How We Can Fix Australia's High Energy Prices

Gavin Mooney

This is the third post in a series looking at the hot topic of Australian power prices. In this post, we’ll look at what can be done about the high power prices in Australia.

In Part 2 we found that cause of the price increases over the last decade could be attributed to the following bill components:

  1. Network charges (41%)
  2. Retail costs and margins (24%)
  3. Wholesale costs (19%)
  4. Green schemes (16%)

A lack of national energy policy?

Many have blamed the current problems on the lack of a national energy policy. In its submission to the Finkel review, chairman of the Australian Energy Market Commission (AEMC) John Pierce stated that the energy sector “has suffered from a long vacuum around national, co-ordinated policy decisions. This has resulted in pervasive uncertainty which makes it difficult for business and consumers to invest – and undermines the reliability of power supply.

Increased supply of reliable energy is needed and this should ideally be selected based on price rather than targets or incentives. I doubt we will see rational investors queueing up to support a new coal-fired power station.

Absence of clear policy is almost certainly a contributor to supply side issues and rising wholesale prices but ACCC chairman Rod Sims said focusing solely on investment uncertainty ignored a “hell of a lot” of other factors.

In his September 2017 National Press Club address, Mr. Sims presented a diagram showing a number of issues to address to make electricity more affordable. The issues are aligned with how much each part of the value chain has contributed to electricity price increases. What is interesting is how widely this list differs from much of the current popular and political debate around energy affordability in Australia.

1. Network

The network cost, the largest component of residential energy bills and the greatest contributor to price rises over the last decade, is probably the thorniest one to address.

Past decisions about network investment are mostly locked-in and will weigh on electricity prices for years to come unless there is a significant change in the funding model.

Network companies submit funding requests to the energy regulator every five years and the regulator determines how much they are allowed to invest, which effectively determines how much they can charge consumers for delivery of electricity. The network companies have traditionally been allowed to appeal any parts of the regulator’s decision that they didn’t like, with no downside risk.

The appeals process has tended to be very successful: according to the regulator, appeals against its decisions between 2008 and 2013 resulted in network company revenue increases of approximately $3.5 billion. This appeals process, known as the Limited Merits Review, was abolished in August this year.

The only other way to reduce network costs under the current funding model would be to reduce the size of regulated asset bases, as suggested in the Finkel Review. But it is unlikely network companies would support any reconsideration or write off of their asset values. This could become increasingly problematic if grid defection (where consumers disconnect from the power grid and become self-sufficient in energy) increases, as the overall network costs would then be shared between fewer end consumers.

2. Retail

The problem here is around consumers not being aware that better offers exist. Consumers can be made more aware of price comparison tools as well as options available to them for managing financial hardship.

Following a meeting with the Prime Minister in August, eight energy retailers have agreed to contact customers who have reached the end of their discounted plan and outline what alternative offers are available. They also committed to developing simpler fact sheets and comparison rates so that consumers can more easily compare the offers available on the market.

In the UK market, there are now third party switching services like Flipper that automatically switch consumers onto the best deal throughout the year. Customers don’t pay Flipper unless they are saved at least £50 per year. Services such as these have the potential to bring huge benefits to Australian consumers.

3. Wholesale (generation)

Currently there is insufficient competition in wholesale markets as well as a high degree of vertical integration with the largest retailers (“gentailers”). More generation capacity is needed, preferably from non-vertically integrated new entrants and in the regions where supply shortfall is most likely (New South Wales, Victoria and South Australia).

Large-scale renewable energy projects will diversify ownership and reduce wholesale prices. This is already starting to happen, with prices forecast to fall steeply in 2018-2022 due to the entry of 6,000MW of renewable energy capacity.

4. Gas prices

To lower the wholesale cost of electricity, the cost of gas needs to be addressed.

As we showed in Part 2, the price of gas is increasingly determining the wholesale price of electricity. Prime Minister Malcolm Turnbull managed to convince the gas producers to supply enough additional gas to the domestic market to cover a predicted shortfall this summer. This will likely avoid price spikes but to lower the cost, more generation capacity is needed.

We can also reduce our reliance on gas up to 25% through energy efficiency measures and fuel shifting, according to a recent ClimateWorks report.

5. Generator bidding behaviour

A recent report by Schneider Electric into spot prices in NSW indicated that bidding practices by generators, including AGL and Origin, were adding about a $30 premium to spot prices over and above what a fair fundamental value would be. This has led Energy Minister Josh Frydenberg to request an investigation by the regulator into generator behaviour.

The AEMC has now confirmed a proposition to change the settlement period from half an hour to five minutes from 1st July 2021. It is widely believed this will reduce generator gaming of the system, lower wholesale costs and drive investment in fast response technologies such as batteries as well as encouraging consumer participation via demand response.

6. Demand response

A significant chunk of what consumers are charged is to ensure the grid can deliver at peak times, such as on a very hot afternoon around 5pm when people get home from work and turn on their air conditioner. But over the whole of 2012, the electricity network experienced “peak demand” for less than 40 hours.

