Published on July 29th, 2016 | by Guest Contributor0
The Rashomon Effect In Our Energy System
July 29th, 2016 by Guest Contributor
By Kathleen Gnocato and Ron Dizy
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.
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.
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.
Much can be done by energy players without the need for direct permission 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.
About the authors:
Kathleen Gnocato is the Senior Associate, leading the Utility Transformation Program for the Advanced Energy Centre at MaRS. Kathleen’s professional background includes an advisory role at Canada’s Permanent Mission to the United Nations in New York and collaborative projects for the UN Office for the Coordination of Humanitarian Affairs, the Foundation for the Defense of Democracies and the MaRS Centre for Impact Investing. Throughout these experiences she remains focused on how Canada might enhance its leadership role at the international level. With a passion for innovation and entrepreneurship, Kathleen is also the program manager of the Global Ideas Institute based out of the Munk School of Global Affairs. Kathleen holds a Master’s of Global Affairs from the University of Toronto’s Munk School of Global Affairs and a BAH from Queen’s University.
Ron Dizy is Managing Director of the MaRS Advanced Energy Centre.Ron works with a diverse group of public and private sector partners to assist utilities, energy users and energy innovators to adopt new technologies faster. He is passionate about making our energy system more cost effective, more resilient and more reliable.He was previously the President and CEO of ENBALA Power Networks, a smart grid technology company that offers grid optimization services to utilities and system operators to increase the overall efficiency and reliability of the power system.He was recruited to the executive committee of the board for the Ontario Energy Association and the Association for Demand Response and Smart Grid, and is also elected chair of the Corporate Partners Committee of the Ontario Smart Grid Forum.His entire career has been focused on bringing new technologies to evolving markets, including spending nearly ten years as a venture capitalist (both as a direct investor and as a pension fund manager), co-founding a company specializing in artificial intelligence and gathering experience in major consulting firms.