**2. Theoretical framework**

#### **2.1. Business models**

The business model concept offers a valuable unit for evaluating new market ventures and business practice [14–16]. There is no universally accepted definition of a business model. However, authors in different industries have proposed a litany of definitions. Ref. [17] defines a business model as "the rationale of how an organization creates, delivers, and captures value" while [18] describes a business model as "the heuristic logic that connects technical potential with the realization of economic value." Ref. [19] defines a business model as "a representation of the underlining core logic and strategic choices for creating and capturing value within a value network." As an analytic tool, the concept has been widely used in studying investors' preference for service-driven business models [15], energy service company (ESCO) [16], micro-generation solutions [20], the distributed electricity generation market [21], energy efficiency programs [22], evolution of energy utilities [23], and the ongoing expansion of distributed electricity generation market [24]. As a result, the business model concept has been widely tested in practice in the energy sector. Common components of the business model include the value chain, value propositions, target markets, competitive strategy, revenue-generation models, customer interface, value network, and infrastructure service [18, 25].

#### **2.2. Business-model innovation**

taking into consideration utility market composition and regulatory structures. This paper evaluates a typology of policy, regulatory, and business model constructs for diversifying energy mix and utility choices, arguing for a polycentric approach to carry out utility businessmodel innovation and electric power market design that might allow this suggested future to play out in the real world. Section 2 discusses challenges, limitations, and opportunities of utility-side and customer-side business models. Section 3 evaluates the Hamel framework, and Section 4 applies this framework to the New York's REV. Section 5 concludes the paper.

**Figure 2.** How the adoption of energy demand-disrupting technologies could erode energy demand and utilities'

The business model concept offers a valuable unit for evaluating new market ventures and business practice [14–16]. There is no universally accepted definition of a business model. However, authors in different industries have proposed a litany of definitions. Ref. [17]

**2. Theoretical framework**

**2.1. Business models**

revenues through 2040.

6 Energy Systems and Environment

Business-model innovation as a term remains largely vague. Reference [25] notes that business-model innovation is less a matter of superior foresight, but more of trial and error and expost adaptation. Reference [26] suggests that it entails business model experimentation, while [27] views it as a strategic renewal mechanism for organizations undergoing through periods of transformation in their external environment [28]. In this chapter, business-model innovation refers to the development of new organizational forms to create, deliver, and capture value for realizing a distributed utilities future. Electric utilities in New York and elsewhere have different starting points, value propositions, customer expectations (across customer classes), and priorities, and they vary significantly with respect to electricity revenues, electricity sales, and customer-base. How can utilities meet these demanding business expectations in an uncertain environment? Fox-Penner (2010) offers a solution through a "two-and-a-halfbusiness model" innovation as an alternative [13, 28]. The half refers to a smart integrator scenario in which the utility operating the power grid does not own or sell the power delivered by the grid. Consequently, power generation and grid infrastructure development including its information and control systems are community-owned (e.g., a community micro-grid). The advantage of a community-owned distributed generation is its potential for economies of scale. Hundreds to thousands of customers join the network participating as both consumers and producers (or prosumers) of renewable electricity from sources like solar PV and wind turbines. These prosumers use the set operational standards, but the financing and administration side of the business model is handled separately by the utility.

With that in mind, our research shows that aligning core business incentives of electricity distribution utilities with cost-effective integration of DERs into power systems is a prerequisite for achieving DMS and UCM business model constructs that might allow this future to come about, arguing for a 'polycentric' approach in the near term. As a preliminary matter, it is commonly noted that the smart integrator model has well-developed analytic capabilities to ensure the electric grid can meet electricity demand at all times. The smart integrator model also has a green dispatch mechanism that enables utilities to determine when and how to switch to low-carbon energy sources such as solar, wind, and hydroelectric power. Therefore, the only key obligation of the utility is ensuring that the local grid meets power demanded in the system. Second, the smart integrator has a "highly secure but maximally open platform for information, price, and control signals" [13]. This feature ensures that it responds well to different regulatory regimes by integrating information for accounting, billing, and settlement systems to accommodate the more complicated functions such as managing pricing plans, payment, and billing. Related to the smart integrator model is the energy services utility (ESU), which is an extension of the smart integrator model. In the ESU model, the focus of the utility shifts from being a purely asset- and commodity-driven entity to a service and value-added enterprise in which profit achievement hinges on the services offered to consumers [13, 15, 28]. Examples of the ESU business model include programs offered by Arizona Public Service Electric Company (the largest electric utility in Arizona), including energy storage, demand response, and load management.

