From information revolution to energy revolution

Comment by Tony Chan

In preparation for an upcoming report on the impact of rising energy prices on the telecommunications industry, I could not help but notice the similarities between the two markets albeit inside a kind of time warp.

When I first started to report on the telecommunications industry in Hong Kong, it was undergoing a profound transformation, from one consisting of major government-owned incumbents and a small number of government-sanctioned competitors, to a fully deregulated market with new players entering the market, with new technologies and services. The period was circa 1997 and dotcoms were all the rage.

While the term dotcom often has people cringing back into their office cubicles, it also refers to an unprecedented era in technology and business innovation. The widespread adoption of computers, mobile phones and the Internet bear witness to the success of those breakthroughs.

Fast forward ten years, and the same situation is happening in the energy space albeit presently limited to the US and European markets.

While the majority of markets have privatized the energy sector, it is still primarily dominated by incumbents and often heavily regulated. Until recently, there were few new entrants in the energy sector due to the high investment required to build power generating facilities and the long return on investment period. That situation is changing, as it did back during the beginning of the information revolution.

There is clear evidence that the energy sector is undergoing a period of rapid advancement and innovation, just like the dotcom era ten years ago, when a flurry of new entrants, equipped with new mobile and IP network infrastructures started to take market share from the incumbent with new and differentiated services.

In the energy space today, perhaps due to the growing urgency created by the threat of global climate change, governments and investors alike are all looking at new sources of energy, the way it is generated, the way it is delivered, the way it is sold, purchased, traded.

The coming of the renewable age
The most evident impact is the emergence of renewable energy generation. Today, wind farms, solar arrays, biomass and biogas plants and older forms of non-fossil fuel energy, such as hydro and geothermal, as well as nuclear, now contribute an increasing amount of power to the electricity grid. While Hydro, geothermal and nuclear have been around for decades and operates much like traditional coal plants in that each system provides a stable flow of energy around the clock, the introduction and growing installation of wind and solar systems are now causing breaking down the traditional energy market model.

The biggest problem is that these systems do not generate power 24 hours a day since the sun doesn’t shine at night and the wind doesn’t always blow, so they must be complemented by traditional, more stable systems. This fact has already led some critics to suggest that introducing wind power into the power grid actually causes more carbon than not because the coal plants must then add capacity just to back up the wind turbines.

On the other hand, wind and solar are increasingly in demand as an increasing number of corporations now look to reduce their environmental impact and curb emissions by purchasing all or some of its electricity from renewable energy sources.

In this way, the energy market represents a rapidly deregulating environment. There are now more players out there than ever, and the barriers to entry have been lowered with the introduction of new technologies such as solar and wind. Of all the wind farm projects I’ve read about, none broke the US$1 billion mark – which is only half of the cost of a single, high-end coal power plant.

Then again, if you are looking to use renewable energy, it is far from easy unless you build your own system next to your facilities, because finding a viable renewable energy provider, in the vicinity of your offices and with enough capacity to supply your requirement is far from an easy task.

REC system in the US
Across the US, renewable energy generation facilities are popping up everywhere, but the total amount of power they offer is far less than the total power required and the availability of renewable energy is far from ubiquitous.

Commenting on its purchase of 1.3 billion kWh of renewable energy, which equaled to about 46% of its total electricity use, Intel says that even if it wanted to, it may not find enough renewable energy to power 100% of its facilities in the US.

Intel’s purchase was also indicative of the new energy market in that it is far more complex than simply going to the power company and plugging in. The company had to buy REC (renewable energy certificates), which equate to kWhs of renewable energy.

As far as I understand, RECs are used to mark renewable energy that is delivered into a power grid. One supplier Austin Energy, which supplies notable name such as AMD, Dell, Apple Computers, and others, says that it buys the rights to electricity generated by wind farms, solar arrays and biogas plants in the area and delivers these to subscribers to its GreenChoice renewable energy program.

