17 Apr Digital Energy: From Survive to Thrive
European think tanks are forming scenarios on the race to deliver digital energy, or the digitalisation of energy. Here’s some of the evolving thinking, based on a workshop I attended recently with the IEA.
About 120 global experts, academics, regulators and leading companies contributed their insights under a Chatham House rules format to the discussion. I do encourage you read the preceding post in this series for the context and background. Otherwise, this is will be a bit too obscure.
The key questions
To repeat, the world of energy is wrestling with a number of perplexing questions.
- What will be the impact of digital on energy and when will the impact be felt?
- Which companies are best positioned to survive and thrive in the turmoil of digital change?
- What are the most significant barriers that must be overcome?
- What should government energy ministries be aware of, and more importantly, do about digital?
The Survivors and the Thrivers
The first question in this series addressed the issue of the size of the impact digital would have on the energy industry, and when that impact will be manifest. The conclusion was that digital will be very big, it will penetrate the industry thoroughly, but it will take a long time.
This begs the second question – who wins and who loses. Participants in the energy industry are used to placing big bets to win, but usually in areas where they may have some specialised knowledge, like oil exploration. Digital is moving so quickly that it’s not clear which bets will pay off and which will be written off.
Incumbents might survive
A consensus is that the incumbents were for the moment still in a strong position. They have the resources, the trust of society, the scale, the capabilities and access to an established ecosystem. These advantages take decades to assemble, in regulated and often publicly owned monopolistic industries that value scale. My experience in the industry suggests that almost all industry incumbents of substance have some kind of digital exploration underway, and those efforts were generally aimed at improving existing business models.
However, the threat from startups is very real. All of the coolest and transformative business efforts shared in the workshop (those that fundamentally challenge the status quo) were from smaller fast moving, nimble and risk-oriented start ups.
That threat shows up in the stock market. Markets are placing outsized value on the potential of these disruptive businesses. For example, Tesla has a stock market valuation greater than Ford and GM, even though Ford sells more F-series pick up trucks in a 3 week period than Tesla sells of all its vehicles in a year. The market believes that the Tesla story (sexy fast electric cars, sold direct, with over the cloud software updates, interconnected in a vast learning network to deliver self driving solutions) is going to deliver superior returns over the incumbents.
In another interpretation, the market may have concluded that incumbent automakers are so saddled with internal impediments that they will simply fail to make the transition to keep pace with Tesla.
Incumbents + upstarts?
Combining the advantages of the incumbents with the disruptive ideas of the startups would be really potent. Policies and programs that promote engagement between start ups and incumbents (such as ecosystems and innovation centres), are helpful. In contrast, government policies that overly coddle the incumbents, block innovation, slow digital uptake or chase innovators away will exact a longer term toll.
Indeed, the value of some innovations actually grows exponentially the more people use it. This network effect can create nearly insurmountable barriers to new challengers. Therefore, first mover advantages do matter. Incumbents can be caught out by not getting involved early enough.
One key emerging theme was the role of data, ownership and privacy. Pioneering disruptors who are experiencing success do so where they get access to industry data. Their success appears to rest on the notion that the data about an individual consumer’s energy use is at least partially owned by the consumer, who can chose to share that data. Regulators in the most advanced economies are therefore forcing incumbents to unlock their data assets for innovators to use and allow that data to cross borders.
Therefore, a winning company or industry participant will likely be those that are leveraging data in some way. That, or they will make electric two-seater transportation, like bikes and scooters. You heard it here first.
The biggest barriers
I’ve written about the key digital blockers and barriers in an earlier post, and the 120 assembled thinkers added to that otherwise rich discussion of problems.
The most cited barrier to digital innovation was the mashed up regulatory framework that govern heavily regulated industries. These frameworks favour the incumbents, and generally inhibit the movement of data that is often the basis for new digital business models.
CEOs of incumbent energy organizations “get” digital and the potential or threat it poses. So do front line workers who crave easier ways to work. The problem looks to be getting middle managers to embrace digital change.
Internal competition for capital in the incumbents could be damaging. Some larger companies have thresholds as high as $1b in new revenue for their company to invest in new businesses, including digital. Few organisations have the prescience to identify with that kind of precision how a digital business will evolve. Who could have predicted the value of Snapchat, Google, Facebook and Uber? Big incumbents may be their own worst enemy in the digital world.
Standards (or lack thereof)
One researcher has identified over 50 standards setting bodies for digital, and over 650 digital standards (including those embedded in other hardware standards). Therefore, there are no standards in digital. The lack of standards is already an impediment and is poised to worsen over time.
Digital technologies for energy (sensors, gauges, meters) are potentially highly vulnerable to cyber attack, and legacy infrastructure was never designed for digital in the first instance. Cyber risks are now at the Board level.
The governmental stance
There are some early lessons to be taken from the pioneers in the digital realm, and these lessons can inform policy choices that governments and regulators will need to make. Failure to take action could relegate whole economies to be dependent on next generation software and digital businesses from foreign countries. That can’t be good.
The fourth and final question is what governments should be aware of, with respect to digital:
First, the digital sector is moving at an unstoppable and blistering pace. That pace is far faster than sectors have traditionally evolved because it’s software based, not hard asset based. Most companies cannot keep up. A public sector that is oriented more to the rhythm of an annual budget cycle and a four year electoral cycle, lengthy public consultations, infrastructure investments that last decades, and dominant legal frameworks that can date back hundreds of years, are not well aligned with a 24 month hardware cycle and a software cycle that turns over every 6 months.
Digital is pervasive. It’s impacting everything, at the same time (residences, manufacturing, logistics, healthcare, finance, energy, agriculture). Our world will likely be unrecognizable in just a few years time. Get used to it.
Policy know how
There’s not nearly enough public policy know how in digital. This is showing up in delayed regulatory responses to digital, knee-jerk reactions to digital innovations, and inconsistent policy positions. Policy makers need to recognize that there are no answers to digital, merely an ever evolving set of plausible scenarios.
It takes a long time to produce a competent workforce in any discipline, including digital, and western society is way behind in preparing to meet the need (in the technical skills of science, technology, engineering and maths, or STEM for short). Shortages of key skills like cyber are already emerging.
Advice for public policy setters
The entire meeting was aimed at surfacing advice for policy makers. Here’s my conclusion:
Why this small European country? Because they are the undisputed global leader in embracing a digital future. They have adopted a simple and compelling digital vision for their nation and a set of principles to achieve it.
Unlock data to unlock digital
If governments want to participate in, and take full advantage of, the rising digital economy, they must unlock data. That means overhauling outdated regulatory frameworks that make data a private asset owned by those who collected it (incumbents), and not those who originated it (consumers). That should not mean sacrificing privacy rules.
Create the future workforce
A national digital future does not rest on the premise of a natural endowment, like resources. Any nation can participate, provided they have the human capital. Look at STEM enrollment and performance on STEM tests to see how you stack up, and change up education to create deep STEM capabilities.
Challenge your investments
Lots of governments own energy assets and companies. Challenge them to create a digital future or risk being left behind.
Governments need to learn too. One way is to copy industry and run some field or closed trials to understand digital behavior. Trials may need to be done very transparently so that any company involvement does not create an uneven market playing field.
Invest in yourself
Build up policy skills by investing in your own people, recruiting in talented leaders, and leveraging exchanges with the private sector.
There will be one more post in this series, on security. Check back in.