“On-demand services: The flexibility in energy systems from a service perspective”

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“On-demand services: The flexibility in

energy systems from a service

perspective”

By: Mike Weering

02-04-2017

University of Groningen Faculty of Economics and Business Master Thesis Supply Chain Management

Supervisors:

prof. dr. ing. J.C. Wortmann ing. R.J.H. Van der Burg (MSc.)

Violenstraat 20-1 9712RJ Groningen

06-83577713 m.g.weering@student.rug.nl

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the end-user expects that consumption is available whenever needed. Flexibility services can increase the well-functioning of the energy system by balancing the demand and supply of energy. The need for flexibility services is unknown and therefore the flexibility services need to be available whenever the energy system needs flexibility. From a service perspective, services with a guaranteed availability are defined as on-demand (OD) services. However, conceptual clarity concerning OD-services is missing and it is not clear how OD-services differ from non-OD-services and what their typical characteristics are. By developing flexibility services with a guaranteed availability in practice this thesis identified five typical OD-service key characteristics. By designing flexibility services with an OD-character in practice (Rooftop Energy), this study enriches contemporary literature with a conceptualization of OD-service characteristics. Consequently, practical understanding on how to implement an OD-(flexibility) service enriches the knowledge about the managerial implications of OD-(flexibility) services in a specific setting.

Keywords: Flexibility services, on-demand services, guaranteed availability, renewable

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1. Introduction

As a result of the Energy Agreement, 20% of the Dutch energy consumption needs to be produced by renewable energy (RE) sources in 2020 (Donker, Huygen, Westerga, Weterings, and Bracht, 2015). Consequently, stakeholders within the energy system are affected by the energy transition because unlike traditional energy production, RE production has an intermittent character (e.g. the production of solar energy is dependent of the sun). As a result, the energy supply will become more unpredictable and fluctuating over time. In order to guarantee the reliability and effectivity of the energy system, continuous balance of energy demand and supply is needed. However, giving guarantees results in severe challenges for the stakeholders in the energy system. In order to overcome these challenges, flexibility in RE systems is needed to manage the uncertainties in energy demand and supply (Huber, Dimkova, and Hamacher, 2014; Ma, Silva, Belhomme, Kirschen, and Ochoa, 2013).

Flexibility in RE systems is defined as the ability to respond to unpredictable shifts in energy supply and demand (Huber et al., 2014), preferably as fast as possible (Donker et al., 2015). Flexibility in RE systems can help the well-functioning of the energy system (Ma et al., 2013), where the well-functioning of the energy system is defined as an energy system which continuously balances energy demand and supply (Donker et al., 2015). Several sources of operational flexibility are identified to maintain the continuous balance between energy demand and supply such as energy storage, energy conversion, demand side management and supply side management (Lund, Andersen, Östergaard, Mathiesen, and Connolly, 2012). By offering these sources of operational flexibility as services (i.e. flexibility services), it will become easier to integrate the sources of flexibility in the energy system. As a result, stakeholders in the energy system can create economic attractive business offerings (Donker et al., 2015). For flexibility services it is of major importance to guarantee the future availability because uncertainty exist when situations of imbalance occur, and therefore, when the flexibility service will be used.

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5 core services and supplementary services. The core service of flexibility services clearly fits within service existing definitions from literature. For example, Grönroos (2008) states that services entail a process and an outcome dimension (e.g. charging an energy device according to the interest of the service client). However, the supplementary service of flexibility services that guarantees the future availability of the core service has not a clear outcome dimension because it can be consumed whenever needed. Besides, literature remains rather silent in describing the future availability sub-service of OD-services while Donker et al. (2015) state that the future availability is important for flexibility services. As a result of this theoretical gap, questions arise how to design a flexibility with an OD-character (i.e. OD-flexibility services) for RTE.

It is remarkable to note that OD-services are not thoroughly discussed in literature while examples are widespread. In order to cover the theoretical gap this study enriches the contemporary literature by identifying the characteristics and conceptualize OD-flexibility services. Through the contributions of this research, firms will be better able to judge the characteristics of an OD-service. By researching an OD-character for flexibility services, managers within the energy sector will be better able to (1) position flexibility services with a guaranteed future availability (Donker et al., 2015); and (2) anticipate on the intermittent character of RE-sources. In order to increase the understanding of the characteristics of OD-services the following research question will be used: “What are the key service characteristics of on-demand (flexibility) services?”

