The rashomon effect in our energy system
This article originally appeared in Cleantechnica.
The Rashomon effect refers to different interpretations of the same event by different people, arising from distinct perspectives or experiences. It derives from the 1950’s Japanese film, Rashomon, based on the (sometimes wildly) differing accounts by witnesses, suspects, and victims of a crime — and has since been used many times as a plot device.
I think we are experiencing the Rashomon effect in our energy system.
There are as many perceptions of the energy system as there are players. Government, utilities, the regulator, and innovators view and understand the energy system from their particular perspectives. Each acts rationally given its respective position and the corresponding risks, rewards, pressures and expectations.
Through our work at the Advanced Energy Centre, we have yet to meet any significant player in the energy system who is not fully supportive of innovation. However, adoption of innovation in energy tends to lag behind other sectors. In a survey of over 60 utility executives, the Advanced Energy Centre noted that key barriers to innovation in the sector are generally non-technical, such as a culture of risk aversion, government-led direction, and a lack of knowledge around what is possible within the current system structure. We have found that even though energy players are supportive of innovation in the sector, each entity faces barriers and makes assumptions based on their position within the system.
The regulator sees it as their role to protect the ratepayer, and feels that utilities sometimes bring forward suggestions to invest in technology, without appropriately sharing the risk and reward. After all, utilities are economically rewarded by increasing rate base in most regulated systems – independent of whether or not innovations actually work and deliver value. As such, all of the risk accrues to the ratepayer.
Innovators want to bring new ideas to bear, but they are wired to find the path of least resistance to market. Acting rationally, innovators are most successful in this sector when they sell incremental solutions into existing supply chains – rather than pursuing totally new ways of thinking about grid solutions.
Governments generally want to encourage innovation, and their core tool is policy. Given governments’ position in the system, they are constrained by election cycles and the need to generate timely results. This is challenging, particularly in the energy sector, where outcomes can take longer than typical political cycles allow. Real innovation happens when markets are opened, economic opportunities are exposed and there are minimal barriers to entry by new participants.
Opening space for innovation requires providing a means to reward risk and promoting market-driven solutions.
Utilities certainly do innovate within the context of rate-funded projects. Examples include Toronto Hydro’s microgrid in the PanAm Athlete’s Village, Oakville Hydro’s control room, and Powerstream’s electric vehicle pilot. These initiatives demonstrate that utilities are willing to implement innovation, but only if there are guaranteed returns. The current regulatory environment provides limited means to reward utility risk and enable business model innovation. Indeed, utilities often suggest that innovative ideas have been rejected during the rate process, or that the rate structure does not reward innovation.
In other sectors — where innovation flourishes — companies take risks to pursue innovation. They make investments without guaranteed returns; but if the innovations work, they receive significant rewards.
Some utilities — the most innovative ones — are turning to non-regulated affiliates to house their innovation. These are owned by the same parent as the regulated utility, but (with a few exceptions) they are free to pursue businesses of their choosing.
Notably, non-regulated affiliates have a different risk profile than utilities’ regulated businesses, but they also have far different reward profiles. Non-regulated entities provide an opportunity for utilities to pursue innovative projects and unlock new business opportunities, enabling them to do far more than they thought possible. For example, a Dutch utility called Eneco is pursuing innovative products and services within their non-regulated affiliate. Eneco invested $520million in renewables and $112million in innovation and start-ups, and is working with several innovators to develop and supply new products and services to their customers. They are treating ICT as a core business and have identified smart homes, solar and storage, smart buildings, and smart mobility as key transformation areas for their business.
[inlinetweet prefix=”” tweeter=”@MaRSDD” suffix=”#Futureofenergy”]Much can be done by energy players without the need for direct permission[/inlinetweet] from and within the current regulatory and policy environment. Hydro Ottawa is exploring new lines of business at the distribution edge in the Zibi project, an urban re-development project on the Ottawa River. Together with Windmill Developments and the Advanced Energy Centre, Hydro Ottawa is exploring new opportunities to realize the vision of a net-zero carbon local energy system.
Today’s energy players have the will and the capacity to collectively identify interventions to enable the adoption of innovation. Opening space for innovation requires providing a means to reward risk and promoting market-driven solutions. As our energy systems evolve, awareness and recognition of each player’s perspective within current structures is critical to better understanding how to adopt innovation at an accelerated pace.