future utility

The Future (utility) is here...

At a conference recently one utility CEO suggested that (like Mark Twain) 'the reports of my company’s death are exaggerated'. Most people in the audience, also utility industry executives, laughed. I believe they laughed prematurely...

Three things have happened in in the last few months at the layers of the industry (infrastructure, technology and customer layers) that make me believe that the pace of the change going on within the industry is accelerating. Taken separately they are not insignificant. Taken together, from a systems perspective, they are signs of a seismic (pardon the pun) power shift. The three things 

  1. Infrastructure: This layer of the industry tends to be the source of utility executive confidence about their indispensability in this industry. It’s totally understandable that this would be the case; it takes 7-8 years and billions of dollars to build a power plant. The first signs of a huge crack came in the form of Pacific Gas & Electric’s announcement yesterday that they’d be transitioning their oldest and most popular nuclear plant Diablo Canyon by 2025. The plants being phased out supply 1.7M homes in Central and Northern California homes. 1.7M homes that will now have to be supplied by alternative distributed power generation. 5 years ago the plan would have been to build or recommission the plant. It’s a new day when this is not the case. 
  2. Infrastructure Technology: The second transition happening at this layer requires some systems thinking to connect the dots 
  • A few months ago a research team from the University of Electro-Communications in Japan announced in the Optical Society research journal that they’d passed 60W of power over 300 meters of Fibre cable by modifying the fibre cladding. The team, led by Prof Motoharu Matsuura, had failed at their attempts over several years but finally got their breakthrough in 2015. It’s a short distance and not that much power but the barrier has been broken. Before Roger Bannister broke the four-minute milein 1954 or before it seemed impossible, now pretty much every elite long distance runner breaks it. It will be the same with the power-over-fibre wattage and the distance barrier as researchers will figure out how to increase the distance and power that can be passed over that distance. 
  • In Michael Lewis’ ‘Flash Boys’ Spread Networks laid 827 miles of fibre optic cable between Chicago and New Jersey at the cost of $300M. The cable was supposed to help shed milliseconds off trading times to improve returns for electronic traders. As far as I know those cables are still there.
  • Google continues to roll out fibre across the US announcing more cities at an increasing pace (see image below). 

What am I suggesting here? That the old technology for distributing electricity, transmission wires/lines, might soon lose its place as the only channel. I’m suggesting that disruption is also happening at the level where the utility continued to charge rent (you and I continue to pay the utility for power moving over transmission lines even in deregulated states like Texas where you can buy electricity from alternative suppliers). That should be scary for those laughing executives from the conference I mentioned above. But the smiles are truly about to be wiped off when we consider the customer layer of the industry.

3. CustomerI’ve written about the lack of a brand name company in the utility industry. That is about to change. On two fronts. Tesla, one of the coolest brands in the world, just proposed to buy SolarCity, one of the leaders in the residential solar industry. By combining Tesla will own distributed generation (solar), storage and some demand (Powerwall) and more demand (electric vehicles). Putting aside the likely difficulties of combining businesses and manufacturing the 400K Teslas that were pre-sold a few months ago the utilities should be worried. Bringing a brand play to this staid market will certainly shake things up. Something else missed is that a few months agoSolarCity launched their utility-scale solar (generation) and dispatchable utility scale energy storage products. In layman's terms? SolarCity was already starting to move into the terrain of some of the utilities they have slowly been taking customers from. Between Tesla’s 450K customers and SolarCity's 300K customers all captivegeneration, demand and storage customers the combined company can be considered a sizable utility. The second brand play is by Apple, the company recently applied for a license that allows it to sell excess solar energy from its campuses. Wholesale now, retail electricity to you and I soon? Time will tell.