First, existing knowledge within the service literature will be examined. In the literature review of this thesis sixteen characteristics of services are identified that can be used when comparing services with each other. This enables a comparison of OD-services with non-OD-services in identifying the characteristics of OD-flexibility services. The characteristics are identified through utilizing the design science methodology in order to find a solution for RTE in designing a flexibility service with a guaranteed availability. The research design of Holmström, Ketokivi, and Hameri (2009) has been performed in transferring the practical findings concerning OD-flexibility services to theoretical knowledge.

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6 designed a flexibility service. Thereafter, the results will be presented followed by the discussion.

2. Literature review

In this literature review the theoretical foundation about services and OD-services will be described. Because a comparison is made between services (i.e. regular services) and OD-services, both concepts will be discussed separately. Next, an overview is given of characteristics that distinguish services from each other and explain the decomposition of core services and facilitating services. Finally, the concept of OD-services will be defined based on the existing service literature.

2.1 Services

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7 as “economic activities that are intangible and imply an interaction to be realized between service provider and consumer” (p.11).

From the literature search it can be concluded that service definitions are on a continuum from very general definitions to focused definitions. While general definitions are applicable on all services, it can be considered that focused definitions do differ in their degree of contextual applicability. Therefore, this thesis will use a combination of service definitions as a function of describing OD-services.

Because the aim of this thesis is to compare the characteristics of general services (or non-OD-services) with OD-services, characteristics can be used to identify the differences between services (Lovelock and Wright, 2001; Van Looy, Gemmel, and Van Dierdonck, 2003). The diversifying characteristic of OD-services that is relevant within the scope of this research is the guaranteed availability. According to Lovelock and Wright (2001) this can be explained by decomposing services into core services and supplementary services, which will be explained in the following section.

2.1.1 Core services and supplementary services

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8 example, if a retailer accepts credit card payments the service is both facilitating (payment is required for the service delivery) as enhancing (added value for the customer because his purchases are automatically insured). Despite literature remains silent concerning a more hybrid form of the decomposition of supplementary services, the distinction of Lovelock and Wright (2001) is at the heart of this paper. This, because OD-services can also be decomposed into core services and supplementary services, as explained in section 2.2.

2.1.2 Characteristics of services

A classification of service characteristics can be used to organize and distinguish services from one another (Hunt, 1976; Lovelock and Wright, 2001). Table 2.1 illustrates a classification of service characteristics, based on the frameworks of Lovelock and Wright (2001) and Van Looy, et al. (2003), that can be used to compare services with one another. By structuring the characteristics of services in a table this thesis is able to structure the characterization of OD-services. Despite many authors state that the IHIP characteristics are not comprehensive enough for comparing services with each other, Van Looy et al. (2003) state that by placing the IHIP characteristics on a continuum these characteristics can be used to compare services with each other. In addition to the IHIP characteristics, Lovelock and Wright (2001) and Van Looy et al. (2003) identified additional service characteristics to compare services from one another. These service characteristics are presented in table 2.1.

Description Degree of

inseparability

The degree to which production and consumption of a service cannot be separated (Edvardsson et al., 2005).

Degree of heterogeneity

The degree of variation of (the same) services (Krause and Scannell, 2002). Standardization will reduce the heterogeneity (Van Looy et al., 2003) whereas customization increases the heterogeneity (Lovelock and Wright, 2001).

Degree of perishability

A service cannot be stored for future sale. The lower the goods component and the higher the simultaneity of production and consumption, the higher the degree of perishability and vice versa (Van Looy et al., 2003).

Degree of intangibility

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Nature of service encounter

The extent to which the service client is integrally involved in the service process, e.g. car maintenance versus barbershop (Lovelock and Wright, 2001). Is the service towards people (barbershop) or towards tangible objects (car).