Instead of building additional generation infrastructure to cope with this, most people agree that reducing demand makes more sense. The uptake of solar panels (and now battery storage) are already helping with this. Energy programs that reward customers who make themselves available to briefly turn off the power at times of stress on the grid are also seen as a key way to better manage demand.

7. The National Energy Guarantee

One of the 50 recommendations in the Finkel review was a Clean Energy Target. The government decided to adopt the other 49 recommendations but not this one. Instead, it has introduced the National Energy Guarantee (NEG). Much is still to be determined about the NEG and there has been a focus on the modelling used and whether it would actually lower energy costs.

At this stage is remains more of an idea than a policy and will likely lead to more policy uncertainty in the short term with at least another 12 months of planning, debate and consideration of the policy. It has also been criticised in its current form for not being ambitious enough and likely bringing about an end to investment in large scale renewable energy.

What can consumers do?

Regardless of industry and government policy, consumers can take steps to reduce their power bills immediately.

1. Start shopping around

A report from the AEMC in July found about 70% of people were not shopping around for the best deals on their power bills, even though this could save households over $500 a year. Further, if consumers allow themselves to slip off their discounted plan onto a standing offer, the cost could be even higher.

The annual cost to households of accepting a standing offer from one of the big three retailers instead of the best offer in the market has been estimated at $830 in Victoria, $900 in Queensland and $1400-$1500 in NSW and SA.

2. Reduce energy consumption

This could be achieved by fitting more efficient LED lighting (government rebates are available and LED replacements for 12v halogen downlights are available for free in Victoria under the VEET scheme), using blinds to cool the house and reduce air conditioner usage, or washing clothes in cold water and drying them on a line. More tips are available online.

Solar panels also help reduce a household’s energy consumption. There are schemes available to help households that cannot afford the high upfront cost or are renting or community schemes for those without a roof.

3. Switch to a time-of-use tariff

Consumers who are able to shift their energy consumption away from peak times (such as evenings) can save money on a time-of-use tariff. This can include running energy-hungry appliances such as dishwashers and washing machines at night.

Battery storage can also drastically reduce peak costs by charging batteries during off peak times (or free of charge during the day if the house has solar panels) and discharging the batteries in the evening to avoid drawing power from the grid.

Wrapping up

Just as there is no single cause of the high energy prices in Australia, there is no silver bullet to resolve the problem. Work is already being done to reduce prices and the effects of these changes should be felt in the coming years.

Read the first two posts in this series: Do Australians really pay the highest power prices in the world? and An explanation for the high power prices in Australia.

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Gavin Mooney

About Gavin Mooney

Gavin Mooney is a utilities industry solution specialist for SAP. From a background in Engineering and IT, Gavin has been working in the utilities industry with SAP products for nearly 15 years. He has had the privilege of working with a number of Electricity, Gas and Water Utilities across the globe to implement SAP’s Industry Solution for Utilities. He now works with utilities to help them identify the best way to run simple and run better with SAP's latest products. Gavin loves to network and build lasting business relationships and is passionate about cleantech and the fundamental transformation currently shaking up the utilities industry.

The Power Of Digital In The Utilities Industry

Henry Bailey

The utilities industry touches every person, household, and business. It provides generation, transmission, distribution, and metering of all forms of energy and water, as well as waste disposal and recycling. It is considered the foundation for modern life.

It also also considered by many as an industry at risk, as the way consumers perceive and consume resources is changing. It is also an industry that stands much to gain from current and emerging digital technologies.

There are three macro forces shaping the industry today: decentralization, deregulation, and decarbonization. Decentralization involves a shift in how and where energy is consumed. No longer the exclusive domain of power companies, energy is now being produced at an increasing rate by both businesses and households leveraging solar, wind, and battery technologies. Most customers that produce their own energy are still connected to the power grid. In fact, many of them sell surplus energy back to the local power utility. This has resulted in a market dynamic where customers have now become suppliers. As a benefit, this allows utility companies to better manage supply and demand, particularly during peak periods. But it also adds significantly to the complexity of the supply chain.

Deregulation is another force shaping the industry. As regulatory bodies have opened the door to new competition, energy resellers (using utility company transmission systems) have become an alternative to the traditional electric or gas company. Deregulation is also allowing non-utility companies into the home, as seen in the rapid rise of on-premises monitoring and control products and companies. These firms, such as Amazon (Nest), offer new ways for consumers to manage their energy usage. In the process, they also have the ability to take control of the customer relationship, often positioning the utility company as a commodity item, while they provide the value-add today’s consumer seeks.

Decarbonization is also changing the utility landscape, as the strong customer-driven push for carbon energy alternatives (e.g., solar, wind, hydro) has resulted in demand for energy saving and the use of renewable resources.

The challenges of being a utility

Combined, these three forces are placing a number of challenges on utilities providers, who are increasingly asking:

  • How can they support and even encourage consumers to smartly generate power, all while retaining control of the relationship (or partnership)?
  • How can they drive the use of smart in-home control and metering devices that add value to both the consumer (lower energy utilization) and the utility (improved load management)?
  • How can they offer clean energy and cost-savings programs through the use of smart sensors and intelligent assets?
  • How can they evolve their businesses, services, and operational processes to survive in a world where the consumer is asking for improved energy consumption at a lower price point than before?