Granted these are experiments, especially the fibre research and Tesla/SolarCity story, but some of these experiments will succeed. The time between WorldCom building all the infrastructure that laid the groundwork for the high-speed internet we know today and the computer-in-every-pocket-world we have now is a mere 13 years. The infrastructure of landlines (analogous to the infrastructure of the centralized grid) and the steady uni-directional business model (you use the phone and you pay a fee) have given way to free phone calls to my childhood friends in Lagos over WhatsApp. In 13 years business models have been upended. Financial cycles tend to be between 7-9 years so it’s taken about two cycles for phone service provider business models to change. This power shift in the utility industry started roughly around a cycle and a half ago (2006). As the infrastructure layer becomes more distributed, the technology layer becomes more fluid and the customers pay more attention to

This power shift in the utility industry started roughly around a cycle and a half ago (2006). As the infrastructure layer becomes more distributed, the technology layer becomes more fluid and the customers pay more attention to brand at a pace that the utility has up until now never had to deal with. Business models will be forever changed and new utility companies will arise.We’ll see who will be laughing then...

Why Are There No Unicorns In Energy Technology?

Opower, the shining light of energy usage management and behavior modification, is being bought by Oracle for (what would otherwise be) a whopping sum of $532M. Under normal circumstances this would be a great thing for the energy technology industry. But it's not.

See until this morning Opower was a public company with a market cap of $556M. Yes, it's being bought by Oracle for slightly less than its market cap. For technology companies delivering products to some of the biggest companies in the world - there are ~27 publicly traded utilities with over $5Bn market cap - it is rather disheartening to see one of the flag bearers end up this way. Especially when the Snapchats and Pinterests of the world command multi-billion dollar valuations.

For technology companies delivering products to some of the biggest companies in the world - there are ~27 publicly traded utilities with over $5Bn market cap - it is rather disheartening to see one of the flag bearers end up this way. Especially when the Snapchats and Pinterests of the world are commanding multi-billion dollar valuations.

So why is it difficult for energy technology startup companies to grow as big or as fast as their social media counterparts? Why are there no unicorns (companies with billion dollar valuations) in energy technology? 3 main reasons (amongst many) for this:

  1. Policy resistanceThis is a system concept where actors all work hard towards their best interests and consequently diminish the value to every actor in the system. The publicly traded utility is focused on maximising shareholder value, the consumer is focused on paying the least possible for secure and stable power, the regulator is focused on protecting the consumer and the technology providers have focused on serving the utility without disrupting business-as-usual. The outcome is a state of resistance where no one's goals are achieved, a suboptimal outcome. For technology startups' innovative efforts end up being stifled and this puts a cap on how much growth is possible in this market.
  2. Regulation and lobbying: The utility industry is, for the most part, heavily regulated. In an odd twist of business logic, the heightened regulation also provides a barrier to entry for smaller entities thereby entrenching the utilities even more. For example an average utility is required to have cash reserves that most technology startups can only dream of. Like pharma and insurance, also heavily regulated sectors, the utility industry spends a lot of money lobbying to maintain this status quo (image below shows the the top lobbying industries)Source: opensecrets.org). To bring to market a technology that would disrupt the utility business model would require a lot of money and a lot of time. Two things most early stage technology companies do not have are a lot of money or a lot of time. 
  3. Behavioural EconomicsAccenture (and anecdotally Google) carried out some research in 2010 that showed consumers only spend 6-9 minutes a year, outside of paying bills, thinking about their energy. The research also found that most of the interactions with the utility was negative. Opower was early in using social pressure to get consumers to pay enough attention to their bills to reduce their energy usage. But when you are working with just 6 minutes a year of negative interaction you have a long long way to go. Especially considering the number of minutes you and I spend reading memes, watching cat videos and dream boards with pictures of furniture we might never actually buy. The normal rules and expectations for user engagement do not apply when it comes to energy technology and stifles growth for companies in this space.

 

Combine the three conditions above and you see why there are fewer energy technology companies that have achieved unicorn status (1 and that company is Nest) than there are Women CEOs at Fortune 500 companies (20). 

Will this change? Thankfully the answer to this question of whether there will be unicorns in the energy technology space is a resounding 'Yes'. As the utility industry moves to data as the value and energy as the commodity, a distributed structure, where every device is connected/controllable and becomes an industry with empowered and mobile phone enabled consumers, new companies will sprout up across the value chain to provide what the consumer demands and enable what technology wants (progress). Steve Case calls these sorts of businesses and entrepreneurs Third Wave Businesses. It will require entrepreneurs that see the future of technology, are in tune with consumer needs and are savvy in dealing with regulation and government. It will demand a new approach to thinking about the utility industry.