Nature of value delivery

Delivering a service is related to the place of the service delivery. Must the customer visit the service organization (e.g. barbershop) or comes the service to the customer (e.g. Thuisbezorgd.nl). Besides, physical channels (e.g. mail) or electronic channels (e.g. email) can be used. These examples are all related to the “how” questions. The locational preferences (“where”) are related to time purchase (“when”) and use.

Customization versus

standardization

The decision whether the service provider offers all the customers the same service (e.g. bus; low customization) or whether service features are tailored to the specific

requirements of the service client (e.g. taxi; high customization) (Van Looy et al., 2003; Lovelock and Wright, 2001).

Nature of relationship with customer

The degree to which a service client is known versus unidentified for the organization. By proactive efforts service providers can sustain an ongoing relationship with a service client (Lovelock and Wright, 2001).

Nature of

service demand

Some service have a stable demand while others encounter fluctuation demand patterns. Besides, demand can be predictable or unpredictable. Demand management and

forecasting are examples to anticipate on fluctuations in demand (Lovelock and Wright, 2001).

Nature of the service act

What is the direct recipient of the service (people or objects); and what is the degree of tangibility of the process? Results in four different types of processes: people-,

possession-, mental stimulus- and information processing (Lovelock and Wright, 2001).

Degree of interaction

Communication between service provider and service client (Grönroos, 2008). The nature of interaction can be physical or arm’s length; the extent to which service clients have contact with the service provider can be placed on a continuum of low to high (Lovelock and Wright, 2001; Van Looy et al., 2003).

Degree of labor intensity

Businesses can differ in the intensity of labor because some services have to deal with equipment (e.g. hospitals) while other services have a higher involvement of human resources (education). The degree of labor intensity can be diversified into low-, moderate- and high (Van Looy et al., 2003).

Nature of value creation

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10 For the service provider value creation is value-based, for the customer value creation is need-based (Vargo and Lusch, 2004; Lovelock and Wright, 2001).

Nature of quality creation

The perceived service quality based on the difference between the expectations and perception (Qiu, 2014; Riedl, Böhmann, Rosemann, and Krcmar, 2009). Research identified five attributes of service quality: reliability, tangibles, responsiveness, assurance and empathy (Lovelock and Wright, 2001).

Nature of service guarantee

Promises the customer a predefined service quality. When the service provider fails to deliver the predefined quality, the service client receives a compensation. Can be back upped by service level agreements (Lovelock and Wright, 2001). The service guarantee can be below-, equal to- or above the predefined service quality.

Nature of service pricing and -payment

Pricing strategies can be cost-, competition- and value-based. Prices are offered as a combination of a flat-fee and pay-per-use (Marston et al., 2011). The mode of paying for services can be self-service (e.g. cash in a parking meter), direct payment to payee (e.g. cash, credit card) or automated payment (e.g. bank charges; Lovelock and Wright, 2001).

Table 2.1: Characteristics of services

While the characteristics of services as given in table 2.1 are visible for the service client, management practices are back-office activities which are not visible for the service client. The abovementioned characteristics (table 2.1) can help practitioners to implement management practices, and can be an input for defining management practices for (OD-) services. For example, a high degree of labor intensity results in a higher focus on human resource management whereas a low degree of labor intensity results in a focus on capital decisions. Besides, fluctuations in demand result in challenges for resource management and capacity management. However, because a conceptualization of the characteristics of OD-services is missing in literature, this thesis focuses on identifying the characteristics of OD-services. This does not alter the fact that management practices are an interesting input for the discussion.

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11 will be compared based on the characteristics from table 2.1. This will result in a structured conceptualization of characteristics that are relevant for OD-services.

2.2 OD-services

This section provides an overview about the existing knowledge on OD-services. A deeper understanding about OD-services will increase the understanding of the service characteristics of table 2.1 in relation to OD-services.

There is not much literature about OD-services. Besides, it is explained that the supplementary service of OD-services is difficult to fit in existing service definitions. However, literature does not remain completely silent when describing OD-services. The most eligible descriptions about the structure of OD-services, as already mentioned in the introduction, are the descriptions by Buyya et al. (2008) and Marston et al. (2011). They state that an OD-service is available whenever the service client needs the service. Consequently, an OD-service needs to be able to deal uncertainties in demand. In the introduction several examples are provided such as Gmail and the roadside assistance (ANWB). Uncertainty in demand is applicable on all these examples: Google does not know when the service client uses a Gmail account, and the ANWB does not know when a member needs roadside assistance. Nonetheless, despite in any of the cases the moment of usage is unknown, the service needs to be available whenever needed.

