Electricity market as a platform market

Electricity market as a platform market

Electricity markets as platform markets Weiller, C. Pollitt, M. Working Paper #1334 EPSRC Autonomic Power System Project Presentation at EPRG E&E Seminar 27th January, 2014 Outline What is a platform market? Why is (retail) electricity becoming one? Cases and examples Consequences for pricing and tariff structures Consequences for energy policy Examples of platform marketsDating, recruiting, & social networking websites Data storage & cloud computing Web search Entertainment & music

Messaging & e-mail Credit cards Online retail, trading platforms, and auctions Operating systems News and educational media Examples Credit cards Software and OS Platform Visa, MasterCard, Amex... Windows, MacOS, Linux... User groups Two (Merchants and consumers banks) Two (Application developers and consumers)

Pricing 2-sided (Amex) or 1-sided (Visa) 2-sided (Windows) or 1-sided (Linux) Network effect Cross-side positive Cross-side positive Same-side (application developers) negative Same-side (consumers) positive Platform technology Chip and card Computers, smart phone or tablet Innovation in complements Medium High

Impact on un-related industries High High What platform markets have in common: Multi-sided markets Network externalities Intermediation service provider Triangular interactions And perhaps... Digital information transmission between user groups Complementary innovation (ecosystem) ICT as the platform technology Service-based business models Enhanced functionality Theory - Definition One or more user groups linked by a service or product provider that mediates their interactions (Triangular) Network externalities Same-side Cross-side

One-way, two-way?... Or none necessary? Difference with a traditional market? Same-side network effects: More than economies of scale Intrinsic value creation primarily by enabling direct interactions Theory - Definition Difference with re-sellers (grocery stores) or input suppliers: Direct interaction Affiliation with the multiple user groups Source: Hagiu & Wright, 2011 Theory - Competition Platform competition: Envelopment (Eisenmann et al., 2011) or bundling (Nalebuff, 2004) Competing on the seller-side Competition between users: Compete to sell through the platform (software, video game developers...) Barriers to entry: High switching costs and network effects (Suarez & Kirtley 2012)

Theory Market structure Single-homing vs. multi-homing Saturation of network effect? Monopoly can be most efficient market structure (Caillaud & Jullien, 2003) Reconfiguration/re allocation of value, rather than Schumpeterian innovation Innovative business ecosystems E.g., Apple Store, Google, Amazon Platform status comes through establishing leadership in a broader business ecosystem (Gawer & Cusumano, 2002) Theory - Pricing Price structure: Transaction-based vs. fee-based Exclusive services, monopoly or dominant-firm equilibria: Pure transaction Two-sided single-homing: Two-part tariff Multi-homing: Pure registration fee (e.g. Amazon & e-Bay) Valuing network externalities Both sides pay positive prices (e.g. newspapers) One side pays positive prices and the other accesses for free (e.g. some credit cards) One side pays positive prices and the other side pays negative prices, i.e. is compensated for using the platform (e.g. dating websites)

Proprietary vs. open platforms Pricing User group subsidisation When the network externalities are high enough, i.e. when the marginal cost of connecting an additional user to the platform is lower than the marginal value of its connection for existing and prospective users, the platform provider can apply negative prices to one user group and still collect overall positive profits in equilibrium (Caillaud & Jullien 2003; Economides & Katsamakas 2006). In this case, the most profitable pricing strategy for a platform provider is sometimes to charge below marginal costs for access (Caillaud & Jullien 2003; Economides & Katsamakas 2006; Eisenmann et al. 2011) and for the producers applications (Economides & Katsamakas 2006), simply to attract a wider user base. A working definition Definition. A platform market is a market where user interactions are mediated by an intermediary, the platform provider, and are subject to network effects. As opposed to a marketplace or trading exchange, a platform intermediary must offer inherent value beyond the simple transaction mediation for the two sides of the market. This added-value usually comes from ICT and the associated complementary innovation that increases utility and attractiveness of the platform to all user groups. Platforms in electricity?

