jueves, mayo 05, 2011

A Predictable Environment for VCs Smart Grid Investments

First update. These comments are the original of the EWPC Blog.

Comments

In response to a comment by JMoore on 05/5/11 3:45 PM, that ended with "Until the PUC's shift to performance based rate structures based on reliability there will be limited demand for innovation and limited appetite by VC's t invest in the smart grid," I wrote on 05/5/11 4:02 PM, that:

Most PUCs will do to little too late. There is a need for legislative action for retail business model competition that is emerging, as described in the good news part of the above mentioned EWPC post "A Predictable Environment for VCs Smart Grid Investments" at http://bit.ly/GMH029
Jose Antonio Vanderhorst-Silverio

On 05/6/11 7:41 AM, I added the following comment:

Eric,

From the architecture point of view, IECSA's concentration on the monopolist mindset, with THE ONLY WAY is certainly the exact opposite of what VCs can add. Having said that, I know there is a lot of value destruction in the making or through very early obsolescene by following utilities' ONLY WAY.

Vertical integration and incomplete organized wholesale markets are going to be replaced with fully functional complete markets that integrate demand to power system planning, operation and control. In fact, I have already shown there is ANOTHER WAY to address, for example, what Mike Dauber said "That creates dramatic unpredictability with customers/revenue, not to mention very long sales cycles."

Worst yet, by concentrating on interoperability as THE ONLY WAY, to protect utilities' Walled Garden, in a system with flawed operability market architecture, it is bound to lead to an OVERCONNECTED arrangement. The OVERCONNECTED concept is described by Bill Davidow, who calls himself in Twitter as "... the high-technology industry executive and a venture investor for more than 30 years," in his book "Overconnected: The Promise and Threat of the Internet," Delphinium Books, Hardcover, January 2011.

I write arrangement, instead of system, because by being OVERCONNECTED what is supposed to be the system is destroyed. What Bill suggests is that we need a Highly Connected system. He also suggests to design the system from scratch, as opposed to adding incremental extensions as has been done in the electric policy of the IOUs-AF.

Written at the end of 2009, the summary of EWPC-AF's article states "A new approach to power energy policy design, based on system's architecting heuristics, has led to an emerging simplified synthesis of the power industry regulatory policy. Instead of undergoing business as usual regulatory proceedings, the approach to the Electricity Without Price Controls Architecture Framework is poised to replace the Investor Owned Utilities Architecture Framework and its incremental extensions that have evolved by analytic patchwork as a extremely complex system."

The EWPC-AF has been intensely tested at it emerged organically in the EWPC Blog, since September 2007, through more than 280 blog entries, that has resulted in more than 850 comments and has more than 662,000 views. Recently the EWPC-AF passed a key test as the best possible plausible future scenario in the IEEE Spectrum Smart Grid 2025 game, where it allowed me to earn the first place of that game.
Jose Antonio Vanderhorst-Silverio

In response to the idea "The customer is the utility, which in turn, is actually the utility commission, FERC...," posted by David Dunnison on 05/5/11 8:31 PM, I wrote on 05/6/11 8:06 AM:

David,

In line with my three other posts, in the Enterprise side of the EWPC-AF, neither T&D Grid utility, the utility commision , nor FERC are the customers. They remain only customers on the T&D Grid side. The customers are what I named Second Generation Retailers (2GRs).

Please go to the EWPC post "A Predictable Environment for VCs Smart Grid Investments" at http://bit.ly/GMH029 to get to a better understanding of the EWPC-AF. It should be easy to see that competitive 2GRs will be a lot more attractive than traditional utilities to VCs.
Jose Antonio Vanderhorst-Silverio

David Dunnison posted a comment on 05/6/11 12:24 PM

Thanks Jose, interesting article.

In terms of what you are proposing - "A new approach to power energy policy design" - reinforces the point that FERC and the Utility Commissions are the customer. Or, perhaps better stated, aren't they the gate to implementing this new "energy policy design"?.

Moving to new business models, like your EWPC-AF, could be very exciting. To get from here to there we may need to work through the current regulatory environment for approval. As we have witnessed in the past, deregulation, or even watered-down reregulation, can take a long time and may not achieve our anticipated objectives.

Waiting for a change in the business model may unfortunately be well outside the timelines of VC investment horizons. What technologies can we pursue today for the T&D infrastructure that can provide near-term benefit and possibly help enable the business model change that you are seeking?

Regards, David
Jose Antonio Vanderhorst-Silverio

On 05/6/11 1:41 PM, I wrote:

David,

Thank you increasing the scope of the discussion. I wrote under the assumption of an enacted EWPC-AF based Energy Policy Act. But you are right to inquire about the process to enact such a policy in the first place.