However, 24/7 supermarkets are also available whenever needed while these supermarkets are not labeled as OD-services. When comparing this specific example with OD-services in practice (e.g. Gmail, ANWB, KPN Mobile), the inclusion of contracts/service level agreements (SLAs) are a distinguishing factor between services and OD-services. Where contracts are defined as a mutual commitment between a principal and agent (Ponsignon et al., 2015), and SLAs are defined as an agreement between a service provider and a consumer that quantifies the minimum acceptable service (Baset, 2012; Goo and Huang, 2008). These contracts also specify the boundaries of the guaranteed availability: The ANWB does not provide its roadside assistance worldwide, Gmail requires internet access to guarantee the availability and KPN Mobile charges additional costs for international calls.

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12 the context of OD-services. Surprisingly, because these examples illustrate the role of contracts/agreements as a pivotal difference between services and OD-services.

When reviewing the descriptions of the structure of OD-services (Buyya et al., 2008; Marston et al., 2011), and abovementioned examples, a comparison can be made with the service description of Lovelock and Wright (2001). Following the perspective of Lovelock and Wright (2001) OD-services can be decomposed into core services and supplementary services as well.

2.2.1 Defining the core and supplementary services of OD-services

When decomposing OD-services, the function of the supplementary service is to guarantee the future availability of the core service. However, Lovelock and Wright (2001) did not classify the guaranteed availability as a supplementary service and therefore did not discuss OD-services. Surprisingly, because several scholars argue that the customer satisfaction increases when a service is available when the service client needs it (Grönroos and Voima, 2013; Massad, Heckman, and Crowston, 2006). Because Lovelock and Wright (2001) state that the supplementary services need to add extra value for the customer in the service delivery, and the guaranteed availability adds extra value for the service client (Grönroos and Voima, 2013; Massad et al., 2006), the guaranteed availability can be considered as a valuable extension of the supplementary services.

It is not easy to categorize OD-services within the definition of Lovelock and Wright (2001) of supplementary services being facilitating or enhancing. On the one hand OD-services may be facilitating, in that the guaranteed availability aids in the use of the core service and is required in the service delivery. If the OD-service would not be available whenever needed, it would not be possible to guarantee the usage of the service whenever the service client needs the core service. Therefore, it can be concluded that the OD-character can be defined as facilitating. On the other hand, the supplementary service adds extra value for the customer as well. As stated before, being available whenever needed creates value for the customer when delivering a service in terms of customer satisfaction (Grönroos and Voima, 2013; Massad et al., 2006). According to this reasoning, it can be argued that the OD-character of a service adds extra value for the customer, and can be defined as enhancing.

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13 service to be consumed whenever needed; and guarantees the future availability of the core service (Buyya et al., 2008; Marston et al., 2011). By combining the two sub-services, an OD-service can be defined as a OD-service that is available whenever needed.

In addition to describing the structure of OD-services, several scholars described some characteristics (table 2.2) of OD-services. These scholars described OD-services within the boundaries of their own research. Because these characteristics are researched within the boundaries of their own research, their applicability is limited.

Characteristic Description

Interaction No interaction is observable in OD-services because service clients interact with platforms (Kuo, 2011).

Stakeholders The OD-character of an service increases the number of stakeholders. Service providers need additional stakeholders to deliver a service on-demand (Marston et al., 2011; Tao, Zhang, Venkatesh, Luo, and Cheng, 2011; Wu, Thames, Rosen, and Schaefer, 2012).

Payment OD-services are characterized by multiple modes of payment (Marston et al., 2011). These payments can be based on the guaranteed availability of the service (flat-fee) or based on the actual consumption (pay-per-use), as described by Stabell and Fjeldstad (1998).

Place and time of value

delivery

OD-services are able to deliver a service independent of location and are available whenever needed with all its functionalities (Kuo, 2011; Marston et al., 2011).

