other platform markets are not capital-intensive business models (think AirBnB and Uber), and are not beholden to legacy investments and regulatory systems. But remaking the distribution grid as a multisided platform has proven hard to do. Still, some of the same value-laden opportunities afforded to digital businesses could also be taken advantage of on the grid, where they may unlock significant economic savings in reallocated capital expense and gains in economic efficiency.
More than most other industries, electricity is already heavily regulated, with features of natural monopoly and significant barriers to entry (some barriers are real and others are imposed by entrenched market structures). This requires addressing thorny questions in public and institutional forums, such as public utilities commission proceedings or policy debates.
Just a few of the major questions that confront DSO development are:
Who should serve in the role of DSO? There are competing views on whether this is a natural and appropriate role for incumbent utilities, if new independent organizations should be established (as was done in establishing independent system operator markets), and whether the DSO should be a for-profit or a nonprofit entity.
What is the revenue model of the DSO? Platform markets are replete with many revenue structures, including transaction-fee models, advertising, and premium services. There is also a choice between supplier-derived versus consumer-derived revenue structures, with important connections to willingness to pay and relative value derived by each side of the market.
What products or services should be transacted in DSO markets? There is a range of perspectives on whether familiar products for energy and capacity will be the basis of markets, or whether distribution-specific products should be created, like local congestion relief or reactive power. Some also see DSO markets as more service oriented rather than based on trading in commodity products. Examples of services include customer-oriented offerings such as risk management for bill volatility, or programs that relieve customers of direct responsibility for their energy decisions.
How to coordinate distribution-level markets with bulk system operations? Questions here include how to coordinate scheduling and dispatch procedures, as well as ensuring that double payments or other financial complications do not arise.
As these questions suggest, regulators, utilities, and industry experts are finding that, although the DSO concept can appear relatively straightforward and attractive at first glance, it tends to get more complicated the closer you get.
DSO innovation is happening
This is not reason for despair. In fact, the mistake may be in assuming that we need to know the answers to every DSO design question at the outset. Although the above design decisions are important and consequential, more will be learned from experiments and demonstration projects than from abstract discussions that attempt to settle everything beforehand. A few notable examples were reviewed at the eLab Summit in December, which are instructive for where DSO design might be headed.
One hotbed of experimentation is New York State, where utilities under the REV process are being pushed to experiment with DSP concepts. For example, ConEdison is implementing a “virtual power plant” (VPP) on 300 homes in New York City and is testing new approaches to aggregate DERs, including solar and storage, to replace the need for traditional investments. The technical potential for the VPP is proving very promising, but scaling the project may be challenging, including how to make the VPP approach compatible with existing tariff designs and how to allow aggregated resources to bid into New York Independent System Operator markets.
Another exciting experiment comes from the other side of the world. The Australian Renewable Energy Agency (ARENA) has sponsored a project to pair technology with competitive market structures in its Decentralized Energy Exchange (deX) project. At the heart of deX, DSO functions are provided by a software-as-a-service layer that reviews availability and price bids from multiple vendors to aggregate demand response and related services from individual homes. The software, provided by GreenSync, selects bids on a least-cost basis in order to deliver required energy or demand reductions to the distribution network operator (i.e., the utility). While the project’s scale is small, it introduces an interesting potential into the DSO debate: Rather than a utility vs. third-party paradigm, can some DSO functions be as simple as writing software and integrating it into the network?
Hints of the DSO future may also be emerging from outside the traditional electricity sector. For example, revolutionary opportunities may emerge from blockchain-enabled systems, which could transform the ways in which data is collected and shared, not to mention how payments and other contracts are enforced. Numerous organizations and initiatives (including the Hyperledger project at Linux Foundation, and RMI’s own Energy Web Foundation) are rapidly staking out this space to develop the technology and business structures that will define new applications.
What does this all mean? Clearly we have some way to go before the DSO vision is realized. And there are certainly some big questions to wrestle with about DSO identity, revenue structures, and more. This is the reality of being in a sector that has massive legacy systems—both physical and institutional—and that is critically important to the economy and to national security.
But while those discussions proceed, it is essential that we also make space for experimentation and incremental learning. Leading states and utilities, and especially new entrants and innovators, are showing glimpses of what a platform-based electricity system may look like. These efforts should be accelerated and their successes scaled. Then, in all likelihood, those questions will start to get answered along the way.
Image courtesy of iStock.