Under a smart integrator, utilities must consider creating different triads of structure, regulation, and revenue models to facilitate transformation to a distributed utilities future. This process requires a variety of innovations, including joint construction and developments of electricity generation and delivery of electricity services such as financing and building related assets, ownership, and operations; growth of diversified independent transmission companies; diversified of generation mix with high composition of low-carbon resources mostly from natural gas and renewables such as hybrid solar PV systems, polygeneration energy systems, or zero-net energy systems; use of subsidiaries to speed up clean energy diversification; and use of utility consortia that expand member utilities' service offerings beyond the provision of electricity service (e.g., to cater to cooperative customers).

#### **2.3. Utility-side versus customer-side business model**

Two principal factors concern utilities. First, electricity must get to the customer reliably and safely. Second, power must be delivered efficiently to maximize profit margins. These factors put pressure on struggling utilities to minimize electric grid system losses. Utility-side business models, concepts, components, and technologies therefore ought to take these factors into consideration. With the growth of prosumers, the challenge then becomes: which key policy, market, and business concerns should utilities prioritize? Other salient challenges include optimal deployment of expensive assets, need for diversification of generation, demand response management, grid stability, and tariff implementation. Some of these challenges can be addressed by deploying 'smart' technologies at the utility-side to monitor operations and improve billing and tariff management. In states with fast changing electric utility landscapes such as New York, however, regulators need to identify and deconstructed elements of innovations in a contextually-appropriate manner to assure scalable solutions.

Ref. [29] examines a suite of wholesale power market design currently in use on the customerside to improve electricity reliability, security, and flexibility. It also assesses feasibility of wholesale market design with high penetration of DERs considering the role of technological innovations such as demand response, distributed generation, and energy storage. These technologies support the infrastructure needed to provide electricity services and address critical challenges such as climate change, energy security, and revenue erosion [2]. The revenue erosion concern can also be addressed through customer-side renewable electricity business models. In this chapter, distributed generation systems refers to small-scale generation systems (e.g., for private customers and small- to medium-sized businesses) in the range of a few kilowatts to about 5 MW from sources such as solar PV, micro-wind turbines, and microcombined heat and gas-power systems. Accordingly, customer-side and utility-side business models follow a very different logic in the value chain: the former is based on many small projects while the latter focuses on a small number of large projects. **Table 1** summarizes the

**Customer-side business model Utility-side business model**

Diversifying Electricity Customer Choice: REVing Up the New York Energy Vision for Polycentric Innovation

• Utility-customer relationship remains

• Electricity is treated as a commodity. • Customer does not host energy generation

• Bulk generation of electricity supplied to

• Additional energy related services and

• Small number of large-scale assets.

• Experienced in large-scale infrastructure

• Partnerships with project developers and

• Revenues through feed-in of electricity. • Economies of scale from large projects and

• Electric cost structures are in favor of utilities experiences with large-scale infrastruc-

• Customer segmentation leads to increased customer base and "eco" price premium

http://dx.doi.org/10.5772/intechopen.76023

9

unchanged.

earnings.

systems.

the grid.

projects.

suppliers.

project portfolios.

ture financing.

• Revenue models are available.

customer value.

• Centralized generation.

• Channels remain the same

• Customer pays per unit.

Customer interface • Better customer relationship needed to

Value proposition • Shift from commodity delivery to energy service provider.

market.