Table 2.2: Characteristics of OD-service in literature

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14 service. Therefore, it can be concluded that the need for an extra stakeholder is not a general applicable characteristic of OD-services. The third characteristic of payment will be researched in the result section. Lastly, it is stated that OD-services are available wherever needed. While this statement can be true for IT-related OD-services, the OD-service of the ANWB is restricted to locational boundaries. The contradictions of these OD-service characteristics highlight the need for a deliberate conceptualization of general applicable OD-service characteristics even more.

2.3 Relation of the concepts

This overview will discuss the previously discussed concepts and how these concepts are related. A graphical representation of the relation of concepts is presented in figure 2.1. In the introduction the four forms of operational flexibility for the RE market are introduced based on Lund et al. (2012). These forms of flexibility can be offered as services in order to increase the ease of implementing flexibility in the energy system (Donker et al., 2015). This relation is colored red in figure 2.1. Because uncertainty exists when the flexibility service will be exploited, the services need to be available whenever needed. Services with this specific characteristic are defined as services. By designing flexibility services with an OD-character (i.e. OD-flexibility services), indicated with the black arrow, a service with a guaranteed availability is researched in the RE market. In thesis it is proposed that OD-flexibility services can be decomposed into core services and facilitating services, indicated with the blue arrows.

Operational Flexibility in RE system Flexibility service OD-services OD-flexibility service Core service Facilitating service

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3. Methodology

As mentioned in the introduction, the literature with regard to OD-services remains rather silent in describing the characteristics of OD-services. However, scholars agree that OD-services can be described as services with a guaranteed availability. In the previous chapters it is also argued that conceptual clarity about the characteristics of OD-services would both enrich the literature and enable practitioners to better position flexibility services in the energy system. An example is the practical problem of RTE in implementing flexibility services in their service offering towards the customer. A flexibility service of RTE needs to be available whenever needed (character). However, RTE does not know what the required service characteristics of OD-flexibility services need to be. Besides, literature is lacking in describing the characteristics of OD-services. By designing an OD-flexibility service, conceptualizing the characteristics of an OD-service in practice, and translating these characteristics into relevant theory the contemporary literature can be enriched with a conceptualization of key characteristics of OD-services. Designing an OD-flexibility service for RTE is considered to be a suitable case in researching OD-services because (1) it is unknown when flexibility services will be used while (2) the flexibility service needs to be available whenever flexibility is needed in the energy system and (3) the increasing need for flexibility in the RE sector.

After the identification of the research gap, a literature study is performed in order to understand the research context. First, a key word search was conducted with key words service, OD-service, guaranteed availability, flexibility services, core services, supplementary services and service characteristics. In order to diversify services from one another table 2.1 is included. This table is strictly structured based on the characteristics identified by Lovelock and Wright (2001) and Van Looy et al. (2003). Seen the explorative nature of this study, strictness in structuring the service characteristics is important when developing formal theory about OD-services (Holmström et al., 2009). The unit of analysis of this study are flexibility OD-services and OD-services, which are thoroughly discussed in the literature review.

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17 accumulation of theoretical knowledge, the following section explains how to coincide these different interests.

3.1 Design science

By designing a flexibility service with an OD-character, this study aims for creating a service with a guaranteed availability. This pragmatic research approach allows the researcher to develop relevant theory from actual practice (Holmström et al., 2009; Meredith, 1998) about OD-(flexibility) services. However, design science is mainly focused on solving organizational problems in practice (Peffers, Tuunanen, Rothenberger, and Chatterjee, 2008). In order to bridge the translation from practical knowledge (i.e. explorative research) to academic knowledge creation (explanatory research) the research design of Holmström et al. (2009) is adopted because it guides researchers through the process starting at solving a practical problem towards developing academic theory.

Figure 3.1: four phases of research by Holmström et al. (2009)

The first two phases that are presented in figure 3.1 entail the design science approach by doing explorative research while the third and fourth phases entail explanatory research. First, the solution incubation frames the practical problem for RTE in a design solution: the creation of flexibility services that anticipate on the uncertainty in demand for flexibility services. Second, in the solution refinement phase the design solution has been refined in an empirical setting. This phase is characterized by iterations and trial-and-error, which is very common in explorative research according to Markus, Majchrzak, and Gasser (2002). Due to the limited amount of time the implementation of flexibility services could not be fulfilled. Because the research design by Holmström et al. (2009) mainly focuses on iterations when evaluating a design solution, the research refinement (phase 2) is validated by interviews with field experts as proposed by Hevner et al. (2004). The interviews concerning the design solution enabled the researchers to gather data concerning the desired effects of the flexibility services. Additionally, informed arguments could be collected to build convincing arguments for the design solution’s utility (Hevner et al., 2004).