Utility providers are also asking how they can attract and retain the talent necessary to address these problems.

Enter the digital solution

The answers to these questions can be found through the right application of digital technologies, a willingness to rethink business operations and revenue models, and the appropriate tools necessary to capture, analyze, and act on the massive amount of data that is available to utilities firms today.

With the right digital core, the cloud can become a secure and ubiquitous platform for the storing of data and a common system of record for the company, its partners, and its customers. Internet of Things (IoT) sensors can be used to gather data from operational infrastructure, supply chain partners, employees, and customers to better understand and manage the generation, distribution, and consumer of its offerings. Predictive analytics and machine learning can offer insights into improved operations and maintenance. Even emerging technologies such as blockchain can play a role, helping record and track supply chain and customer equipment transactions.

The bottom line is digital offers the ability to foster innovation, develop new revenue opportunities, and address the challenges faced by today’s utilities industry.

Download our “Digital Transformation in the Utilities Industry” white paper now to get an even greater look at the importance of innovating and digitizing in this high paced industry. And learn how SAP Leonardo can help your company make the move to digital.

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Henry Bailey

About Henry Bailey

Henry Bailey is global vice president of Utilities Industry Business Unit for SAP. He leads a team of customer focused professionals creating end-2-end solutions across the 5 key market categories; Core Applications, Cloud Computing, Mobile Platforms, Business Intelligence and Database Technologies with HANA.

The Promise Of Drones And Machine Learning For Oil And Gas Industry

Ansari Nubeel

Digital transformation is no longer a fuzzy buzzword in industry, rather it is now a well understood and a credible approach to achieving business value. With increasing maturation of transformative technologies, it’s becoming a lot easier for organizations to chart their approach and digital transformation journeys.

The oil and gas industry was slow to leverage transformative technologies like the Internet of Things, machine learning, blockchain, artificial intelligence, and virtual reality. However, progressive companies have started to experiment with these new technologies to drive incremental value for their organization. These early adopters are showing how digital transformation is driving cost reduction, improving reliability, and increasing safety of people across the industry value chain and, in the process, attracting more companies and investment in these technologies.

Key challenges

The oil and gas industry faces the unique challenge of ensuring the efficient and safe operation of assets that are distributed geographically or in areas that are not easily accessible. In these cases, technologies like drones and machine learning could become very relevant. Drone-based aerial surveys of inaccessible areas can provide rich insights into the condition of the assets. Well platforms or areas above and near underground pipelines are some of the places where drone based inspection can work wonders.

How drones and machine learning can help overcome challenges

A common and simple use of a drone is to inspect inaccessible areas that would typically require scaffolding, rope, or a physical setups. By taking pictures of assets, such as flares, refinery columns, offshore platforms, or large crude oil tanks, and using them for visual inspections, oil and gas companies can prioritize detailed inspection and maintenance activities.

However, drone inspection’s true potential can be unleashed if machine learning is used to analyze the large volume of images to identify patterns and/or map the images to look for abnormalities. In this regard, a deep-learning algorithm based on a convolutional neural network (CNN) can help. In machine learning, a CNN (or ConvNet) is a class of deep, feed-forward artificial neural networks used for analyzing visual imagery. Simply put, it’s learning based on imagery.

In an oil and gas installation, a CNN-based algorithm running on a geoservice-enabled machine learning platform can be used to create a digital representation of a remote platform, a crude oil tank farm, an over-ground layout for an underground pipeline, etc., by feeding standard images (a test data set) to train the algorithm to identify an asset on the ground. This enables a CNN algorithm to understand the details in imagery. Any new photograph captured with drone-based inspection can then be evaluated based on the CNN algorithm

For example, standard images of the surface over an underground pipeline can be fed into the algorithm to train it. Afterwards, every time a visual survey is done, the new images can be analyzed based on the learning in the CNN algorithm, and any abnormality that can’t be mapped with the existing data set can be highlighted in the analysis. Human intervention can target this exception for inspection, instead of reviewing the entire information.

Summary

Drone-based aerial imagery has the potential to significantly transform maintenance and inspection processes for oil and gas installations. A geoservice-enabled machine learning platform with a CNN-based algorithm can analyze the results from aerial inspection, and recommend human intervention only if there are mismatches between the new imagery and the imagery used for training the algorithm.

For more on how technology is transforming the supply chain, see Tick Tock: Start Preparing for Resource Disruption.

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Ansari Nubeel

About Ansari Nubeel

Nubeel Ansari is the Digital Leader for Oil & Gas and Utilities industries at SAP India. He is responsible for driving SAP India's Go to Market for these industries, and engage with key customers in these industries through value management, customer co-innovation, digital transformation, and business process performance improvement programs by developing road maps, reimagining business models, and helping them reduce costs with digital technologies.

