What Role for Digital Platforms in Energy?

We have seen above that digital platforms have the potential to platformize DSOs. The question is how far these new digital energy platforms can actually go? Do they have the potential, as in the case of Amazon, Airbnb, or Uber, to become global platforms, and thus eliminate most of their competitors? Or will they remain, as seems to be the case of the MaaS platforms, confined to the local or more precisely urban level?

As in all other network industries, digitalization enters because it makes operations, maintenance, and planning more efficient. This evolution is already well under way in the electricity and in most other energy sectors, such as waste management, district heating, gas supply, buildings and facility management, and mobility.

Will this lead to substitution or to platformization? We have argued that the power of digital platforms lies in the coordination of previously badly coordinated infrastructure assets, and there are many if one considers the broader energy system, especially at the distributed level: batteries in cars, bicycles and scooters, solar panels on rooftops, heat pumps, electric or gas heating in buildings, etc. Coordinating these scattered assets more efficiently can bring benefits to all actors involved: a car battery can be charged when the sun shines or when a heat pump is not working, heating and cooling can be much better coordinated with local weather patterns, etc. There are clearly many potential indirect and algorithmic network effects that can be leveraged by a digital platform coordinating a large number of fragmented energy assets.

As badly coordinated as they are, most of these infrastructure assets are already connected to the electricity grid, most likely at the distribution level. They are thus somewhat coordinated by the local distribution system operator (DSO), but this coordination is typically limited to tailoring electricity supply to somewhat unpredictable electricity demand. If mandated by law, the DSO will also accept that excess electricity produced by a household or a factory is being fed back into the grid. However, DSOs typically do not leverage the potential indirect and even less so algorithmic network effects, as they have limited control over most of these assets. The intelligence of the DSO is generally limited to the meter, which is usually not even smart, measuring electricity outflows from the distribution grid to the households and perhaps inflows in case the household produces excess electricity. The DSO has no access and even less control of the operations of the different devices inside a household or a factory, such as the heat pump, the electric vehicle charger, the buildings cooling system, etc. Thus, the potential to leverage network effects is huge, yet mostly untapped.

All this would be much easier in the case of purely off-grid operations: here, a platform could substitute a decentralized energy system and fully exploit the various network effects. Such off-grid operations do exist, but are limited to remote and rural areas, such as in Africa, where electricity is produced from decentralized solar power sources, somewhat stored, but mostly directly used for cooking and lighting, with limited potential to generate network effects.

A more promising approach is much larger greenfield operations, typically called “smart cities.” Still in Africa, Konza Technopolis is a large technology hub planned by the Government of Kenya to be built 64 km South of Nairobi on the way to the port city of Mombasa. Similar projects are being planned and others have already been built and in operation in Africa, but mostly in Asia (Malaysia, Korea, China, India, Thailand, etc.). The obvious advantage of such projects is that digital devices (sensors, meters, etc.) can be built into every single piece of infrastructure from the very beginning; not just buildings, but also roads, water pipes, heating systems, and of course all the appliances that come with the building. A digital platform can subsequently coordinate all these assets for maximum efficiency. This is basically what a smart city and a smart city platform is all about. In short, a smart city will indisputably be a more efficient city.

It is not digital platforms that are building smart cities; real estate developers are too. Airbnb does not own property and Uber does not own any cars. While real estate developers are interested in more efficient cities, as it reduces their costs of building, maintaining, and operating them, they have no interest in being platformed either. Consequently, they want to remain in charge of the digitalization portion of their smart city, which they do - by definition - less efficiently than a platform would. Operating a digital platform is not their core competence, so it is unsurprising that labeling their real estate as a smart city is often simply a means to better market their buildings. In any case, the costs of an inefficient energy system can be passed on to the renters of their real estate.

Inversely, digital platforms have no interest in running smart cities either. They could be interested in running the platform of a smart city, if given unlimited access to the data produced by all these sensors, meters, cameras, etc. Of course, they do not want to own any of the assets and bear the associated infrastructure risks. However, the potential for reaping network effects becomes more limited in an already smartly planned and built city than in an originally highly fragmented system, as legacy cities are. Therefore, smart cities are probably not the first choice for a digital platform wanting to enter the energy industry, except perhaps for experimental, demonstration, and marketing purposes.

One important thing can be learnt from the various smart city experiments when it comes to the coordinating role of platforms: being set up as a greenfield operation, a smart city is in control of its electricity and energy systems. There is typically a single point of connection between the Smart city and the local or sometimes national electricity grid. Everything inside the city is managed by the smart city itself: regulated tariffs, grid charges, national consumer protection rules, etc. do not apply within the smart city, which handles all these issues bilaterally, via contract, with its “customers”; that is, the real estate owners (individual houses, buildings, shops, etc.). The smart city management, Konza Technopolis in our case, contracts with a wholesaler for the electricity it still needs, after all its internal efficiency measures and presuming. It also coordinates with the local grid company, but most typically the national one, the TSO, for technical matters (grid stability, balancing, etc.), just like a DSO does with its national TSO. This is only in the case of greenfield operations, which are precisely what digital platforms are not interested in. In greenfield cities, the possibility to create efficiency gains thanks to coordinating fragmented and basically uncoordinated assets is much lower than in the case of legacy cities. Inversely, regulatory obstacles to reaping the full benefits of network effects are also smaller, if not inexistent, in greenfield cities.

 
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