The first two steps of the research design consist of a Business Process Modelling and Notation (BPMN) which will be explained more in-depth in the subsequent paragraph. In the third phase the researcher examined the design solution from the theoretical point of view. In this phase the

1. Solution incubation

2. Solution

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18 researcher focused on the development of a substantive theory (Holmström et al., 2009). The creation of a flexibility service with an OD-character within the RE-market enabled the researcher to create a context-dependent theory about the key characteristics of OD-services. The conclusions from the third phase could be used in the fourth phase in order to develop a formal theory. However, in order to research the key characteristics across different contexts this research should be expanded by a multiple case study. Due to the lacking time this study remains limited to the creation of a substantive theory.

3.2 Design solution

In this research the graphical notation of the first two steps of the research design by Holmström et al. (2009) is BPMN. BPMN is a relative young notation method which is considered to be more expressive compared to for example service blueprinting, easily understandable for multiple stakeholders and entails graphical objects that represent actions that determine role-specific behavior inside a business process (Chinosi and Trombetta, 2012; der Aalst et al., 2006). Nevertheless, the first graphical notation of the design solution within the research process of this research was service blueprinting. During informal discussions, however, service blueprinting turned out to be not expressive enough. When the researcher subsequently expressed the design solution with BPMN this seemed to be a better understandable graphical notation. A pitfall, however, of a wide variety of expressing objects is the needed prior knowledge concerning the distinguishing objects. In order increase the understanding of the design solution, interviewees received a graphical explanation about BPMN before the interview (Appendix A).

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19 3.3 Data collection

The data collection of this study has been conducted during an internship at a case company in the RE-sector and represents the first two phases of the research design by Holmström et al. (2009). This enabled the researcher to understand the organizational objectives when designing flexibility services with a guaranteed availability.

Typically, the data in design science is collected from the design solutions. In order to increase the quality of the design solution in the first two phases of the research design of Holmström et al. (2009) the data collection is expanded by multiple sources of data (Appendix D), as proposed by Hevner et al. (2004). In total, three interviews were conducted with employees of the case company (RTE) and one interview with a microgrid company in the RE-sector. During the interviews (Appendix C), with an approximate length of 30 minutes, the following topics were discussed in order to answer the research question:

- The field expert’s opinion about the proposed design solution;

- The role of a flexibility services with a guaranteed availability in the RE-sector; - Important characteristics of flexibility sources offered as a service;

- Identification of the constraints of flexibility services with a guaranteed availability;

Before the interviews the were executed, the experts received the design solutions as presented in figure 5.1 and 5.2 and an explanation of BPMN (appendix A). The interviews were recorded and transcribed in order to analyze the interviews afterwards. The validity of the interviews increased by a submission of the interview transcription by the interviewee (Voss, Tsikriktsis, and Frohlich, 2002). The semi-structured nature of the interviews enabled the interviewees to discuss additional insights concerning flexibility services with an OD-character. This enriched the interviews with personal visions (Voss et al., 2002) about relevant topics concerning flexibility in the RE-sector. In addition to semi-structured interviews, informal discussions, internal document and observations were used in the exploration phase of the research design. This resulted in the collection of explorative data which gained the understanding of important elements (Wieringa, 2014) of OD-flexibility services in the RE-sector.

3.4 Data analysis

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20 stakeholders were satisfied with the design solution, the categorized interview data (appendix E) has been used in building convincing arguments for the utility of the design solution (i.e. descriptive evaluation by Hevner et al., 2004; p. 86) and the development of substantive theory. Subsequently, several propositions are created in the result section in order to create a conceptualization of key-characteristics of OD-flexibility services. Thereafter, analytical generalization enabled a comparison between this research and previous research concerning the characteristics of OD-services, as proposed by (Yin, 2009).