Infrastructure • Large number of small-scale assets.

projects.

local installers.

Revenue model • Revenue from direct use, feed-in and/or from services.

margins.

**Table 1.** Utility-side versus customer-side business model.

develop new value propositions. • Changes in customer segments. • New channels are needed.

• Long-term customer relationship.

• Customer hosts energy generation system and shares the benefits with the utility.

• New value propositions needed for the

• Partnerships with system suppliers and

• High transaction costs reduce profit

• Complex electric cost structure more due to many small investments instead of few

• New revenue models needed.

large investments.

• Generation close to consumers. • Experienced in small-scale energy

Unlocking greater value of distributed utilities requires new business models that improves ownership, asset management, and monetization of utility assets. In the utility-controlled and utility-owned value arrangement, utilities continue to execute their core competency functions, for example, asset ownership and operation. For instance, New York State's (NYS), clean energy standard (CES) provides for a "50 by 30" goal, which commits the state to

differences of the two models [30, 31].


**Table 1.** Utility-side versus customer-side business model.

the system. Second, the smart integrator has a "highly secure but maximally open platform for information, price, and control signals" [13]. This feature ensures that it responds well to different regulatory regimes by integrating information for accounting, billing, and settlement systems to accommodate the more complicated functions such as managing pricing plans, payment, and billing. Related to the smart integrator model is the energy services utility (ESU), which is an extension of the smart integrator model. In the ESU model, the focus of the utility shifts from being a purely asset- and commodity-driven entity to a service and value-added enterprise in which profit achievement hinges on the services offered to consumers [13, 15, 28]. Examples of the ESU business model include programs offered by Arizona Public Service Electric Company (the largest electric utility in Arizona), including energy stor-

Under a smart integrator, utilities must consider creating different triads of structure, regulation, and revenue models to facilitate transformation to a distributed utilities future. This process requires a variety of innovations, including joint construction and developments of electricity generation and delivery of electricity services such as financing and building related assets, ownership, and operations; growth of diversified independent transmission companies; diversified of generation mix with high composition of low-carbon resources mostly from natural gas and renewables such as hybrid solar PV systems, polygeneration energy systems, or zero-net energy systems; use of subsidiaries to speed up clean energy diversification; and use of utility consortia that expand member utilities' service offerings

beyond the provision of electricity service (e.g., to cater to cooperative customers).

Two principal factors concern utilities. First, electricity must get to the customer reliably and safely. Second, power must be delivered efficiently to maximize profit margins. These factors put pressure on struggling utilities to minimize electric grid system losses. Utility-side business models, concepts, components, and technologies therefore ought to take these factors into consideration. With the growth of prosumers, the challenge then becomes: which key policy, market, and business concerns should utilities prioritize? Other salient challenges include optimal deployment of expensive assets, need for diversification of generation, demand response management, grid stability, and tariff implementation. Some of these challenges can be addressed by deploying 'smart' technologies at the utility-side to monitor operations and improve billing and tariff management. In states with fast changing electric utility landscapes such as New York, however, regulators need to identify and deconstructed elements of innovations in a contextually-appropriate manner to assure scalable solutions.

Ref. [29] examines a suite of wholesale power market design currently in use on the customerside to improve electricity reliability, security, and flexibility. It also assesses feasibility of wholesale market design with high penetration of DERs considering the role of technological innovations such as demand response, distributed generation, and energy storage. These technologies support the infrastructure needed to provide electricity services and address critical challenges such as climate change, energy security, and revenue erosion [2]. The revenue erosion concern can also be addressed through customer-side renewable electricity business models. In this chapter, distributed generation systems refers to small-scale generation systems (e.g., for private customers and small- to medium-sized businesses) in the range of a

age, demand response, and load management.