While the FERC might be involved, the real issue is retail markets which are under state jurisdictions. As far as I know, most PUCs are not the (my) customer; instead, state legislative bodies are (my) customers.

Once a law is enacted, PUCs are bound to exercise it. That's how it gets approved. The good news I mentioned is that retail competition is already emerging. However, I do not know when it will reach a tipping point. My advise to VCs is to use scenario planning so that their investments are robust, i.e., good for the Status Quo (SQ) and good for the EWPC-AF scenarios.

The EWPC-AF is not itself a business model in the proper sense. Once enacted into law, the EWPC-AF opens up the electric power industry to a business model architecture competition, by 2GRs, on the high-tech adoption life cycle. Eventually, most business models might end up in Geoffey's Moore Chasm (very likely those on the SQ scenario), while it is expected that the best ones (like those based on the EWPC-AF) will cross the Chasm.
Jose Antonio Vanderhorst-Silverio



Why Aren’t VCs Investing in the Smart Grid? is an interesting Research & Analysis article written by Eric Wesoff on May 4, 2011. Its subheading adds that "So far in 2011, only two percent of greentech VC dollars have gone to smart grid companies. Updated with feedback from some VCs." Next is my response to Eric:
This is a bad news first. The problem with the semantics is due to the Integrated Energy and Communication Systems Architecture (IECSA) project, circa 2003, where under the title “THE NEED FOR AN INDUSTRY ARCHITECTURE,” on page 2-1 of the final release of IECSA Volume I, it is written that “There is a two-part answer to the question, “Why it is necessary to develop an industry architecture?’ First, it must be understood that the challenge facing utility executives is keeping the lights on while also enhancing the value of services to consumer… The second, and more powerful argument, is that the only way to address the challenge utility executives face is to go back to basics, understand why the current system doesn’t perform as needed, and then to design interoperability into the system from the ground up.” It is very clear that VCs investors were not part of the Smart Grid definition, but to a challenge faced by utility executives.

In fact, it was defined that among the Areas beyond IECSA were “changes to the overall business and regulatory structure of the industry.” In other words, semantics were limited to a technological system to protect the status quo of the Investor Owned Utilities Architecture Framework (IOUs-AF). To read additional architecting evidence in support of the urgent need to restructure the electric power industry can be found in the article Should the Smart Grid be a Technological Project to Address a Challenge Faced by Utility Executives?

I have created the replacement of the IOUs-AF and it is the Electricity Without Price Controls Architecture Framework (EWPC-AF) by explicitly including in a socio-technical system “changes to the overall business and regulatory structure of the industry.” The EWPC-AF is structured on two highly cohesive systems with lightly coupled interfaces among them:
(1) A primary regulated power (integrated transmission and distribution) transportation service system compact with a responsibility to transport electricity of commercial quality of a given area; and
(2) A complementary open market business system on the value chain generation, retail, pro-sumer (consumer that may produce). I later named those systems as the Enterprise side and the T&D Grid side of the EWPC-AF.

It should not surprise any one that most of VC investments are on the Enterprise side, as they concentrate on the development of the resources on the demand side, in an industry that has concentrated almost exclusively for many years on the development of the resources of the supply side. In fact, the real problem of the power industry is an overinvestment on the resources of the supply side.

This is the good news. Please take a look at the post The Coming Renaissance" of Business Model (not Price) Competition under #EWPC-AF . It should become clear that a predictable environment will be available for VCs investments.



5 comentarios:

José Antonio Vanderhorst Silverio, PhD dijo...

In response to a comment by JMoore on 05/5/11 3:45 PM, that ended with "Until the PUC’s shift to performance based rate structures based on reliability there will be limited demand for innovation and limited appetite by VC’s t invest in the smart grid," I wrote on 05/5/11 4:02 PM, that:

Most PUCs will do to little too late. There is a need for legislative action for retail business model competition that is emerging, as described in the good news part of the above mentioned EWPC post “A Predictable Environment for VCs Smart Grid Investments” at http://bit.ly/GMH029

José Antonio Vanderhorst Silverio, PhD dijo...

On 05/6/11 7:41 AM, I added the following comment:

Eric,

From the architecture point of view, IECSA’s concentration on the monopolist mindset, with THE ONLY WAY is certainly the exact opposite of what VCs can add. Having said that, I know there is a lot of value destruction in the making or through very early obsolescene by following utilities’ ONLY WAY.