That work has already started.

Future of the Power Sector in Nigeria (A Response to the Minister)

The transparency that the Minister of Power, Works and Housing provided in the Q&A session on the electricity industry published in Vanguard newspaper is commendable. There was a time when things happened and no one knew why or why not. We truly live in a new Nigeria. The candor shown is also worthy of commendation. Unfortunately, as I read the article I could not help but share my thoughts on some of the responses and hope to contribute my voice to this conversation, one that has never really happened regarding the moribund state of the power industry in Nigeria. 

I write this from a place of hope and a desire to see things change for my family and the millions of Nigerians who have gone from a world where there was power to one where people go weeks without a blink of electricity. There are complaints from the populace but I choose to believe that these complaints come from a place that recognizes that once the power issue is solved there is no way but up for Nigeria. This is how critical power is, it drives the economy. I also write this from a place of experience having worked in every segment of the power industry from power plant operations and distribution (Barking Power Station a 1000MW Gas plant that supplied 400k homes in london), trading (Energyquote a wholesale power brokerage firm acquired by Accenture), investments and consumer services (Power2Switch in the US, serving ~40k customers with energy purchasing and management, and on the board of 2 energy technology companies) for 14+ years.

So what parts of the Minister’s response do I want to address? Unfortunately I will have to frame this from a perspective that suggests that the DISCOs, a central player in the Minister’s Q&A, should not play as critical a role in the future of Nigeria’s power sector. In an industry, across the world, where the incumbent utilities are all currently working on figuring out a minimized role for the DISCO it seems Nigeria is still trying to fix what was instead of recognizing and tapping into what will be. There are three main issues to focus on here

  1. The future of the utility will be distributed and not centralized: The utility industry is made up of 3 layers. The infrastructure layer (generation plants, wires and lines, transformers, meters), a technology layer (the software that runs the operations of all the infrastructure and customer interactions) and the customer layer (metering, billing and payments). Every one of those layers used to operate on the premise that there was generation in a location that is far from the customer and the power is then transmitted to the consumer. In the future of the industry, one that was not mentioned in the Ministers response, generation of electricity will be closer to the location of the consumer. The future of the utility industry is already playing out in countries across the world in the form of incentives provided to consumers to purchase solar panels and geothermal generation at a cost that makes it lower than the cost of power obtained from the grid. Unfortunately this means that the customer is the one who enjoys the benefit and obviously (a point the Minister kept making) the DISCOs are left holding on to assets that are not as valuable as they thought they were when they got into this business of privatizing the Nigerian power market. The tariff increases compensate the DISCOs for a business model of the past when the government (and customers money) should go into building the utility industry of the future. Embracing solar generation and providing rebates and incentives to consumers will enable Nigeria meet the shortfall in power generation quicker than we would by building huge plants in remote locations to help the DISCOs. Building those solar panels in Nigeria, since we will not be reinventing the wheel on a manufacturing process that is relatively straightforward, would create thousands of technical jobs and consequently improving the lives of thousands of Nigerians creating a cycle of jobs-income-spending and a boost to the economy. The part of the Ministers response that mentioned this future reality spoke about the high cost of solar and I address this in point 2 below.
  2. Technology prices will surely drop once mass adoption takes place: The Minister talked about Solar prices being higher than the current price of electricity (N34/kWh for solar compared to tariff of N24) and I will suggest that there is no technology where this has not been the case in the early days of introducing the technology to the market. I will use an example that is familiar to almost every Nigerian; the mobile phone. When I was growing up in Nigeria in the 80’s landline telephones where for the few and the management of those phones were centralized (similar to the centralized nature of the power industry of today). In the late 1990’s and early 2000’s when mobile phones started getting into the market it was still for the educated and slightly well off. I remember holding my fathers bulky Motorola mobile phone and wondering when I would get one of my own (and that future felt very far away). Today, April 2016, there are more mobile phones in Nigeria than there are automobiles and it has become the engine of trade empowering tens of millions of Nigerians, this at a cost that is affordable for most people. People get a phone that is most affordable for them and get credits to use as much as they can afford to. The industry is distributed and no longer centralized. That is the reality of most technologies; they are expensive at the beginning and as time goes on they become affordable to the masses. This will be the case with solar energy if we realize that it has a big role to play in the future of the power sector in this country. The price of solar will drop in the same way the price of mobile phones dropped and even right now with $20M we can supply ~5000 homes with power from solar for (at least) 10 years. Considering the money we are recovering from our past ‘leaders’ this is a small price to pay to start to head in the direction we need to go. This decentralization of the technology addresses one of the other issues that the Minister highlighted; the issue of gas distribution across long distances and sabotage. Very few people, when they start benefiting from distributed solar on the roof of their homes, will sabotage their own electricity supply. People, for the most part, are not self destructive and this is evident as shown in the third and final point I make below.
  3. That future is already here and the cost will be less than fixing the mistakes of the past: Driving through Lagos and even some of the most remote locations in Nigeria what we see is generators managed by businesses and individuals who can afford them and small generators and even smaller lamps being run by individuals who have a need for power to run their lives. This is the future that we are talking about; one where power generation and management is done at the individual level. Again, this is not something that is hard to envision because it is already here and it takes away the need to buy or replace infrastructure that is best suited for the past and instead focusing on adopting technology that serves our future needs. So what is the role of the DISCOs you ask? Their role will be whatever they decide they want it to be. There will still be a need to provide infrastructure as the transition will take time and there will always be a need for some level of centralization even in a localized and distributed grid, the DISCOs can do this. There will still be a need for technology to manage this distributed grid and the DISCOs can play that role and of course there will be a need for customer billing and payments management and this also solves one of the issues the Minister mentioned of fewer users being measured than the number that actually uses the electricity currently generated. When there is a solar panel on your roof or community solar in your neighborhood there is nowhere to hide.