8 Energy Systems and Environment

**2.3. Utility-side versus customer-side business model**

few kilowatts to about 5 MW from sources such as solar PV, micro-wind turbines, and microcombined heat and gas-power systems. Accordingly, customer-side and utility-side business models follow a very different logic in the value chain: the former is based on many small projects while the latter focuses on a small number of large projects. **Table 1** summarizes the differences of the two models [30, 31].

Unlocking greater value of distributed utilities requires new business models that improves ownership, asset management, and monetization of utility assets. In the utility-controlled and utility-owned value arrangement, utilities continue to execute their core competency functions, for example, asset ownership and operation. For instance, New York State's (NYS), clean energy standard (CES) provides for a "50 by 30" goal, which commits the state to procure 50% of its electricity from renewable resources by 2030. Each load-serving entity is required to procure for their retail customers renewable energy credits (RECs) linked to DERs listed in Tier 1 (e.g., solar, wind, biomass, and pumped storage hydroelectric) [32]. Likewise, the customer-side structure provides a context in which to situate the RECs' management; utilities can bundle these RECs into service programs, such as utility green pricing plans, and sell them to other parties.

competitors [34]. Finally, basis for differentiation captures how the firm or organization competes differently from its competitors. For instance, a firm differentiates itself from competitors by seeking answers to questions such as: how do opponents differentiate themselves in the electricity market (e.g., in designing utility revenue models such as platform service revenues, rate design, and customer energy data usage)? Are there other dimensions of marketoriented revenue model differentiations that could be explored? In what aspects of the energy service (e.g., rate design) has there been the least differentiation? How could differentiation be increased in some of these dimensions (e.g., by implementing opt-in rate initiatives such as time-of-use rates or smart home rates)? And have differentiation opportunities been dili-

Diversifying Electricity Customer Choice: REVing Up the New York Energy Vision for Polycentric Innovation

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11

Hamel's second major component, *strategic or unique firm-specific resources*, constitutes a source of competitive advantage. Fundamentally transforming the market to increase renewable electricity generation in New York is a source of business concept innovation. A successful business model thus creates its own intellectual hegemony. Strategic resources embody core competencies, and comprises skills and unique capabilities. Strategic assets depicts what is owned by the firm. They are rare and valuable things other than know-how, and include brand, patents, infrastructure, proprietary standards, and customer data. A prudent firm-wide use of strategic assets can lead to business concept innovation. According to [41], asymmetry in the resources a firm controls and discretionary managerial decisions about resource development and deployment can be sources of sustainable economic rent. On the other hand, core processes illustrate what people in the firm do. They are methodologies and routines used in translating competencies, assets, and other inputs into customer value. A reconfiguration of central components and core processes in the business model therefore constitutes business concept innovation [42].

The third major component of the Hamel framework is *customer interface*. It is comprised of four elements: (a) *fulfillment and support*, which describes market access (i.e., how the firm reaches the market and it includes channels, customer support, and service levels); (b) i*nformation and insight*, which refers to knowledge that is collected from customers and the ability of the organization to extract insights from this information to design new products and services for customers; (c) *relationship dynamics* refers to the nature of interaction between the firm (producer) and the customers; and (d) *pricing structure* specifies the revenue mechanism

The fourth component is the *value network* of the firm. This includes suppliers, partners, and coalitions that complement and strengthen organization's resources. Suppliers typically reside "up the value chain" from the producer [34]. The configuration of activities is a bridge component that links the organizations' core strategy to its strategic resources. *Configuration* of activities specifies unique ways in which core competencies, strategic assets, and core processes interrelate to support a chosen strategy and how those linkages are managed in order to achieve greater value. Intermediating between the core strategy and customer interface is another bridge component—the *customer benefits*—which describes the bundle of benefits that is essentially offered to consumers. *Company boundaries* refers to decisions regarding what the

At the base of the framework are four factors that define the utility of the Hamel business model. *Efficiency* guarantees that the value of benefits delivered to customers exceeds their

for monetizing services rendered (i.e., flat-rate charges or charges based on TOU).

firm does internally based on what it contracts out to the value network.

gently sought in every dimension of the business model?