Vertical integration and incomplete organized wholesale markets are going to be replaced with fully functional complete markets that integrate demand to power system planning, operation and control. In fact, I have already shown there is ANOTHER WAY to address, for example, what Mike Dauber said “That creates dramatic unpredictability with customers/revenue, not to mention very long sales cycles.”

Worst yet, by concentrating on interoperability as THE ONLY WAY, to protect utilities’ Walled Garden, in a system with flawed operability market architecture, it is bound to lead to an OVERCONNECTED arrangement. The OVERCONNECTED concept is described by Bill Davidow, who calls himself in Twitter as “… the high-technology industry executive and a venture investor for more than 30 years,” in his book “Overconnected: The Promise and Threat of the Internet,” Delphinium Books, Hardcover, January 2011.

I write arrangement, instead of system, because by being OVERCONNECTED what is supposed to be the system is destroyed. What Bill suggests is that we need a Highly Connected system. He also suggests to design the system from scratch, as opposed to adding incremental extensions as has been done in the electric policy of the IOUs-AF.

Written at the end of 2009, the summary of EWPC-AF’s article states “A new approach to power energy policy design, based on system’s architecting heuristics, has led to an emerging simplified synthesis of the power industry regulatory policy. Instead of undergoing business as usual regulatory proceedings, the approach to the Electricity Without Price Controls Architecture Framework is poised to replace the Investor Owned Utilities Architecture Framework and its incremental extensions that have evolved by analytic patchwork as a extremely complex system.”

The EWPC-AF has been intensely tested at it emerged organically in the EWPC Blog, since September 2007, through more than 280 blog entries, that has resulted in more than 850 comments and has more than 662,000 views. Recently the EWPC-AF passed a key test as the best possible plausible future scenario in the IEEE Spectrum Smart Grid 2025 game, where it allowed me to earn the first place of that game.

José Antonio Vanderhorst Silverio, PhD dijo...

In response to the idea "The customer is the utility, which in turn, is actually the utility commission, FERC...," posted by David Dunnison on 05/5/11 8:31 PM, I wrote on 05/6/11 8:06 AM:

David,

In line with my three other posts, in the Enterprise side of the EWPC-AF, neither T&D Grid utility, the utility commision , nor FERC are the customers. They remain only customers on the T&D Grid side. The customers are what I named Second Generation Retailers (2GRs).

Please go to the EWPC post “A Predictable Environment for VCs Smart Grid Investments” at http://bit.ly/GMH029 to get to a better understanding of the EWPC-AF. It should be easy to see that competitive 2GRs will be a lot more attractive than traditional utilities to VCs.

José Antonio Vanderhorst Silverio, PhD dijo...

David Dunnison posted a comment on 05/6/11 12:24 PM

Thanks Jose, interesting article.

In terms of what you are proposing - “A new approach to power energy policy design” - reinforces the point that FERC and the Utility Commissions are the customer. Or, perhaps better stated, aren’t they the gate to implementing this new “energy policy design”?.

Moving to new business models, like your EWPC-AF, could be very exciting. To get from here to there we may need to work through the current regulatory environment for approval. As we have witnessed in the past, deregulation, or even watered-down reregulation, can take a long time and may not achieve our anticipated objectives.

Waiting for a change in the business model may unfortunately be well outside the timelines of VC investment horizons. What technologies can we pursue today for the T&D infrastructure that can provide near-term benefit and possibly help enable the business model change that you are seeking?

Regards, David

José Antonio Vanderhorst Silverio, PhD dijo...

On 05/6/11 1:41 PM, I wrote;

David,

Thank you increasing the scope of the discussion. I wrote under the assumption of an enacted EWPC-AF based Energy Policy Act. But you are right to inquire about the process to enact such a policy in the first place.

While the FERC might be involved, the real issue is retail markets which are under state jurisdictions. As far as I know, most PUCs are not the (my) customer; instead, state legislative bodies are (my) customers.

Once a law is enacted, PUCs are bound to exercise it. That’s how it gets approved. The good news I mentioned is that retail competition is already emerging. However, I do not know when it will reach a tipping point. My advise to VCs is to use scenario planning so that their investments are robust, i.e., good for the Status Quo (SQ) and good for the EWPC-AF scenarios.

The EWPC-AF is not itself a business model in the proper sense. Once enacted into law, the EWPC-AF opens up the electric power industry to a business model architecture competition, by 2GRs, on the high-tech adoption life cycle. Eventually, most business models might end up in Geoffey’s Moore Chasm (very likely those on the SQ scenario), while it is expected that the best ones (like those based on the EWPC-AF) will cross the Chasm.