The real question the Minister should be helping the DISCOs answer is what role do they want to play in serving a country of consumers that are yearning for a world where the naturally abundant sources of energy that they can use is not being provided to them? Customers will always want electricity and, as technology improves and the situation continues to get worse, what customers will ask is ‘who can give us power?’ The role of the government should be to help customers answer that question instead of trying to help a soon to be obsolete business model to survive against the tide of change. It is what consumers and technology wants.  

SunEdison Bankruptcy? Nothing To Worry About!

I read the news of the SunEdison bankruptcy and @Jigar Shah’s gracious note to his old team from the offices of a nano-grid development company in Lagos Nigeria (picture below). Like everyone who is working, investing and hoping on the impact that renewable energy can have on our lives I asked the question ‘what happened? How does a company, any company, go from a stock price of $34 to (technically) $0 in about a year and a half? 

So what went wrong? The common understanding, at this point, is that SunEdison fell for three main reasons. The company

  1. spent too much money on acquisitions
  2. placed bets on Yieldcos (special vehicles that were essentially holding companies for renewable investments) but raised about 30% less funding than the $1Bn it intended to raise selling more shares in the Yieldco than it intended to sell.
  3. spent way more money than it was making. Much more. In Nov 2015 the company was $11bn in debt, was generating $2.4Bn in revenue and had net income of $536M.

Summary? Icarus flew too close to the sun (hubris), lost the wax in his wings (money) and fell to his death (bankruptcy).But things are not as bad as it seems.

We have seen this before and things actually turned out great for you and I. It is the story of  WorldCom in the early days of the current telecommunications industry. WorldCom, which started off as a small long-distance telephone company, followed the same strategy of growth through acquisition completing 

  • a mind-boggling 65 acquisitions in 6 years
  • to the tune of $60Bn
  • incurring debt of $41Bn! 

The company bought MFS/UUNet and got into internet service provision to businesses (see where I’m going here?). The acquisitions came with managerial problems for the company and the high flying stock price led to hubris in decision making (more acquisitions and a feeling of invincibility). Like Worldcom SunEdison found accounting issues but unlike WorldCom, which gave loans to executives to load up on company stock, found no fraud.