The validity and reliability of this research is based on four criteria that ensure the quality of data collection and analysis, as proposed by Karlsson (2009). The construct validity covers the extent to which OD-flexibility services have been studied. This study consists of a triangular research approach by using multiple sources of data, -theories and -methods. Internal validity is accomplished by interviewing internal and external stakeholders with focused questions. Generalization, i.e. external validity, is hard to achieve in this research because of the explorative nature (Karlsson, 2009). However, this study contributes to future generalization by a conceptualization of OD-characteristics by focusing on existing service characteristics (table 2.1). Besides, existing research designs increased the external validity (Karlsson, 2009). Interview protocols aimed for ensuring the reliability of this research. Because the researcher had direct access to practical knowledge, adjustments concerning the design solution could be applied. A more comprehensive overview of the quality assessment is given in table 3.1.

Construct validity - Testing multiple methods (BPMN, service blueprinting);

- Multiple sources of data for refinement and evaluation (e.g. informal discussions, interviews);

- Multiple sources of theory.

Internal validity - Interview protocol with focused questions;

- Reviewing the design solution by multiple stakeholders; - Validating the design solution by multiple stakeholders;

- Decision to use the more comprehensive BPMN (compared to service blueprinting).

External validity - Existing research design;

- High focus on evaluation of design solution;

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21 - Analytical generalization.

Reliability - Interview protocol;

- Direct access to internal data;

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4. Case description

The case company of this research has been briefly introduced in the previous section. In this section the case company will be described more in-depth. This description is of great importance because this will increase the understanding of the design solution. Besides, it will increase the understanding concerning the relation between this research and the company’ need for an increased understanding concerning the characteristics of flexibility services with a guaranteed availability, i.e. OD-flexibility services.

By building PV systems in a B2B market, RTE is a company that operates in the RE sector. Similar to RTE’ competitors, the company builds solar panels on the rooftops of its customers. However, the customers of RTE do not have to invest in the PV system. Instead, the customers pay a fixed monthly fee based on the consumption of the energy that has been produced on their own rooftop. Additionally, the customers are unburdened with regard to the installation, management of PV-energy production, administration and maintenance of the solar system. Because RTE is not able to finance the PV systems of all of its projects (duration of projects is 15 years) they need investors. For every new project investors are approached for participating in these projects. In return, the investors receive interest and shares for their participation. Once the PV-installation is installed, RTE can generate additional incomes by offering additional services.

4.1 Business model of RTE

As already mentioned, RTE manages the entire PV-installation on the rooftop of the customer. This process starts with calculating the feasibility of a PV-installation for each specific customer and continues with installing and managing the PV-installation. The feasibility analysis is based on (1) quotations of the traditional concerning the energy consumption of the customer and (2) the forecasted production of a PV-installation on a specific location. Subsequently, a PV-energy price (kWh) can be calculated. This process is of minor importance within the scope of this research and can be found in appendix B.

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23 production RTE could have charged a higher amount of money). The PV-projects have a duration of 15 years because of the relative high investments and the low profit margins.

Another form of income for RTE are subsidies and tax regulations. These subsidies in the Dutch energy market can be based on small users or heavy users (grid connection > 3 * 80 ampere). The usage of green energy for the small users is stimulated by ‘netting’ while the heavy users are stimulated by the ‘stimulant of durable energy’ (SDE). Netting is delivering the energy back to the grid for the same price as delivered by the grid supplier to the customer. The SDE settlement makes the gap between the rather cheap traditional forms of energy and the renewable energy smaller. The value of this SDE settlement depends per customer because depends on the size of the solar installation: the larger the installation, the higher the solar energy production which results in a higher subsidy.

Within this case the design solution is focused on the heavy users because flexibility services are less valuable for small users because of the netting regulation. Besides, the consumption of heavy users is constantly higher than production. Therefore, heavy users need to use as much as possible PV-energy since this is cheaper compared to grid energy (which needs to be bought when the PV-energy production is insufficient). By using flexibility services these heavy users can use the PV-energy more efficiently, which consequently results in lower energy costs for the customer. As a consequence of the more efficient use of energy, the revenues of RTE increase.

