Integrating renewables into the electricity system is a challenging
task. Currently, different concepts of how to do this are being
discussed. In our last two posts we focussed on different concepts for
regional flexibility markets in Europe and Germany. In addition, we raised the question whether the future of the distribution grid operators
lies in platform businesses or basic asset ownership. In all our recent
posts the discussion evolved around markets and platforms. Though these
are two important topics, they are not the same. Therefore, in today’s
post we will shed some light on platforms and their potential role in
the energy sector.
What are platforms?
The term ‘platform’ is used to describe many different things. As Gawer (2014)
pointed out, the term platform is used in a technological (a core
technology in a modular architecture), an organizational (institutions
that facilitate coordination between agents) and in an economical way.
For now, let us focus on the last dimension of platforms. There are
certain criteria that are used to define platforms from an economic
perspective. On a general basis, platforms at least have to fulfil two
criteria (cf. Rochet & Tirole 2003):
1. A platform can be defined as an intermediary between different (at least two) users or user groups.
A platform addresses network externalities: This means that the
individual user of a platform gains more from this service (higher
utility), the larger the number of total users of the platform.
Cross-side externalities are in most cases positive, e.g. the higher the
number of stores that accept a certain credit card, the higher the
incentive for a consumer to use this credit card. Same-side
externalities, on the other hand, occur on one side of the market,
either positive or negative, e.g. the higher the number of app
developers for a smart phone operation system, the higher the
competition, which increases price competition.
However, as these criteria are still very general, let’s consult Weiller & Pollitt (2003) for a more precise definition of platforms:
3. A platform is triangular, meaning that the users interact with each other and with the platform provider.
A platform facilitates the direct contact between two parties, which
is different from other intermediaries like retailers, who do not
facilitate this direct exchange.
5. A platform allows for innovation in complementary services, products, or business models. Weiller & Pollitt (2003)
here refer to iTunes to stress the importance of this criterion.
Basically, iTunes provides a technological platform that allows app
developers to add additional innovative services to its system. In most
cases, the current platform business provides a technological innovation
that allows the users on one side of its market to build new innovative
products or services on top of this technological innovation.
competition is characterised by bundling or enveloping rather than by
the creative destruction process that we know from other sectors in the
Schumpeterian sense: Enveloping or bundling here refers to the fact that
most platform innovations do not create a totally new product, but
rather take an existing platform and use a new technology to bundle this
old product with new features.
and Communication Technology (ICT) provides the basis for platform
businesses. ICT can be considered the General Purpose Technology (GPT)
that provides the technological foundation for platforms. However, GPT
is a much simpler component of the platform that focuses on
Platforms are often described as
two-sided markets with two distinct user groups on each side (e.g.
drivers and riders in the case of uber). Yet, there are a few
exceptions: Weiller & Politt (2003)
observed that not all two-sided markets are platforms, and not all
platforms are two-sided markets. Facebook, for example, started as a
one-sided platform (students at university stay in contact), but is now a
multi-sided market platform (people stay in contact, advertisement,
Summing up, Weiller & Politt (2013) provide the following definition of platforms, which provides a good basis for further discussions:
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 mediation
process 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. (Weiller & Pollitt 2003:7)
Demand Response & ancillary services - first platform markets in the energy sector?
on Weiller & Pollitt’s understanding of platforms, we are wondering
in what direction platform businesses in the energy sector might
evolve. Especially one criterion that is used to define platforms
narrows down the number of potential applications: “added-value from
platforms usually comes from ICT and the associated complementary
innovation that increases utility and attractiveness of the platform to
all user groups“. Where in the energy sector can we expect that complementary innovations evolve based on ICT? As we have discussed in this post
digitalization in the energy sector starts with the smart meter roll
out. Based on smart metering, data for different platform markets might
become available. For now, let us take a brief look at two related
markets that are currently evolving: Demand response and regional
flexibility provision (ancillary services).
Platform Markets and ancillary services from distributed resources
recent discussions in the US and Europe, the active involvement of
distributed generators in the ancillary service market is deemed to be
one promising application for platform markets in the energy sector. As
we have introduced in our last two posts on regional flexibility markets
(here you can find the European debate and here
the Germany view), platform markets are one approach to actively
involve distributed renewable generators in flexibility markets (e.g.
for ancillary services like voltage control). The primary advantage of
the platform market for ancillary services is the ability to access
different products and address different needs.
potential of platforms to allow complementary innovations becomes a key
element: We know that we need distributed generation for ancillary
services in the future, but we expect the platform market to develop
additional products and services that increase the utility of the
distributed generators, aggregators, network operators, balancing
responsible parties and other platform users. Thereby, more distributed
generators should be attracted to join the platform market and
ultimately, the platform could be used to involve the demand side as
well, providing flexibility from generation and demand. This leads us
to a second application of platform markets in the energy sector: Demand
Platform Markets and Demand Response
in the US, demand response (DR) is already in application. Basically,
we can define DR as temporary changes in the electricity usage patterns
of end-consumers resulting from the changes in electricity price or from
other types of incentive payments (Albadi & El-Saadany, 2008).
Therefore, demand response aims at shifting energy consumption from one
point in time to another to increase system efficiency, but this does
not require that DR actually reduces the total energy consumption as
For example, in California the three largest Investor Owned
Utilities (IOUs) already contracted 320 MW (in three auctions) of demand
response capacity. Among these demand response providers are Tesla
(with only a small share of the total capacity) and other companies like
OhmConnect (more than 60 MW contracted with the IOUs). OhmConnect
aggregates the flexibility from private households (behaviour-based load
reduction) and sells this flexibility to the IOUs. Similar initiatives
like Nest, who aggregate 50,000 thermostats in California, or OPower
successfully provide demand response services in the US (more info about
the DR initiatives in the US can be found here @Greentechmedia).
All of these different initiatives have in common that they gain from
network effects: The larger the number of involved households, the
larger the individual benefit for each of them. The potential for
platform markets in the context of demand response seems to be huge.
Platform markets – one part of the energy transition with huge potential
energy transition triggers a decentralization of generation, especially
from renewable resources. Platform markets might help us to increase
coordination and unlock new flexibility potential from generators and
new loads like electric vehicles, battery storage or heat pumps. First
initiatives in the US, especially in New York, aim at the development of
platform markets (see this post
for more details). For now, these platforms are only concepts, but we
will see many different developments in this area soon, especially as
smart metering is now on the run.
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