Drivers of transition in electricity markets 1. Smart metering data: New business models, new entrants Understanding of behaviour Balancing services in retail market 2. Customer participation: Generation owners (solar panels) Storage owners (EVs) Demand-elastic (DSM) Value of consumers as resources 1. Renewables: Volatility, unpredictability (loss of revenue) Value of switchable uptake or VPP 2. ICT: Apps, web interfaces

Smart appliances, smart meters New functionality Emerging realities... Differentiated needs for quality (consumer) Differentiated elasticities of demand (consumer) Differentiated environmental preferences (consumer) Differentiated service preferences (consumer) Differentiated ability to provide services as resources (consumer) Differentiated service offerings (supply) Increased volatility (supply) Availability of more granular data (supply). Platform positioning 41 major power producers Trading through bilateral contracts in forwards, futures and short-term markets (incl. through power exchanges) National Grid Company Transmission Operator 14 distribution network

operators (distribution areas) Wholesale balancing mechanism and imbalance settlement Small- and medium-scale power generation (renewables) 15 supply companies Electric vehicle management platform Balancing service platform Customers Sources: Adapted from Simmonds (2002); UK Department of Energy and Climate Change (2012b); Ofgem (2012)

Platforms in electricity: Balancing services/Energy optimisation Platform mediator COULD BE: 1. Specialised de novo energy service company 2. ESCO 3. ICT or data management company 4. General service company (finance, retail, etc.) User group 1: Retail suppliers or generators User group 2: Electricity consumers Platform mediator Platform technology: ICT Platforms in electricity:

Electric vehicle charge management Platform mediator COULD BE: 1. Charging service company 2. Specialised EV aggregator 3. ICT or data management company User group 1: Retail suppliers or DNOs User group 2: Electricity consumers Platform mediator Platform technology: Charging network* * The term network refers to the combination of ICT and hardware infrastructure

Why the traditional (current) electricity market is not a platform... Network element, but network externalities? Simple supply chain Electricity is charged to consumers on a transaction basis: per-kWh costs of energy delivered + fixed costs of investments in the network Financial transactions flow linearly from consumers back to generators Two-sided market? ICT/Platform interface is needed to realise value from both sides for both sides The question of subsidising some consumers is not on the table An electricity platform in practice Multi-homing or single-homing Consumers likely to adopt one platform only Suppliers could participate in multiple platforms, as the value of the optimisation service is to reach as many customers as possible, including those that are not their own customers!, Competitive market structure Co-existence of multiple platforms possible Monopoly (not necessarily inefficient!) Relationship with ESCOs Consumers can use the platform services and remain customers of ESCO Platform could bundle electricity supply + optimisation services, bypassing ESCO Cost/benefits of customer acquisition

Target valuable customers first and subsidise their participation Find optimal number of consumer participants Examples in electricity (Emerging) Functionality: Tracking Billing Advice Remote control Mobile Energy, bill-splitting... Bidgely, consumption monitoring and itemization... Kill-Ur-Watts Simple energy Social network PHEV manager: The Chevy Volt OnStar Consequences: Pricing

Flat-fee tariff structure, akin to a subscription or registration tariff Consumer differentiation Subsidisation of (consumer-side) user group Consumers as a resource for the system High demand, highly flexible consumers = more valuable Value (monetisation) of service to (supply-side) user group Efficiency, customer service, in DNO revenue calculation Value of certainty of uptake or VPP for renewable generators Consequences: Society 1. Ethics of smart-metering Does real-time/TOU/peak pricing disproportionally affect lowerincome households? (Hogan 2010; Faruqui 2010) A platform-type service could help consumers manage their electricity costs, and ensure an effective re-allocation of value in the market Platform pricing (fee-based) protects the vulnerable Buffer Consequences 2. Innovation Internalise vs. outsource platform service: New entry Platform market to stimulate complementary innovation and increase consumer interest (e.g. smart phone apps) 3. Social welfare through energy optimisation A platform intermediary that minimises losses and improves the utilisation of the system in the retail sector through a matching service

