Digital platforms in the energy sector – definition & first applications
Integrating renewables into the electricity system is a challenging task. Currently, different concepts of how to do this are being discussed. In our last two posts we focussed on different concepts for regional flexibility markets in Europe and Germany. In addition, we raised the question whether the future of the distribution grid operators lies in platform businesses or basic asset ownership. In all our recent posts the discussion evolved around markets and platforms. Though these are two important topics, they are not the same. Therefore, in today’s post we will shed some light on platforms and their potential role in the energy sector.
What are platforms?
The term ‘platform’ is used to describe many different things. As Gawer (2014) pointed out, the term platform is used in a technological (a core technology in a modular architecture), an organizational (institutions that facilitate coordination between agents) and in an economical way. For now, let us focus on the last dimension of platforms. There are certain criteria that are used to define platforms from an economic perspective. On a general basis, platforms at least have to fulfil two criteria (cf. Rochet & Tirole 2003):
1. A platform can be defined as an intermediary between different (at least two) users or user groups.
2. A platform addresses network externalities: This means that the individual user of a platform gains more from this service (higher utility), the larger the number of total users of the platform. Cross-side externalities are in most cases positive, e.g. the higher the number of stores that accept a certain credit card, the higher the incentive for a consumer to use this credit card. Same-side externalities, on the other hand, occur on one side of the market, either positive or negative, e.g. the higher the number of app developers for a smart phone operation system, the higher the competition, which increases price competition.
However, as these criteria are still very general, let’s consult Weiller & Pollitt (2003) for a more precise definition of platforms:
3. A platform is triangular, meaning that the users interact with each other and with the platform provider.
4. A platform facilitates the direct contact between two parties, which is different from other intermediaries like retailers, who do not facilitate this direct exchange.
5. A platform allows for innovation in complementary services, products, or business models. Weiller & Pollitt (2003) here refer to iTunes to stress the importance of this criterion. Basically, iTunes provides a technological platform that allows app developers to add additional innovative services to its system. In most cases, the current platform business provides a technological innovation that allows the users on one side of its market to build new innovative products or services on top of this technological innovation.
6. Platform competition is characterised by bundling or enveloping rather than by the creative destruction process that we know from other sectors in the Schumpeterian sense: Enveloping or bundling here refers to the fact that most platform innovations do not create a totally new product, but rather take an existing platform and use a new technology to bundle this old product with new features.
7. Information and Communication Technology (ICT) provides the basis for platform businesses. ICT can be considered the General Purpose Technology (GPT) that provides the technological foundation for platforms. However, GPT is a much simpler component of the platform that focuses on technological advancement.
Platforms are often described as two-sided markets with two distinct user groups on each side (e.g. drivers and riders in the case of uber). Yet, there are a few exceptions: Weiller & Politt (2003) observed that not all two-sided markets are platforms, and not all platforms are two-sided markets. Facebook, for example, started as a one-sided platform (students at university stay in contact), but is now a multi-sided market platform (people stay in contact, advertisement, news etc.).
Summing up, Weiller & Politt (2013) provide the following definition of platforms, which provides a good basis for further discussions:
A platform market is a market where user interactions are mediated by an intermediary, the platform provider, and are subject to network effects. As opposed to a marketplace or trading exchange, a platform intermediary must offer inherent value beyond the simple mediation process for the two sides of the market. This added-value usually comes from ICT and the associated complementary innovation that increases utility and attractiveness of the platform to all user groups. (Weiller & Pollitt 2003:7)
Demand Response & ancillary services - first platform markets in the energy sector?
Based on Weiller & Pollitt’s understanding of platforms, we are wondering in what direction platform businesses in the energy sector might evolve. Especially one criterion that is used to define platforms narrows down the number of potential applications: “added-value from platforms usually comes from ICT and the associated complementary innovation that increases utility and attractiveness of the platform to all user groups“. Where in the energy sector can we expect that complementary innovations evolve based on ICT? As we have discussed in this post digitalization in the energy sector starts with the smart meter roll out. Based on smart metering, data for different platform markets might become available. For now, let us take a brief look at two related markets that are currently evolving: Demand response and regional flexibility provision (ancillary services).
Platform Markets and ancillary services from distributed resources
In recent discussions in the US and Europe, the active involvement of distributed generators in the ancillary service market is deemed to be one promising application for platform markets in the energy sector. As we have introduced in our last two posts on regional flexibility markets (here you can find the European debate and here the Germany view), platform markets are one approach to actively involve distributed renewable generators in flexibility markets (e.g. for ancillary services like voltage control). The primary advantage of the platform market for ancillary services is the ability to access different products and address different needs.
Here, the potential of platforms to allow complementary innovations becomes a key element: We know that we need distributed generation for ancillary services in the future, but we expect the platform market to develop additional products and services that increase the utility of the distributed generators, aggregators, network operators, balancing responsible parties and other platform users. Thereby, more distributed generators should be attracted to join the platform market and ultimately, the platform could be used to involve the demand side as well, providing flexibility from generation and demand. This leads us to a second application of platform markets in the energy sector: Demand response.
Platform Markets and Demand Response
Especially in the US, demand response (DR) is already in application. Basically, we can define DR as temporary changes in the electricity usage patterns of end-consumers resulting from the changes in electricity price or from other types of incentive payments (Albadi & El-Saadany, 2008). Therefore, demand response aims at shifting energy consumption from one point in time to another to increase system efficiency, but this does not require that DR actually reduces the total energy consumption as such.
For example, in California the three largest Investor Owned Utilities (IOUs) already contracted 320 MW (in three auctions) of demand response capacity. Among these demand response providers are Tesla (with only a small share of the total capacity) and other companies like OhmConnect (more than 60 MW contracted with the IOUs). OhmConnect aggregates the flexibility from private households (behaviour-based load reduction) and sells this flexibility to the IOUs. Similar initiatives like Nest, who aggregate 50,000 thermostats in California, or OPower successfully provide demand response services in the US (more info about the DR initiatives in the US can be found here @Greentechmedia). All of these different initiatives have in common that they gain from network effects: The larger the number of involved households, the larger the individual benefit for each of them. The potential for platform markets in the context of demand response seems to be huge.
Platform markets – one part of the energy transition with huge potential
The energy transition triggers a decentralization of generation, especially from renewable resources. Platform markets might help us to increase coordination and unlock new flexibility potential from generators and new loads like electric vehicles, battery storage or heat pumps. First initiatives in the US, especially in New York, aim at the development of platform markets (see this post for more details). For now, these platforms are only concepts, but we will see many different developments in this area soon, especially as smart metering is now on the run.
Are distribution network operators in Europe threatened by a potential application of blockchain technology in the energy sector? This seems to be the pressing question that was at least partially the motivation for a recent report on blockchain in the energy sector by eurelectric, which is the European association of the distribution grid operators. From our perspective, this report reads like an attempt by the industry to reassure itself that its core business model – asset ownership and operation of the electricity networks – is not threatened by blockchain. While this might be true for asset ownership, this is different in the case of network operation.