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 markets
Data storage &
cloud computing
Dating, recruiting, & social
networking websites
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
3. Renewables:
• Volatility, unpredictability (loss of
revenue)
 Value of switchable uptake or VPP
4. 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: cw451@cam.ac.uk
Cited references
• Caillaud, B., & Jullien, B. (2003). Chicken & egg: Competition among intermediation service providers. RAND journal of Economics,
34(2), 309–328.
• 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), 1057–1071.
• Eisenmann, T., Parker, G. G., & Van Alstyne, M. W. (2011). PLATFORM ENVELOPMENT. Strategic Management Journal, 32, 1270–
1285.
• Faruqui, A., 2010. The Ethics of Dynamic Pricing. The Electricity Journal, 23(6), pp.13–27.
• 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.28–35.
• 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), 35–41.
• 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
Web search
(Eisenmann,
Parker &
Alstyne 2006)
3 (websites,
readers, and
advertisers)
Cross-side
positive?
Internet
High (e.g. semantic
web)
Internet
High
File storage: Cloud
computing (e.g.
Dropbox, Google Drive,
Sugarsync, iCloud)
Online retail, music,
trading platforms, and
auctions (e.g. eBay,
Amazon MarketPlace,
Rocket Internet, iTunes,
Spotify)
News and educational
media
New!
1 (users)
Same-side
positive
Internet
High
High (customized intelligent
search, bundle with other
Internet services like e-mail
and chat)
High (Remote access,
sharing, security)
Facilitates
exchange or
processing of
digital
information
Yes
Internet
and ICT
High
Yes
(Hagiu &
Wright 2011)
1 or more (1
for peer-topeer selling;
2 for buyers
and sellers)
Cross-side
positive
Internet
Medium-High
Internet
Yes
(Parker & Van
Alstyne 2005)
3 (readers,
publishers,
and
advertisers)
Cross-side
positive
between
readers and
publishers
Internet
LimitedMostly on
business
model of
given
industry
Limited
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
Medium (time saving,
information completeness
and symmetry, convenience)
–these are mostly related to
the utility in interaction
mediation
Medium (online
High (more interactive
education changes
content, real-time dynamics,
in learning methods, unlimited access to news...)
news changes e.g.
wiki and contributor
blogs)
Low-medium
Medium (efficiency and
symmetry of information) –
mostly related to interaction
mediation
Internet
Internet
Yes
Not
Yes
necessarily –
mostly on
advertising
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)
New!
Multiple (health
professionals,
consumers, and
complementary service
providers)
(Eisenmann, 1 (call makers and
Parker &
receivers)
Alstyne
2006)
Medium
ICT
High
Medium
Limited
Not necessarily
Database
system/softwar
e
High
High (improved
evidence-based
practice, service
personalisation)
Potentially high
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
Healthcare database
systems (Watson)
Telephone networks