Tick Tock: Start Preparing for Resource Disruption

By Maurizio Cattaneo, Joerg Ferchow, Daniel Wellers, and Christopher Koch

Businesses share something important with lions. When a lion captures and consumes its prey, only about 10% to 20% of the prey’s energy is directly transferred into the lion’s metabolism. The rest evaporates away, mostly as heat loss, according to research done in the 1940s by ecologist Raymond Lindeman.

Today, businesses do only about as well as the big cats. When you consider the energy required to manage, power, and move products and services, less than 20% goes directly into the typical product or service—what economists call aggregate efficiency (the ratio of potential work to the actual useful work that gets embedded into a product or service at the expense of the energy lost in moving products and services through all of the steps of their value chains). Aggregate efficiency is a key factor in determining productivity.

After making steady gains during much of the 20th century, businesses’ aggregate energy efficiency peaked in the 1980s and then stalled. Japan, home of the world’s most energy-efficient economy, has been skating along at or near 20% ever since. The U.S. economy, meanwhile, topped out at about 13% aggregate efficiency in the 1990s, according to research.

Why does this matter? Jeremy Rifkin says he knows why. Rifkin is an economic and social theorist, author, consultant, and lecturer at the Wharton School’s Executive Education program who believes that economies experience major increases in growth and productivity only when big shifts occur in three integrated infrastructure segments around the same time: communications, energy, and transportation.

But it’s only a matter of time before information technology blows all three wide open, says Rifkin. He envisions a new economic infrastructure based on digital integration of communications, energy, and transportation, riding atop an Internet of Things (IoT) platform that incorporates Big Data, analytics, and artificial intelligence. This platform will disrupt the world economy and bring dramatic levels of efficiency and productivity to businesses that take advantage of it, he says.

Some economists consider Rifkin’s ideas controversial. And his vision of a new economic platform may be problematic—at least globally. It will require massive investments and unusually high levels of government, community, and private sector cooperation, all of which seem to be at depressingly low levels these days.

However, Rifkin has some influential adherents to his philosophy. He has advised three presidents of the European Commission—Romano Prodi, José Manuel Barroso, and the current president, Jean-Claude Juncker—as well as the European Parliament and numerous European Union (EU) heads of state, including Angela Merkel, on the ushering in of what he calls “a smart, green Third Industrial Revolution.” Rifkin is also advising the leadership of the People’s Republic of China on the build out and scale up of the “Internet Plus” Third Industrial Revolution infrastructure to usher in a sustainable low-carbon economy.

The internet has already shaken up one of the three major economic sectors: communications. Today it takes little more than a cell phone, an internet connection, and social media to publish a book or music video for free—what Rifkin calls zero marginal cost. The result has been a hollowing out of once-mighty media empires in just over 10 years. Much of what remains of their business models and revenues has been converted from physical (remember CDs and video stores?) to digital.

But we haven’t hit the trifecta yet. Transportation and energy have changed little since the middle of the last century, says Rifkin. That’s when superhighways reached their saturation point across the developed world and the internal-combustion engine came close to the limits of its potential on the roads, in the air, and at sea. “We have all these killer new technology products, but they’re being plugged into the same old infrastructure, and it’s not creating enough new business opportunities,” he says.

All that may be about to undergo a big shake-up, however. The digitalization of information on the IoT at near-zero marginal cost generates Big Data that can be mined with analytics to create algorithms and apps enabling ubiquitous networking. This digital transformation is beginning to have a big impact on the energy and transportation sectors. If that trend continues, we could see a metamorphosis in the economy and society not unlike previous industrial revolutions in history. And given the pace of technology change today, the shift could happen much faster than ever before.

The speed of change is dictated by the increase in digitalization of these three main sectors; expensive physical assets and processes are partially replaced by low-cost virtual ones. The cost efficiencies brought on by digitalization drive disruption in existing business models toward zero marginal cost, as we’ve already seen in entertainment and publishing. According to research company Gartner, when an industry gets to the point where digital drives at least 20% of revenues, you reach the tipping point.

“A clear pattern has emerged,” says Peter Sondergaard, executive vice president and head of research and advisory for Gartner. “Once digital revenues for a sector hit 20% of total revenue, the digital bloodbath begins,” he told the audience at Gartner’s annual 2017 IT Symposium/ITxpo, according to The Wall Street Journal. “No matter what industry you are in, 20% will be the point of no return.”

Communications is already there, and energy and transportation are heading down that path. If they hit the magic 20% mark, the impact will be felt not just within those industries but across all industries. After all, who doesn’t rely on energy and transportation to power their value chains?

The eye of the technology disruption hurricane has moved beyond communications and is heading toward … the rest of the economy.

That’s why businesses need to factor potentially massive business model disruptions into their plans for digital transformation today if they want to remain competitive with organizations in early adopter countries like China and Germany. China, for example, is already halfway through an US$88 billion upgrade to its state electricity grid that will enable renewable energy transmission around the country—all managed and moved digitally, according to an article in The Economist magazine. And it is competing with the United States for leadership in self-driving vehicles, which will shift the transportation process and revenue streams heavily to digital, according to an article in Wired magazine.

