For Energy Companies to Navigate Decentralized Energy Resources, They’ll Need to Learn from Uber

Many people use complicated and complex as synonyms, but the Cynefin framework draws important distinctions between the two. The transition of the global energy system from a centralized hub-and-spoke model to a distributed node-to-node model represents a fundamental change in the level of complexity of the system and so requires a mindset shift before any engineering solutions can be successful. If you’re unfamiliar with the Cynefin framework, it’s a decision-making aid developed by Welsh management consultant Dave Snowden in 1999. The framework identifies five different types of problems, but for our purposes, we’ll focus on the first three.

A “simple” problem is easy and highly predictable with few components and a clear recipe for resolution. “Complicated” problems might have many components that require deep expertise to understand, but they retain a high degree of predictability. “Complex” issues, on the other hand, are less predictable and contain inevitable surprises, and they’re based around what Snowden calls “unknown unknowns” — meaning cause and effect are really only informative after the fact.

Emerging Complexities in Energy

Applying the Cynefin framework to the ongoing transition of the energy industry shows we are in the midst of an evolution from highly complicated to complex. The current model is analogous to hub-and-spoke, with a central power authority making decisions and generating energy in a few centralized locations and then using high-voltage transmission lines to get that energy to millions of customers at nearly the speed of light.

As electricity is a staple of the modern lifestyle, traditional utilities have engineered solutions over time that keep the grid predictable (and thus complicated rather than complex) as that simplifies their role of running, maintaining, and supporting the grid. They are experts in managing the rules and constraints of the existing system in order to balance current and frequency down to the millisecond. One of the side effects of the current system (due to challenges with energy storage) is that we generate more electricity than is consumed at any moment, and about 67% of all power generated is lost as waste heat before reaching our homes and businesses.

As microgrids and residential solar become more commonplace, the hub-and-spoke model is becoming obsolete. This disrupts the state-sanctioned monopolies of utilities, but it also fundamentally alters the job of grid management. With decentralized energy resources and behind-the-meter generation gaining traction, grid operators will have to embrace a new node-to-node model, where power can be created or used at any point in the grid.

This transition should result in a more flexible, efficient, and resilient grid, but it doesn’t just make things more complicated. Instead, it’s a massively complex undertaking that will fundamentally alter the value chain for independent system operators and regional transmission organizations.

The Changing Value Chain

Utilities have historically operated under a linear value chain. Generators produce electricity, which is then transmitted to customers for consumption. More energy generated leads to higher revenue. Customers are increasingly thinking of their energy needs more holistically, however. As they embrace solutions such as rooftop solar, efficiency retrofits, and behind-the-meter storage, they’ll need less energy from their regional utilities. Instead of struggling against this shift, retail energy companies must look for new opportunities to provide value.

In many cases, these opportunities can come from higher-margin services, such as helping customers manage their energy usage or providing an integrated picture of their next-generation electrical appliances. In Texas, Austin Energy is partnering with local residential solar installers to actually help customers go solar, and for energy users who rent their home or live in a shaded area unsuitable for rooftop photovoltaic technology, the utility’s Community Solar Program can still provide a renewable energy option that doesn't rely mainly on offsets.

Austin Energy’s Community Solar Program might be limited in scale, but there are many emerging business models for utilities to tap into the changing energy landscape. According to a report from Global Market Insights, microgrids were an $8 billion market in 2019, and that figure is expected to enjoy a compound annual growth rate in excess of 24% through 2026. These grid-tied systems allow schools, hospitals, industrial parks, and even neighborhoods to function normally on a day-to-day basis while relying on sustainable, self-sufficient power generation and storage facilities to operate independently of the grid when needed.

Microgrids and nanogrids are the central examples of how the value chain has become more complex. They can either import or export energy depending on circumstances outside of the control of the regional power authority. The initial reaction of many traditional utilities is to apply an engineering approach, such as wanting decentralized energy resources to be remotely managed within strict limits. An approach that considers the nature of complex systems will recognize that doing so would miss out on the added resiliency potential of a system of independent nodes.

Microgrids have become much more financially feasible in the past few years as the price of renewable energy has plummeted, with many projects (such as this one for Santa Barbara’s Unified School District) able to be completely financed by long-term power purchase agreements that are no greater than current electricity costs. It will be an easy financial decision for institutions to invest in microgrids given the added resilience during natural disasters or the kind of rolling outages that many California PG&E customers became familiar with in 2019.

As utilities decide how they will cope with an evolving value chain and address the challenges of a more complex industry, here are two things to take into account when dealing with this complexity:

1. Prepare for the unexpected

In a complex system, control is an illusion. While energy companies have thus far enjoyed an abundance of control — holding sway over a captive audience, limits to competition, and final say on both the amount of power to deliver and the means of generation — that control will continue to recede.

In a complex environment, organizations need to put systems in place that automatically react to unpredictable events in real time. In the case of utilities, systems should be based on the assumption that each individual node will act in its own self-interest. As such, economic, market-based structures are a reasonable way to design how a node-to-node complex system should behave.

2. Learn from other decentralized systems

Decentralized systems are all around us, and they’ve left an indelible mark on our way of life in just a few short years. Their power stems from their ability to operate a system of disconnected nodes in a way that unlocks the value of previously unused resources. Consider Uber, which connects drivers with passengers who need a ride, or Airbnb, which helps travelers find a place to stay with a host looking to monetize their additional capacity, whether it’s a spare bedroom or an entire vacation home.

The fact that these companies have become household names is a good sign for energy companies, especially in a future where many customers are generating their own electricity. There will still be a need for organizations and technologies to funnel that energy from those who have spare kilowatts to those who need them, and the value created with a dynamic solution will be tremendous. Trading energy locally could increase the efficiency and resiliency of the grid via avoiding transmission loss, automatic micro-balancing, and enabling new cleantech business models. A mechanism for sharing energy among neighbors does not exist today, and will certainly require a mix of regulatory and digital innovations to make it a reality. This is a hurdle, but it's also an opportunity for those organizations that tackle it first.

There’s no doubt that the energy industry’s job of creating huge amounts of power and supplying it to a large geographic region has always been complicated, and the shift to utility-scale intermittent renewables such as wind and solar only added another layer. Today, however, as more and more customers look to generate and even store their own power while maintaining a connection to the grid, the energy industry is becoming truly complex in both a layman sense and as defined by the Cynefin framework.

If the utilities of the future hope to juggle the product of a vast number of independent generating plants that produce according to unknown variables of weather and cloud coverage, they’ll need to look to the decentralized systems that are currently transforming industries and learn to build models that tolerate “unknown unknowns.”