So what's the lesson from similar paths between two businesses in different industries in different eras but with the same outcome? The similarities are that all the work that WorldCom (better known to you and I as Verizon) did in the 1990’s had a hand in you streaming Netflix and binge-watching Transparent on Amazon this morning. Yes, the wires that were laid, towers that were built and the infrastructure that was put in place during those early days of the telecomms industry as we know it now are critical to the benefits we enjoy close to 20 years later.

And that is the lesson here. The renewable energy sector is in it’s very early days. The bankruptcies and confusion come from the search for business models that will work in a new paradigm of energy provision. We will figure it out. But there will be blood. A lot of money will be spent, made and lost as we wade through the murky waters in the early stages of this industry (the same way it works for the early days of any business). We, as an industry, will figure it out and the world will be better for it.

So whenever you doubt whether the renewable energy will survive just glance at your mobile phone and remember that the companies that laid the foundation for your enjoyment of Beyonce’s visual album mostly no longer exist. SunEdison may be struggling now but hundreds of businesses will take it’s place and ensure the adoption of renewable energy continues.

Here I’ll make a pitch for investing in renewable energy in Africa; The average cost of commercial power in the USA is ~12c/kWh, in Nigeria the average is ~36c/kWh (I’m looking at data from hundreds of commercial locations as I type this) and rises to closer to ~50c/kWh if you factor in diesel generators (which is a big part of the mix). With ~8 sun hours/day solar generation, at 12.2c/kWh, makes so much sense that it’s surprising there aren’t more investors diving into what is a ripe market. Reach out if you are interested...the adoption of renewable energy across the world is inevitable. SunEdison has been a big part of that revolution.

Seyi Fabode is an author and Partner at Asha Labs consulting with power industry executives to develop and implement strategic plans for technological change. Seyi writes about energy (future utility), technology (smart cities) and people (systems thinking) at www.asha-labs.com/blog. Follow@Seyi_Fab.

Quick Guide To Nanogrids and Minigrids

One of the ongoing issues with the transition to a new utility paradigm, for both consumers and providers, is the required change from a centralized to a distributed framework. Utilities are worried that consumers will abandon the power coming from a big power station far away in favor of the solar panel on their roofs, the tesla powerwall in their homes and the extra power from their neighbor. At the same time consumers are worried that the new forms of energy will cost them more than they currently pay and not everyone wants to ‘pay a premium to promote renewables’. Good news is that there is a transition opportunity that helps achieve the goals and desires of the consumer for safe (read as clean), reliable and stable power. They are called Nanogrids and Minigrids.

Nanogrids: are considered as discrete loads (the power drawn) that sometimes use direct current (DC) to reduce on energy losses that we normally see in long distance energy transmission. Navigant suggests a 5kW capacity for standalone systems and 100kW capacity if the system is tied to the current grid. Sidenote: think of kW as stock (energy in a tank) and kWh as flow (power used by your ac). The off-grid central Texas farm with its solar panels and its diesel generator on the back of the pickup truck is already operating as a nanogrid.  Why is it less disruptive to the the utility? Because nanogrids, at current scale, do not take too much off the plate of the utility enabling them make the adjustment in a more transitional way. Why is it good for consumers? The ability to manage your own generation, demand and usage using renewable energy is where we are all going so why not get there earlier than others. The fascinating thing is that in African countries, including the one where I was born, either through lack of infrastructure or depreciated assets this is already the case. I wrote about my fathers generation serving as their own Youtility with each home running a nanogrid unto itself with a generator combined with solar energy for power, a borehole dug in the back of the compound for water and gas tanks swapped out at the gas station for cooking gas. A nanogrid…


MiniGrid: So what do you get when you combine nanogrids? Doesn’t take too much of a leap in imagination to see what a minigrid is; in lay terms it is a modular collection of nanogrids. It is often a collection of demand nodes (buildings) all pulling from one or a few distributed energy sources (a solar array and some storage). The difference from the current microgrid or centralized utility structure is in the size. There will be wires required to connect the homes and commercial buildings, which is not the case in a nanogrid, but not at the range that the current grid covers. This structure of grid lends itself to the pay-as-you-go model of electricity usage that is prevalent in the developing countries where this is already in play. This is a model that can be borrowed for low-income areas of most of our fast changing cities, a model that starts to cater to the customization of service that the future utility (customer) will demand.