Once China’s and Germany’s renewables and driverless infrastructures are in place, the only additional costs are management and maintenance. That could bring businesses in these countries dramatic cost savings over those that still rely on fossil fuels and nuclear energy to power their supply chains and logistics. “Once you pay the fixed costs of renewables, the marginal costs are near zero,” says Rifkin. “The sun and wind haven’t sent us invoices yet.”

In other words, zero marginal cost has become a zero-sum game.

To understand why that is, consider the major industrial revolutions in history, writes Rifkin in his books, The Zero Marginal Cost Society and The Third Industrial Revolution. The first major shift occurred in the 19th century when cheap, abundant coal provided an efficient new source of power (steam) for manufacturing and enabled the creation of a vast railway transportation network. Meanwhile, the telegraph gave the world near-instant communication over a globally connected network.

The second big change occurred at the beginning of the 20th century, when inexpensive oil began to displace coal and gave rise to a much more flexible new transportation network of cars and trucks. Telephones, radios, and televisions had a similar impact on communications.

Breaking Down the Walls Between Sectors

Now, according to Rifkin, we’re poised for the third big shift. The eye of the technology disruption hurricane has moved beyond communications and is heading toward—or as publishing and entertainment executives might warn, coming for—the rest of the economy. With its assemblage of global internet and cellular network connectivity and ever-smaller and more powerful sensors, the IoT, along with Big Data analytics and artificial intelligence, is breaking down the economic walls that have protected the energy and transportation sectors for the past 50 years.

Daimler is now among the first movers in transitioning into a digitalized mobility internet. The company has equipped nearly 400,000 of its trucks with external sensors, transforming the vehicles into mobile Big Data centers. The sensors are picking up real-time Big Data on weather conditions, traffic flows, and warehouse availability. Daimler plans to establish collaborations with thousands of companies, providing them with Big Data and analytics that can help dramatically increase their aggregate efficiency and productivity in shipping goods across their value chains. The Daimler trucks are autonomous and capable of establishing platoons of multiple trucks driving across highways.

It won’t be long before vehicles that navigate the more complex transportation infrastructures around the world begin to think for themselves. Autonomous vehicles will bring massive economic disruption to transportation and logistics thanks to new aggregate efficiencies. Without the cost of having a human at the wheel, autonomous cars could achieve a shared cost per mile below that of owned vehicles by as early as 2030, according to research from financial services company Morgan Stanley.

The transition is getting a push from governments pledging to give up their addiction to cars powered by combustion engines. Great Britain, France, India, and Norway are seeking to go all electric as early as 2025 and by 2040 at the latest.

The Final Piece of the Transition

Considering that automobiles account for 47% of petroleum consumption in the United States alone—more than twice the amount used for generators and heating for homes and businesses, according to the U.S. Energy Information Administration—Rifkin argues that the shift to autonomous electric vehicles could provide the momentum needed to upend the final pillar of the economic platform: energy. Though energy has gone through three major disruptions over the past 150 years, from coal to oil to natural gas—each causing massive teardowns and rebuilds of infrastructure—the underlying economic model has remained constant: highly concentrated and easily accessible fossil fuels and highly centralized, vertically integrated, and enormous (and enormously powerful) energy and utility companies.

Now, according to Rifkin, the “Third Industrial Revolution Internet of Things infrastructure” is on course to disrupt all of it. It’s neither centralized nor vertically integrated; instead, it’s distributed and networked. And that fits perfectly with the commercial evolution of two energy sources that, until the efficiencies of the IoT came along, made no sense for large-scale energy production: the sun and the wind.

But the IoT gives power utilities the means to harness these batches together and to account for variable energy flows. Sensors on solar panels and wind turbines, along with intelligent meters and a smart grid based on the internet, manage a new, two-way flow of energy to and from the grid.

Today, fossil fuel–based power plants need to kick in extra energy if insufficient energy is collected from the sun and wind. But industrial-strength batteries and hydrogen fuel cells are beginning to take their place by storing large reservoirs of reserve power for rainy or windless days. In addition, electric vehicles will be able to send some of their stored energy to the digitalized energy internet during peak use. Demand for ever-more efficient cell phone and vehicle batteries is helping push the evolution of batteries along, but batteries will need to get a lot better if renewables are to completely replace fossil fuel energy generation.

Meanwhile, silicon-based solar cells have not yet approached their limits of efficiency. They have their own version of computing’s Moore’s Law called Swanson’s Law. According to data from research company Bloomberg New Energy Finance (BNEF), Swanson’s Law means that for each doubling of global solar panel manufacturing capacity, the price falls by 28%, from $76 per watt in 1977 to $0.41 in 2016. (Wind power is on a similar plunging exponential cost curve, according to data from the U.S. Department of Energy.)

Thanks to the plummeting solar price, by 2028, the cost of building and operating new sun-based generation capacity will drop below the cost of running existing fossil power plants, according to BNEF. “One of the surprising things in this year’s forecast,” says Seb Henbest, lead author of BNEF’s annual long-term forecast, the New Energy Outlook, “is that the crossover points in the economics of new and old technologies are happening much sooner than we thought last year … and those were all happening a bit sooner than we thought the year before. There’s this sense that it’s not some distant risk or distant opportunity. A lot of these realities are rushing toward us.”