offers a valuable service to both consumers and suppliers Solve peak load problem by making some decisions on behalf of the consumer (constrained by pre-specified preferences) Conclusions We discussed implications of entry of platform services between consumers and suppliers or DNOs, through cases: Home energy management/balancing services, and EV charging Drivers are consumer differentiation, data availability, and low-carbon transition Future research should investigate the economic aspects of electricity platform pricing Contact: [email protected] Cited references Caillaud, B., & Jullien, B. (2003). Chicken & egg: Competition among intermediation service providers. RAND journal of Economics, 34(2), 309328. Economides, N., & Katsamakas, E. (2006). Two-Sided Competition of Proprietary vs. Open Source Technology Platforms and the Implications for the Software Industry. Management Science, 52(7), 10571071. Eisenmann, T., Parker, G. G., & Van Alstyne, M. W. (2011). PLATFORM ENVELOPMENT. Strategic Management Journal, 32, 12701285. Faruqui, A., 2010. The Ethics of Dynamic Pricing. The Electricity Journal, 23(6), pp.1327. Gawer, A., & Cusumano, M. A. (2002). Platform leadership: How Intel, Microsoft, and Cisco drive industry innovation (Vol. 31). Harvard Business School Press. Hogan, W.W., 2010. Fairness and Dynamic Pricing: Comments. The Electricity Journal, 23(6), pp.2835.

Ofgem, 2012. Electricity distribution annual report 2010-11. Rochet, J., & Tirole, J. (2003). Platform competition in two-sided markets. Journal of the European Economic Association, 1(4), 990 1029. Simmonds, G., 2002. Regulation of the UK electricity industry. CRI Industry brief. Suarez, F. F., & Kirtley, J. (2012). Dethroning an Established Platform. MIT Sloan Management Review, 53(4), 3541. UK Department of Energy and Climate Change, 2012b. UK Energy Sector Indicators 2012 Weiller, C. and Pollitt, M. Platform Markets and Energy Services. EPRG WP #1334 Extra slides Examples of platform markets Table 1. Examples of industries that have transitioned from non-platform markets (see table below) to becoming Internet-based platform markets Features Examples Cited in Number of user groups Network externalities Platform Complementary

technology innovation Added-value platform (inherent) Generalpurpose technology Impact on un-related industries Facilitates exchange or processing of digital information Web search (Eisenmann, Parker & Alstyne 2006) 3 (websites, readers, and

advertisers) Cross-side positive? Internet High (e.g. semantic web) High (customized intelligent search, bundle with other Internet services like e-mail and chat) Internet High Yes File storage: Cloud computing (e.g. Dropbox, Google Drive, Sugarsync, iCloud)

New! 1 (users) Same-side positive Internet High High (Remote access, sharing, security) Internet and ICT High Yes Online retail, music, trading platforms, and auctions (e.g. eBay, Amazon MarketPlace, Rocket Internet, iTunes,

Spotify) (Hagiu & Wright 2011) 1 or more (1 for peer-topeer selling; 2 for buyers and sellers) Cross-side positive Internet Medium-High Medium (time saving, information completeness and symmetry, convenience) these are mostly related to the utility in interaction mediation Internet

LimitedMostly on business model of given industry Yes News and educational media (Parker & Van Alstyne 2005) 3 (readers, publishers, and advertisers) Cross-side positive between readers and publishers Internet

Medium (online High (more interactive Internet education changes content, real-time dynamics, in learning methods, unlimited access to news...) news changes e.g. wiki and contributor blogs) Limited Yes Dating, recruiting, and social networking websites (Armstrong 2006; Hagiu & Wright 2011; Boudreau & Hagiu 2009) 2 or 3

(generally 2 user groups and advertisers) Cross-side positive except with advertising? Internet Low-medium Not Yes necessarily mostly on advertising Medium (efficiency and symmetry of information) mostly related to interaction mediation Internet

Examples in electricity, IT, and software Features Examples Cited in Number of user groups Network externalities (other than economies of scale) Platform technology Complementary innovation Added-value platform (inherent) Impact on unrelated industries Electric vehicle charging

infrastructure and service network New! 2 (car owners and electricity suppliers) High Charging infrastructure and ICT (Cloud services) High High Medium-High Retail electricity balancing services New!

2 (distribution grid operators and consumers) Medium ICT High Medium Limited Healthcare database systems (Watson) New! Multiple (health professionals, consumers, and complementary service providers) Not necessarily

Database system/softwar e High High (improved evidence-based practice, service personalisation) Potentially high Telephone networks (Eisenmann, 1 (call makers and Parker & receivers) Alstyne 2006) Not necessarily ICT (Wired and wireless

network) High High High Credit cards (Amex) (Rochet & Tirole 2003) 2 (merchants and consumers) Cross-side positive Chip and card Medium High High

Operating systems (Rochet & Tirole 2003) 2 (application developers and consumers) Cross-side positive; same-side (application developers) negative; same-side (consumers) positive when proprietary platform Computers, smart phone or tablet High High High

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