Favourites: 28 September 2010 –In this second article of a series of three, Anthony Szatow and George Quezada explore what new business models capable of realising value from distributed energy may look like. The final article will examine the conditions that enable innovation.

Our first article gave a sense of the huge value of distributed energy (collectively distributed generation, energy efficiency and demand management) and how that value could be realised. We explored how re-visioning strategic direction through a backcasting process with collaborators, be they government, industry, researchers or community, can help galvanise collective action and effective partnerships for transforming energy systems.

We introduced the idea that backcasting has an ethical sub-text, because it asks us to imagine the future as it should be, and to work backwards from that vision to determine how to get there. Backcasting helps us break out of thinking that may be constrained by our sense of what seems possible or practical today.

Let’s now take creative licence and whet the innovation appetite by imaging the energy provider of tomorrow.

This starts by picturing a living, breathing ecosystem. Perhaps it’s a place you know well from time spent camping, bushwalking, or cycling. Perhaps you have an image of an iconic ecosystem such as the Great Barrier Reef…

Over time, predator and prey fluctuate in number in that ecosystem, competing for resources. When predators are too successful in the short run they deplete their resource base in the long run. Ecosystems and species go through cycles of boom and bust, sometimes experiencing significant discontinuous change in response to tipping points that alter the conditions upon which the ecosystem or species was previously adapted to.

Now picture our economy as an extension of the ecosystem you have just imagined. Financial and physical assets, from your bank balance to the building you work in, are in some way an extension of ecosystems from around the world, the economy having turned raw materials and energy into products and services to be bought and sold. If an ecosystem collapses, or a precious resource runs dry, the economy has to adjust. If many ecosystems collapse or resources become scarce simultaneously, the economy experiences significant shock that forces it to reconfigure.

So what does this mean for the energy provider of tomorrow?

Successful organisms and healthy ecosystems are mutable and can rapidly adapt to change. They may have symbiotic relationships throughout the ecosystem, living alongside other species who are better equipped to perceive and warn of threats. Vibrant ecosystems have ways of cycling nutrients and energy with minimal depletion or losses, with every organism’s waste being another’s food.

Tomorrow’s energy provider understands that our economy and ecosystems are intrinsically linked. It creates a structure and operating model that enables rapid adaption to change. It actively monitors its dependant physical environments, intervening where necessary to ensure they remain viable. It seeks out and creates symbiotic relationships throughout the economy to ensure energy and material losses are minimised.

In more concrete terms, the energy provider of tomorrow is not constrained by technology type, technology vendors or clunky assets. It meets customer needs in the most efficient way possible and shapes those needs towards strategically critical goals, for example reducing emissions at low cost. It is geared towards providing energy services such as thermal comfort and mobility, not electricity, gas or petrol. It partners with other businesses in the economy where it sees potential for symbiosis and sees customers as a mutual  partner in its enterprise. It understands how its assets impact on the ecosystems it operates across, minimises disruptive impact and actively works to repair any damage it causes. Where it relies on precious resources, it operates with closed loop principles.

What we have described may sound abstract, but we see examples being established or emerging.

For example energy retailers are developing capability for meeting customer needs in more efficient ways by using distributed energy solutions and product leasing. Solar PV providers that rely on precious metals are offering a closed loop service, taking back panels at the end of their operating life to retain ownership over valuable materials. Electric vehicle providers are exploring battery leasing models realising customers want mobility at low capital cost, not batteries for their own sake. This has the added advantage of retaining control over precious materials in the batteries themselves.

New partnership models are emerging to provide clean energy at lower cost, sometimes driven by individuals or organisations not traditionally involved in energy supply. For example property developers are exploring how to create or facilitate precinct scale energy solutions, realising the success of their developments are tightly coupled with our society’s ability to reduce emissions and contain energy prices.

What we haven’t yet seen in Australia is the business, or partnerships between businesses, community, government and others capable of packaging and delivering the full suite of distributed generation, energy efficiency and demand management options at scale in a business model that aligns customer and energy provider interest with reducing emissions and energy supply costs.

The importance of packaging is that the value of the whole is more than the sum of the parts. When selling energy services, demand management and energy efficiency help maximise the value of distributed generation by minimising customer energy consumption required to meet the energy service. This can reduce the size and cost of the generation system required, or can increase value that can be derived from energy exports. Packaging in this way using the right model can also align interests of the customer and the provider with reducing energy use through conservation.

While the complexity of packaging solutions at any given location creates a transaction cost, it is a cost that will come down with application and learning.

In its  latest (2010) technology perspectives publication, the International Energy Agency continues a theme established in 2009, which called for an energy revolution. It notes: “It is clear that, at present, the energy technology revolution is coming from the ‘bottom up’. In many ways, this is a healthy sign; many energy challenges have the greatest impact on local populations” and that “evidence suggests that a large proportion of breakthrough innovations come from new firms that challenge existing business models”.

This insight is evident across other industries, including retail banking, telecommunications and computing/microprocessor. Typically, breakthroughs gain traction in response to dramatic change or crisis, such as the global financial crisis for banking, deregulation in telecommunications and new and more powerful micro processing designs in computers. New market entrants don’t come with pre-existing patterns of thinking about and doing particular solutions, so don’t require effort to break out of an operating mould.
But why bottom up change and what does this mean?

Local communities are likely to drive “bottom up” action where local concern on an issue such as climate change (or sustainability more broadly) outstrips national or global concern. We saw this in Castlemaine, and this appears to be happening in new land developments that aim to address multiple and overlapping sustainability challenges at various stages of evolution such as Currumbin, Crystal waters, Cape Paterson, Bega, Camdenhaven. Naturally there are many other examples, but the important point to note is that this sometimes quiet bottom up revolution has the potential to create exemplars, new ways of doing that show others a new way is possible.

The connection between innovation, the property sector and energy is an important one. The property sector is not directly invested in energy supply infrastructure, yet sometimes unknowingly, it  is  already an energy service provider. How we master plan, design, construct and operate buildings has a significant impact on energy service provision.
Can the property sector transform itself, or find the symbiotic relationships that allow a full suite of energy supply options to be packaged for efficient, clean energy service provision? If it can, some critical ingredients exist for reducing emissions at a new speed and scale. We would have a sector unencumbered by history, with access to finance and capability at scale, and the ability to create value using the full distributed energy suite.

As scientists, our role at CSIRO in the Energy Transformed Flagship is less speculation on where this innovation may come from and more research to understand and catalyse such innovation through knowledge and technology transfer where it can deliver cost effective emission reductions.

In our next and final article, we will explore what transformative innovation looks like, and the enabling conditions that can bring it about.

Energy Technology Perspectives, 2010. International Energy Agency. Summary available here.

This article draws on research from the intelligent grid project. Details of research published to date can be found here. The project is now focussed on engaging industry and government on research findings and pursuing new research directions around organisation change and the innovation process.

You can contact the researchers via email – anthony.szatow@csiro.au; george.quezada@csiro.au