The conclusion, he says, is irrefutable. “We can see the data and when we map that forward with conservative assumptions, these technologies just get cheaper than everything else.”

The smart money, then—72% of total new power generation capacity investment worldwide by 2040—will go to renewable energy, according to BNEF. The firm’s research also suggests that there’s more room in Swanson’s Law along the way, with solar prices expected to drop another 66% by 2040.

Another factor could push the economic shift to renewables even faster. Just as computers transitioned from being strictly corporate infrastructure to becoming consumer products with the invention of the PC in the 1980s, ultimately causing a dramatic increase in corporate IT investments, energy generation has also made the transition to the consumer side.

Thanks to future tech media star Elon Musk, consumers can go to his Tesla Energy company website and order tempered glass solar panels that look like chic, designer versions of old-fashioned roof shingles. Models that look like slate or a curved, terracotta-colored, ceramic-style glass that will make roofs look like those of Tuscan country villas, are promised soon. Consumers can also buy a sleek-looking battery called a Powerwall to store energy from the roof.

The combination of solar panels, batteries, and smart meters transforms homeowners from passive consumers of energy into active producers and traders who can choose to take energy from the grid during off-peak hours, when some utilities offer discounts, and sell energy back to the grid during periods when prices are higher. And new blockchain applications promise to accelerate the shift to an energy market that is laterally integrated rather than vertically integrated as it is now. Consumers like their newfound sense of control, according to Henbest. “Energy’s never been an interesting consumer decision before and suddenly it is,” he says.

As the price of solar equipment continues to drop, homes, offices, and factories will become like nodes on a computer network. And if promising new solar cell technologies, such as organic polymers, small molecules, and inorganic compounds, supplant silicon, which is not nearly as efficient with sunlight as it is with ones and zeroes, solar receivers could become embedded into windows and building compounds. Solar production could move off the roof and become integrated into the external facades of homes and office buildings, making nearly every edifice in town a node.

The big question, of course, is how quickly those nodes will become linked together—if, say doubters, they become linked at all. As we learned from Metcalfe’s Law, the value of a network is proportional to its number of connected users.

The Will Determines the Way

Right now, the network is limited. Wind and solar account for just 5% of global energy production today, according to Bloomberg.

But, says Rifkin, technology exists that could enable the network to grow exponentially. We are seeing the beginnings of a digital energy network, which uses a combination of the IoT, Big Data, analytics, and artificial intelligence to manage distributed energy sources, such as solar and wind power from homes and businesses.

As nodes on this network, consumers and businesses could take a more active role in energy production, management, and efficiency, according to Rifkin. Utilities, in turn, could transition from simply transmitting power and maintaining power plants and lines to managing the flow to and from many different energy nodes; selling and maintaining smart home energy management products; and monitoring and maintaining solar panels and wind turbines. By analyzing energy use in the network, utilities could create algorithms that automatically smooth the flow of renewables. Consumers and businesses, meanwhile, would not have to worry about connecting their wind and solar assets to the grid and keeping them up and running; utilities could take on those tasks more efficiently.

Already in Germany, two utility companies, E.ON and RWE, have each split their businesses into legacy fossil and nuclear fuel companies and new services companies based on distributed generation from renewables, new technologies, and digitalization.

The reason is simple: it’s about survival. As fossil fuel generation winds down, the utilities need a new business model to make up for lost revenue. Due to Germany’s population density, “the utilities realize that they won’t ever have access to enough land to scale renewables themselves,” says Rifkin. “So they are starting service companies to link together all the different communities that are building solar and wind and are managing energy flows for them and for their customers, doing their analytics, and managing their Big Data. That’s how they will make more money while selling less energy in the future.”

The digital energy internet is already starting out in pockets and at different levels of intensity around the world, depending on a combination of citizen support, utility company investments, governmental power, and economic incentives.

China and some countries within the EU, such as Germany and France, are the most likely leaders in the transition toward a renewable, energy-based infrastructure because they have been able to align the government and private sectors in long-term energy planning. In the EU for example, wind has already overtaken coal as the second largest form of power capacity behind natural gas, according to an article in The Guardian newspaper. Indeed, Rifkin has been working with China, the EU, and governments, communities, and utilities in Northern France, the Netherlands, and Luxembourg to begin building these new internets.

Hauts-de-France, a region that borders the English Channel and Belgium and has one of the highest poverty rates in France, enlisted Rifkin to develop a plan to lift it out of its downward spiral of shuttered factories and abandoned coal mines. In collaboration with a diverse group of CEOs, politicians, teachers, scientists, and others, it developed Rev3, a plan to put people to work building a renewable energy network, according to an article in Vice.

Today, more than 1,000 Rev3 projects are underway, encompassing everything from residential windmills made from local linen to a fully electric car–sharing system. Rev3 has received financial support from the European Investment Bank and a handful of private investment funds, and startups have benefited from crowdfunding mechanisms sponsored by Rev3. Today, 90% of new energy in the region is renewable and 1,500 new jobs have been created in the wind energy sector alone.