Nanogrids will play a big role in the smart and connected homes we will all live in in the future and consequently the minigrid system will heavily impact the smart city future that is upon us. It is quite ironic that is a grid system that we in the US will be borrowing from developing countries where the lack of infrastructure is forcing the fast adoption of these systems. The utility, in it’s current state, will play some role in this future.

What is required is for the utility to take their vast reserves of cash and infrastructure and decide which part of the value chain - infrastructure, technology or people - their strengths lie.

It is a decision that needs to be made soon.

3 Ways Blockchain is Fundamentally Changing The Power Industry

I attended a TED style energy conference about a week ago and the consensus was that the future utility is here regardless of how reluctant the industry is. With impending delivery of Tesla Powerwalls and continued reduction in solar panel prices (with science now able to facilitate solar power generation even in rainy conditions [PDF]) fundamental change is not just imminent, it is here.

I wrote a future utility post a year ago and in it I suggested a scenario where

'Sam is considered as a 'node' on the future electricity grid (with a card and a mobile app to measure how much energy she uses or produces)... Sam’s home is powered by a rooftop solar panel and has a neighbor, Jo (with his own + or -), who doesn’t drive, doesn’t own a solar panel but trades stocks for a living, using a lot more electricity than Sam by running servers at home. Some days Jo (conceptually) ‘gets’ electricity from Sam's 'home battery' or the Walgreens or the wind farm depending on whether Jo 'wants' renewable energy. Because Jo is another node on the grid'.

That scenario is closer than I projected all because of Blockchain. As I share in my ebook Managing Technological Change In The Utility Industry I see 3 areas of fundamental change

  1. Consumer data management: The ledger function that the Blockchain provides will allow 3rd party technology and service providers to safely interact with the end consumer in a relationship that up until now didn't exist; the utility acted as the gatekeeper of consumer data preventing access to the services that we now take for granted in other industries for example the ability to get contracts based on your customized usage profile.
  2. Retail trading between consumers: the contract between the utility and you is for the utility to generate and deliver electricity to the your home. Smart contracts, enabled by blockchain, will enable a solar panel and Powerwall owner to sell electricity to their neighbors, effectively cutting out the utility. It's already being piloted in NY and will be an area of huge impact. Yes, the future is now.
  3. Utility security: data transmission, and consequently data security, at the scale the utility has never known is currently at the top of industry concerns. Secure data transmission, using the blockchain and its public/private key cryptography and cryptographic signatures (amongst other cryptographic techniques), takes away the pain of the utility CIO. 

The industry is not prepared for these changes and in some cases is actively resisting it. Blockchain as an infrastructure platform is not a fad, even if Bitcoin may be, and Goldman Sachs is spending heavily to disrupt itself [PDF].

As Nobel prize winning physicist Max Planck suggested 'a new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents finally die'. Time for the industry to wake up.

A Simple Heuristic for Managing Technological Change in The Utility Industry.

The electric utility industry is glacial in its adoption of technology. There is evidence of this in never-ending pilot projects with startups that lead nowhere and in product design crowdsourcing campaigns that take a year and end up with products that remind one of the failed healthcare.gov project.

But change the industry must. The new consumer demands it (push) and it is what technology wants (pull). Caught in the middle of this push and pull is a cadre of management that is struggling with understanding who the new consumer is and is hampered by the bureaucracy and hierarchical decision making process in an environment where speed is crucial. Built on a premise that the utility's role was to provide stable power reliably and safely the system, and consequently the industry, has failed to adapt to a time where the consumers definition of safe and reliable power is one that is reasonably priced and sourced from renewables in a digitized economy.

What is required is a decision making approach that facilitates speed without compromising on the need to continue to provide stable power safely and reliably (as newly defined by the consumer). The new approach should factor in the 4P’s and weigh the impact of any new technology based on these four factors below by asking some critical questions. There are a few more questions than the ones listed below and I cover these in my ebook ‘Managing Technological Change in the Utility Industry’. 

  • People: How will the new technology impact consumers and employees?
  • Product: How does the new technology change the product we are providing?
  • Performance: Do our processes change as a result of this new technology?
  • Policy: what are the policy implications of adopting this new technology?

