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Oct 30, 2014

The Electricity Grid Gets a Value Chain

How Does Your Business Model Fit?


In the past 10 years many technologies and services have entered the energy market, from LED lights to smart meters to rooftop solar. Yet these emerging technologies haven’t (yet) taken off and become as ubiquitous as cell phones or DVD players.  There are far more opportunities for energy-based emerging technologies to offer value—to customers and to the grid.

So why do many opportunities remain untapped? Because until now it has been difficult for new ventures to fully capture and monetize their value. The electricity grid, complex as it is, needs a value chain framework to identify a) values, b) the flow of those values, and c) opportunities for how to capture that value.

Moving Beyond a Linear Value Chain

In a typical value chain there is a linear progression from raw materials to finished products. Consider the value chain for a solar panel. It starts with raw material inputs used to make silicon ingots that are then cut into individual wafers. The wafers in turn are processed to create individual photovoltaic cells, which are combined into a module panel that can be easily transported and installed. A system designer combines panels and other parts, which are taken to site and installed at the end point of use. Along each step of the chain some value is added, passed along, and monetized—whether explicitly in the transaction between a supplier and buyer or implicitly within a vertically integrated company that controls portions or all of its chain.

The electricity grid isn’t so simple. It’s a much more complicated web of perishable supply (generation) and demand (load). It is not possible to create a linear value chain for such a matrixed system. However, it is possible to create a nodal value chain map that captures the flow within the matrix and illustrates where the value is created and passed along to the next step.

A Value Matrix for the Electricity Grid

The framework we use contains three layers with three essential functions to map the system value chain of the electricity grid. A layer defines where actions are occurring and essential functions define what those actions are.

1. Organizational Layer: where operational decisions are made, such as the computer systems and operators that make decisions regarding deployment or generation.
2. Communications Layer: the assets that transmit and receive data, such as the sensors and wireless communications that allow the transfer of data to the organizational layer for decision making and back to the electrical layer to create action.
3. Electrical Layer: the physical grid, such as the wires and inverters that allow the passage of electricity.

Each layer MUST contain three essential functions:

1. Input: the generation of activity within that layer
2. Process: manipulating the activity within that layer
3. Output: the end use within that layer

There isn’t anything magical about an electricity system value chain, but what it does is remind you to think about what is happening several steps before and after your product’s or service’s action. This makes it possible to highlight what might be important to the other actors in the space and how you might be able to provide added value.

The Electricity Value Matrix In Practice

So, how would this work? Let’s walk through a very simple but specific example using a nine-step process to illustrate using the system value chain to capture where value is added.

You are Smith Smart Ware (SSW). You’ve just developed a new line of smart thermostats and you want to confirm your value proposition and revenue streams.

STEP 1: Define the boundaries of control.

You could set broad boundaries, such as the electricity grid, in which value flows across the meter from a customer’s thermostat to the grid. You could set tighter boundaries, such as a behind-the-meter perspective in which value is optimized for the individual customer. Or you could choose another set of boundaries entirely, in which the meter doesn’t come into play. In this case, let’s say your system boundaries will be the space the thermostat is trying to control.

STEP 2: What is the value the system is trying to capture?

Distributed energy resources (DERs) can offer 18 distinct values. You can select one or more of those against which to apply the value chain framework for your DER. In this case we are focused on the environmental value of CO2 reduction. From the standpoint of your thermostat, we’ll look to do that by better managing the space’s climate (i.e., temperature) to keep occupants acceptably comfortable while using less fossil-fueled electricity. 

STEP 3: What decisions need to be made to capture that value?

In order for a thermostat to help reduce CO2 emissions by using less electricity to provide the same level of service, we must decide what the acceptable levels of comfort are for the space, as well as when to turn the HVAC system on or off to maintain that comfort—including potentially running that system less, more efficiently, or at times of day or night when the energy running the HVAC system would be more or less carbon intensive. 

STEP 4: What do you need to know to make that decision?

In order to determine how to meet the appropriate comfort level, the thermostat must be able to detect the space’s comfort level (i.e., temperature) and then adjust that level via available room HVAC systems.

STEP 5: How do you get this information from the electrical system?

The thermostat senses the space temperature to determine the indicative comfort level. What is the “appropriate” temperature? That’s personal.  My “I lived through the Great Depression” grandmother is fine with 62 degrees; I need a jacket and hat at anything less than 68.

STEP 6: What can you do to make this decision happen?

In order to decide whether or not it is too cold or too hot for a given time period, you can either give the system set temperatures, or you can manually adjust the setting each time, as my grandmother still does.

STEP 7: How is this decision making performed?

The SSW thermostat is the platform by which all this decision-making is performed.

STEP 8: How do you realize these actions in the electrical system?

Traditional HVAC components are generally turned off or on until a desired set point is reached or manually adjusted.

STEP 9: Now, let’s take a look!

Has the process you defined created the optimal end output? Did it do what you wanted it to do? Did it do it in the way that you thought it would? Or did it help discover missing components, required specifications, and/or synergies among processes?

Again, this was meant to be an overly simple example to illustrate the point, but even here, we can see how the framework could be used to identify and unlock additional value. For example, thermostats typically monitor and respond to one variable—temperature—and do basically one thing—turn the HVAC system on or off. But the value chain, and the boundaries and criteria and nodal connections we must consider when navigating it—can help us expand our thinking about something as basic (or potentially sophisticated) as a thermostat.

For example, at the end of the day we want a thermostat that keeps our space comfortable while reducing energy consumption to lower our carbon emissions. For most thermostats, temperature is used as a proxy for comfort, but other factors, such as humidity, influence the subjective feeling of comfort, too. In addition, why must thermostats only control an HVAC system? What if they could also automatically adjust window coverings, to regulate solar gain in a space and keep it cooler or warmer passively? Lastly, have we considering to whom the sensed data might be valuable, such as a utility operating a residential demand response program? Could the utility or even the equipment OEMs use this data for their own value creation, and if so, could we record and present it to them in the way they find most valuable?

We want to encourage you to try incorporating your own product or service into this framework and letting us know what you can discover. Or send your idea to us and we apply the framework for you.

Image courtesy of Shutterstock.


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