“When you subscribe to GreenChoice, Austin Energy contracts for green power to meet your needs. Green power then is delivered to our electric system daily. This means less electricity is needed from natural gas or coal-fired power plants,” the company explains on its Web site. “The green power reaches Austin over the state-wide transmission system. Once it enters our system, it mixes with power from the generating plants. This means the electricity generated from “green” sources is not being directed to a specific home or business. Rather, as more customers subscribe to GreenChoice, the proportion of green power in that mix grows larger and larger.”

In other words, Austin Energy is really acting as a middleman for customers looking to buy green energy. This further accentuates the increased complexity of the energy market. What RECs do is offer a common platform for energy supplier and corporations to buy, sell and trade renewable energy, making renewable energy much more accessible.

Unbundling of the power grid
This common platform has resulted in the emergence of online energy exchanges such as World Energy, which recently helped Ericsson purchased 18 million kWh of energy for its US office which included 25% from renewable sources. The interesting part of the deal was that it was conducted in a reverse auction format, with Ericsson specifying its requirements and power companies bidding to supply that requirement.

The result, according to the press release, saved Ericsson 8.3% of a US$1.5 million one-year contract.

Sound familiar? Many large corporations today rely on online auctions to purchase telecoms capacity from carriers.

The similarities do not end there. Liberty Power Corporations, the winner of the Ericsson auction, reveals that in Texas, a wholesale deregulation of the market has taken place.

“The Electric Reliability Council of Texas (ERCOT) operates Texas’ electricity grid and manages most of the state’s deregulated energy market,” Liberty Power’s site says. “As a result of deregulation, each legacy utility in ERCOT geography unbundled into three units: a power generation company; a retail electric provider; and a transmission and distribution company. This allowed competitive retail electric providers to enter the state.”

Now that should sound familiar to most people in the telecoms business, where local loop unbundling is taking place in a growing number of markets.

Perhaps the last point to note in the Ericsson deal is that Liberty Power doesn’t even have to be a generator of renewable energy, or have the ability to buy green electricity from a nearby supplier. Through the REC system, it can simply buy RECs to meet Ericsson’s requirements on the open market. That means that the RECs that Ericsson buys from Liberty Power as its corporate aim to use 25% of energy from renewable, doesn’t even have to mean it is actually using renewable energy. It just means that it is paying for renewable energy generated and (I assume) use somewhere in the US.

Time to take a closer look
So what’s the big deal for this long rant? There is overwhelming evidence that the energy market is changing at an accelerated pace, as are corporate policies regarding energy. For all corporations, telecoms or otherwise, it is time to take another look at energy.

It used to be that businesses had very little choice when it comes to buying telecommunications services. There was only the incumbent and perhaps one or two more for mobile services. Today, that market has undergone a dramatic transformation, with multiple fixed and mobile service providers. Each has their own competitive advantages and selling points, each promising the ability to meet specific business requirements, flexible pricing and service structures.

Then there are managed services, outsourcing and so on, which will enable businesses to offload some non-core functions to third party operators.
Today, the world’s businesses spend vast amounts of time and energy (no pun intended) on finding the right telecommunications service provider that match their individual needs – whether it is simply price, or network performance, SLAs, network coverage and so on.

I seriously doubt many corporations today investigate their energy purchases with as much intensity and vigor. Given the potential volatility of energy prices, (emerging) government mandates to audit and reduce carbon emissions, proposed carbon tax schemes in Europe and the US, and increase pressure from shareholders, banks and end-users on corporate sustainability credentials, energy will become as important a factor for business success as a high performance corporate WAN.

Failure to mitigate risks for energy prices, or securing a stable and scalable supply of renewable energy can result in higher power and tax bills in the future. With power the number one cost (over 90%) for network-based telecommunications providers, any instability in the cost structure such as fluctuations in coal and oil prices or the imposition of a carbon cap tax, could seriously undermine margins and competitiveness.

Related posts:

1. Intel buys 1.3 billion kWh of renewable energy
2. Google aims to accelerate renewable energy development
3. HP sources solar and wind power for Irish, US facilities
4. Motorola eyes potential for alternative energy powered systems

Tags: energy security, Renewables, solar, wind

Category: Climate change, Featured articles, Global energy, Green corporations, Renewables