A comprehensive risk and response prioritization assessment of the answers to the questions above. This enables the development of a simple radar chart that enables the manager make the case for the right projects to be implemented at the right speed. An example radar chart for Augmented Reality (AR) is shown below. As easily seen, employees and processes are most affected by AR. This is due to the possibility to train a new employee to address the skills shortage that is quickly becoming a big problem in utilities across the country.

Simple heuristics like the 4Ps also provide a mindset modification to favor speed over ‘paralysis by analysis’. A much needed mindset change in the industry. As the industry moves to a distributed structure, as consumers request a deeper and more customized experience from their utility providers and as technology advances at all layers (from the infrastructure to the interaction layer) the ‘glacial-response-while-we-collect-rent income-business-as-usual-approach' of the utility will no longer work.

It’s what technology wants. And you and I know that technology eventually gets it’s way.

Please like, share and tweet!

Berkshire Hathaway, Alphabet & Why Warren Buffett Should Be Worried

Warren Buffett (through NV Energy) and Elon Musk (through Solarcity) are currently battling in Arizona; one wants status quo and the other wants the government to continue providing subsidies to homeowners with solar panels who want to sell their power back to the grid (it’s known as net-metering). NV Energy has fought the subsidies using lobbyists, and won this round by getting the laws rewritten making solar cost prohibitive  for new customers and uneconomical for current solar panel owners. Apart from the creepy image of half naked Buffett and half naked Musk, Bloomberg Business magazine shows a myopia that I doubt Warren Buffett himself has. 

Sidenote: The battle actually highlights a systems thinking trap that actors fall into called Policy resistance; various actors try to pull a system towards various goals (most of the time conflicting as in this case), the result is an outcome no one likes but everyone spends considerable time and money maintaining. Point is, no one benefits from this war.

See, this battle might be between Warren Buffett (Berkshire Hathaway or BRK) and Musk (Solarcity, Powerwall) but the real war is actually between Berkshire Hathaway and Alphabet (formerly known as Google).

A simple look at Berkshire Hathaway’s portfolio of companies shows a heavy tilt towards companies that provide (according to Maslow's Hierarchy) safety, physiological needs and a huge dose of self esteem. The graph below shows how BRK companies are heavily skewed towards these needs we have - the desire to house, clothe, feed and affirm our families; in the form of home construction/ownership, protecting those homes and our livelihoods in the form of insurance and the things we do when we have security and comfort, boating/jewelry and the like.


Crazy thing is Alphabet is not just borrowing the holding company model from BRK, Alphabet is competing directly. Here are the 3 segments of competition below. Some clear areas of overlap and competition: 

  1. Energy (safety and security): Apart from NV energy (the entity battling with Solarcity above), Berkshire Hathaway has made a lot of investments in traditional energy (coal, natural gas etc). As I mentioned in an earlier post about Alphabet/Google’s ambitions in the utility space, is fully focused on where the industry is going. Point is, for Alphabets bet to succeed to the heights we expect of Alphabet/Google bets, BRKs bet on NV Energy etc has to fail. 
  2. Infrastructure~40% of the manufactured homes in the US are owned by Marmon  a BRK portfolio company but these are traditional homes. According to Zillow more people are renting longer and less consumers are buying. What BRK has done is ‘own’ the resources required to give consumers the sense of ownership of a home, that’s the bet BRK has made. On the flip side Alphabet has made a bet on the new definition of a home not being the four walls; Nest and it’s suite of products, combined with the energy story above, enables Alphabet to own ‘inside’ the home. Again, opposite sides of a bet with the changing demographics and behavior trends giving an indication of who might win these bets. 
  3. Esteem (and maybe even self-actualization): The ‘vanity’ bucket of BRK’s investments are expressions of wealth from a time fast fading; jewelry, luxury boats and jets. While some of these might still be signs of affluence the demographic trends point to a move towards experiences. I’ll also suggest that as much as Calico is about extending life, it is the new ‘vanity’ desire, with the goal being to live long to enable us continue to have more experiences.

Larry Page has taken Warren Buffett’s playbook and modified it for the next century. Alphabet is a Berkshire Hathaway for the next 20 years, with a focus on advanced technology to satisfy our basic needs. 