Meanwhile, thanks in part to generous government financial support, Germany is already producing 35% of its energy from renewables, according to an article in The Independent, and there is near unanimous citizen support (95%, according to a recent government poll) for its expansion.

If renewables are to move forward …, it must come from the ability to make green, not act green.

If renewable energy is to move forward in other areas of the world that don’t enjoy such strong economic and political support, however, it must come from the ability to make green, not act green.

Not everyone agrees that renewables will produce cost savings sufficient to cause widespread cost disruption anytime soon. A recent forecast by the U.S. Energy Information Administration predicts that in 2040, oil, natural gas, and coal will still be the planet’s major electricity producers, powering 77% of worldwide production, while renewables such as wind, solar, and biofuels will account for just 15%.

Skeptics also say that renewables’ complex management needs, combined with the need to store reserve power, will make them less economical than fossil fuels through at least 2035. “All advanced economies demand full-time electricity,” Benjamin Sporton, chief executive officer of the World Coal Association told Bloomberg. “Wind and solar can only generate part-time, intermittent electricity. While some renewable technologies have achieved significant cost reductions in recent years, it’s important to look at total system costs.”

On the other hand, there are many areas of the world where distributed, decentralized, renewable power generation already makes more sense than a centralized fossil fuel–powered grid. More than 20% of Indians in far flung areas of the country have no access to power today, according to an article in The Guardian. Locally owned and managed solar and wind farms are the most economical way forward. The same is true in other developing countries, such as Afghanistan, where rugged terrain, war, and tribal territorialism make a centralized grid an easy target, and mountainous Costa Rica, where strong winds and rivers have pushed the country to near 100% renewable energy, according to The Guardian.

The Light and the Darknet

Even if all the different IoT-enabled economic platforms become financially advantageous, there is another concern that could disrupt progress and potentially cause widespread disaster once the new platforms are up and running: hacking. Poorly secured IoT sensors have allowed hackers to take over everything from Wi-Fi enabled Barbie dolls to Jeep Cherokees, according to an article in Wired magazine.

Humans may be lousy drivers, but at least we can’t be hacked (yet). And while the grid may be prone to outages, it is tightly controlled, has few access points for hackers, and is physically separated from the Wild West of the internet.

If our transportation and energy networks join the fray, however, every sensor, from those in the steering system on vehicles to grid-connected toasters, becomes as vulnerable as a credit card number. Fake news and election hacking are bad enough, but what about fake drivers or fake energy? Now we’re talking dangerous disruptions and putting millions of people in harm’s way.

The only answer, according to Rifkin, is for businesses and governments to start taking the hacking threat much more seriously than they do today and to begin pouring money into research and technologies for making the internet less vulnerable. That means establishing “a fully distributed, redundant, and resilient digital infrastructure less vulnerable to the kind of disruptions experienced by Second Industrial Revolution–centralized communication systems and power grids that are increasingly subject to climate change, disasters, cybercrime, and cyberterrorism,” he says. “The ability of neighborhoods and communities to go off centralized grids during crises and re-aggregate in locally decentralized networks is the key to advancing societal security in the digital era,” he adds.

Start Looking Ahead

Until today, digital transformation has come mainly through the networking and communications efficiencies made possible by the internet. Airbnb thrives because web communications make it possible to create virtual trust markets that allow people to feel safe about swapping their most private spaces with one another.

But now these same efficiencies are coming to two other areas that have never been considered core to business strategy. That’s why businesses need to begin managing energy and transportation as key elements of their digital transformation portfolios.

Microsoft, for example, formed a senior energy team to develop an energy strategy to mitigate risk from fluctuating energy prices and increasing demands from customers to reduce carbon emissions, according to an article in Harvard Business Review. “Energy has become a C-suite issue,” Rob Bernard, Microsoft’s top environmental and sustainability executive told the magazine. “The CFO and president are now actively involved in our energy road map.”

As Daimler’s experience shows, driverless vehicles will push autonomous transportation and automated logistics up the strategic agenda within the next few years. Boston Consulting Group predicts that the driverless vehicle market will hit $42 billion by 2025. If that happens, it could have a lateral impact across many industries, from insurance to healthcare to the military.

Businesses must start planning now. “There’s always a period when businesses have to live in the new and the old worlds at the same time,” says Rifkin. “So businesses need to be considering new business models and structures now while continuing to operate their existing models.”

He worries that many businesses will be left behind if their communications, energy, and transportation infrastructures don’t evolve. Companies that still rely on fossil fuels for powering traditional transportation and logistics could be at a major competitive disadvantage to those that have moved to the new, IoT-based energy and transportation infrastructures.

Germany, for example, has set a target of 80% renewables for gross power consumption by 2050, according to The Independent. If the cost advantages of renewables bear out, German businesses, which are already the world’s third-largest exporters behind China and the United States, could have a major competitive advantage.

“How would a second industrial revolution society or country compete with one that has energy at zero marginal cost and driverless vehicles?” asks Rifkin. “It can’t be done.” D!


About the Authors

Maurizio Cattaneo is Director, Delivery Execution, Energy and Natural Resources, at SAP.

Joerg Ferchow is Senior Utilities Expert and Design Thinking Coach, Digital Transformation, at SAP.

Daniel Wellers is Digital Futures Lead, Global Marketing, at SAP.

Christopher Koch is Editorial Director, SAP Center for Business Insight, at SAP.


Read more thought provoking articles in the latest issue of the Digitalist Magazine, Executive Quarterly.

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Human Is The Next Big Thing

Traci Maddox

One of my favorite movies of 2016 was Hidden Figures. The main character, Katherine Johnson, and her team of colleagues had an interesting job title: Computer. Here’s what Katherine said about her job: “On any given day, I analyze the binomial levels of air displacement, friction, and velocity. And compute over 10 thousand calculations by cosine, square root, and lately analytic geometry. By hand.”

That was the 1960s. It was amazing work, but work that took hours to complete – and something an in-memory computer could do in a fraction of a second today.

Just as in-memory computing transformed calculating by hand (and made jobs like Katherine’s much easier), digital technologies are transforming the way we work today – and making our day-to-day activities more efficient.

What’s the real impact of technology in today’s workplace?

We are surrounded by technology, both at home and at work. Machine learning and robotics are making their way into everyday life and are affecting the way we expect to engage with technology at work. That has a big impact on organizations: If a machine can do a job safely and more efficiently, a company, nonprofit, or government – and its employees – will benefit. Digital technologies are becoming increasingly more feasible, affordable, and desirable. The challenge for organizations now is effectively merging human talent and digital business to harness new capabilities.

How will jobs change?

What does this mean for humans in the workplace? In a previous blog, Kerry Brown showed that as enterprises continue to learn, human/machine collaboration increases. People will direct technology and hand over work that can be done more efficiently by machine. Does that mean people will go away? No – but they will need to leverage different skills than they have today.

Although we don’t know exactly how jobs will change, one thing is for sure: Becoming more digitally proficient will help every employee stay relevant (and prepare them to move forward in their careers). Today’s workforce demographic complicates how people embrace technology – with up to five generations in the workforce, there is a wide variety in digital fluency (i.e., the ability to understand which technology is available and what tools will best achieve desired outcomes).

What is digital fluency and how can organizations embrace it?

Digital fluency is the combination of several capabilities related to technology:

  • Foundation skills: The ability to use technology tools that enhance your productivity and effectiveness
  • Information skills: The ability to research and develop your own perspective on topics using technology
  • Collaboration skills: The ability to share knowledge and collaborate with others using technology
  • Transformation skills: The ability to assess your own skills and take action toward building your digital fluency

No matter how proficient you are today, you can continue to build your digital IQ by building new habits and skills. This is something that both the organization and employee will have to own to be successful.

So, what skills are needed?

In a Technical University of Munich study released in July 2017, 64% of respondents said they do not have the skills necessary for digital transformation.

Today's workplace reality

These skills will be applied not only to the jobs of today, but also to the top jobs of the future, which haven’t been imagined yet! A recent article in Fast Company mentions a few, which include Digital Death Manager, Corporate Disorganizer, and 3D Printing Handyman.

And today’s skills will be used differently in 2025, as reported by another Fast Company article:

  • Tech skills, especially analytical skills, will increase in importance. Demand for software developers, market analysts, and computer analysts will increase significantly between now and 2025.
  • Retail and sales skills, or any job related to soft skills that are hard for computers to learn, will continue to grow. Customer service representatives, marketing specialists, and sales reps must continue to collaborate and understand how to use social media effectively to communicate worldwide.
  • Lifelong learning will be necessary to keep up with the changes in technology and adapt to our fast-moving lives. Teachers and trainers will continue to be hot jobs in the future, but the style of teaching will change to adapt to a “sound bite” world.
  • Contract workers who understand how businesses and projects work will thrive in the “gig economy.” Management analysts and auditors will continue to be in high demand.

What’s next?

How do companies address a shortage of digital skills and build digital fluency? Here are some steps you can take to increase your digital fluency – and that of your organization:

  • Assess where you are today. Either personally or organizationally, knowing what skills you have is the first step toward identifying where you need to go.
  • Identify one of each of the skill sets to focus on. What foundational skills do you or your organization need? How can you promote collaboration? What thought leadership can your team share – and how can they connect with the right information to stay relevant?
  • Start practicing! Choose just one thing – and use that technology every day for a month. Use it within your organization so others can practice too.

And up next for this blog series – a look at the workplace of the future!

The computer made its debut in Hidden Figures. Did it replace jobs? Yes, for some of the computer team. But members of that team did not leave quietly and continue manual calculations elsewhere. They learned how to use that new mainframe computer and became programmers. I believe humans will always be the next big thing.

If we want to retain humanity’s value in an increasingly automated world, we need to start recognizing and nurturing Human Skills for the Digital Future.

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Traci Maddox

About Traci Maddox

Traci Maddox is the Director of the North America Customer Transformation Office at SAP, where she is elevating customer success through innovation and digital transformation. Traci is also part of the Digital Workforce Taskforce, a team of SAP leaders whose mission is to help companies succeed by understanding and addressing workforce implications of digital technology.