I’m not a fan of trite general statements but ‘Software is eating the world’ by Andreessen Horowitz, might be apt here; the software guys are eating Warren Buffet’s world. Alphabet will be sharing their numbers for Q4 2015 today but Larry and Sergey are about to be even more embedded in our lives (and a lot richer) than we can imagine at this point.

Tech Trends That Will Impact The Utility Sector in 2016

Working at the intersection of technology and the utility industry for over a decade has taught me two things

  1. Few industries are as glacial as the utility industry in adopting innovative technology.
  2. Despite all the resistance the industry inevitably adopts the technology it resists especially if shareholder value can be created.

For an industry that is critical to our day to day functioning (you are reading this from a device powered by the grid) I stay amazed at how little attention is paid to the industry. Regardless, it is on the cusp of a world of change (otherwise known as 'hurt') in the three broad sectors of the i) grid (the wires and lines that get power to your home), ii) operations (the people and equipment that keeps your lights on) and iii) consumers services (billing/payments and customer services).

In futurecasting for this industry one does not need to take too much of a leap in imagination to determine technological advancements because the industry borrows from other asset heavy (but technology friendly) industries. A key one being telecommunications. Investors and professionals interested in this space will do well to watch for the following 

  1. Portfolio management software for distributed energy resources (DER)As solar panel prices continue to drop, as installations of Tesla Powerwalls start in markets where the kWh/price make the battery pack competitive and car manufacturers promise electric cars for the masses, the utility has to manage the variability in source and demand for power. The utility will require software to manage these microsecond decisions on where your electricity should or is coming from.  A corollary is the high frequency trading (HFT) software used in flash trading; enable traders buy and trade stock in microseconds. Similar software, that enables the management of the grid to ensure quick responses and optimal grid performance, will be required and start to make its way into the utilities arsenal for delivering electricity to you and I.
  2. Virtual Reality for Workforce efficiency: VR and AR for training and simulations will enable knowledge transfer and retention to curb the problem of an aging workforce (55% of the utility workforce will be eligible to retire in the next 5 years) before it becomes a catastrophic issue for the industry. A few months ago I attended a conference on the Future of Work and experienced the demo of an Augmented Reality product. The product wasn't for the utility industry but I quickly shared with them how perfect of a use case they have in the utility industry and how well suited their product is to the utility industry.
  3. Self Driving Cars and plummeting LiDAR costs: Unbeknownst to most, a big problem for utilities is outages caused by fallen trees/vegetation. Yes, vegetation. A single tree limb coming in contact with a power line causes circuit breakers to shut off your power. Not ideal as it inconveniences you and costs the utility money. Those self-driving cars you see roaming your streets (for those of us in Austin and San Francisco that is) and the plummeting cost of LIDAR* equipment (from tens of thousands of Dollars to $250) will enable utilities capture 3D data of vegetation close to wires and lines and plan ahead and make decisions about what to trim, when and how before unexpected outages occur. This will cut cost and improve the linesman efficiency who now have a plan to work with instead of driving around all day in search of stray tree limbs. 
  4. Customer service, billing and payment user experience improvements:  I met with a passionate entrepreneur here in Austin a few weeks ago who's applying an experience ubiquitous to digital natives who do use Venmo and do everything with a few clicks on their mobile phone; share payments. George Koutitas through his company Gridmates is enabling any consumer to share energy with people in need in the same way we transfer money to friends/family through mobile phone banking apps.  It's a simple premise but one that is truly disruptive to the current payment and billing technology stack of the power industry (which I've spoken about before).

As is obvious from the list above, these technologies aren't new. But they are new to the utility industry. These technologies are mature in their applications in other industries and, for those in the utility industry, this is an indication of their reliability. The utility requires robust, tried and tested products that will enable secure and stable delivery of power to you and I. That's always been the case and, regardless of how cool or trendy an applicable technology is, the utility is not about to change its criteria...

Any other trends or products you expect to make its way into the industry in 2016?

* LIDAR: is a portmanteau of 'light' and 'radar' which explains the means by which the equipment captures data and converts into 3D imagery.