4.2 Stakeholders

In the previous section several stakeholders are being passed. Because of the involvement of investors and variable payment fees, RTE has an unique concept and can typically be described as an ESCo (an asset owning company in the RE-sector which manages PV-installations).

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24 suppliers. The last stakeholder in the value chain of RTE is the government. Beside the earlier mentioned SDE settlement payments, another role of the government is the approval of building an PV-system for every single customer. The relations of RTE with its stakeholders are visualized in figure 4.1.

Figure 4.1: overview of stakeholders and the value streams (source: internal document RTE)

4.3 Purpose of the case

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5. Results

As proposed in this research design, this chapter entails the explorative contributions of developing a flexibility service with an OD-character for RTE. After the design solution, the developed OD-flexibility services will be observed in order to identify context specific characteristics of OD-flexibility services. Finally, the validation of the design solution will be presented. The findings of this chapter will consequently be used in the discussion where the explanatory theory will be developed.

5.1 Explorative research – the design solution

RTE has more than 100 customers with all their own production and consumption patterns. The developed flexibility services are applicable on the heavy users because for heavy users it is very unattractive to deliver energy back to the grid. As a result, these customers want to use the PV-energy more efficiently because a more efficient use of energy reduces their energy expenses.

This research consists of two design solutions, which are reinforced with BPMN’s to illustrate flexibility services with a guaranteed availability. Two requirements of RTE are included in the design solution: the first requirement is that the flexibility service is applicable on every customer, i.e. the flexibility service needs to be standardized. Therefore, the presented design solutions are applicable in multiple contexts. Second, the flexibility service needs to reinforce the monitoring system of RTE by creating additional incomes. Within the design solution an assumption is made: the battery is owned by RTE because this party has the objective to sell as much as possible PV-energy to the customer. The flexibility services where will be elaborated on are presented in table 5.1. These flexibility services will be explained more in-depth in the subsequent sections.

Self-balancing Making use of surpluses and trade surpluses on the APX: buy energy for a low price on the APX, sell when the price is high on the APX. This service aims for selling and buying energy at the right moment on the APX. As a result, more value is created for the produced and consumed energy of the customer.

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26 makes the “end-user more aware of the economic choices they make about electricity usage” (Lo Schiavo, Delfanti, Fumagalli, and Olivieri, 2013; p. 514)

Table 5.1: potential flexibility services for RTE (Meursink, 2016)

The representation of the design solution in BPMN’s entail swimlanes that represent four different actors: customer, RTE, APX and the energy supplier. The design solutions are presented from the perspective of the customer, the recipient of the flexibility service. The customer receives the OD-flexibility service from RTE. The third actor is the energy supplier, which is the supplier of energy for the customer when the production of PV-energy is insufficient or less profitable. The fourth actor is the APX, which can be used as an informational source concerning the actual prices of energy and is a platform where energy can be traded. At the end of each month, the OD-flexibility service needs to be paid. The payment of the OD-flexibility service is based on a combination of a flat-fee (which covers the guaranteed availability) and a pay-per-use fee (which is related to the variable benefits of both services). Both services can be offered to new- and existing customers: existing customers can be analyzed by monitoring their PV-production and consumption patterns while for new customers a flexibility service can be offered during the sales process (appendix B). Based on the information concerning the historical production- and consumption patterns the feasibility of a flexibility service can be calculated.

5.1.1 Self-balancing OD-flexibility service

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27 customer. In order to secure the guaranteed availability of the advice, RTE needs to have a back-up plan. This, because without the continuous availability of the self-balancing advice the value creation of the OD-flexibility service will not be optimal because the most economic attractive option cannot be chosen on-demand. Thus, the battery needs to be available in a situation when charging is attractive; the availability of the software needs to be reinforced by back-up software and hardware to give an guaranteed advice; and when the customer wants to consume the energy it needs to be available as well. Therefore, these options are designed to be available ‘whenever needed’, in other words available on-demand. The BPMN of the OD-flexibility service ends with the monthly payment of the self-balancing service.

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5.1.2 Time of use optimization OD-flexibility service

The time of use (ToU) optimization service shifts the consumption from high price intervals to low price intervals and aims for increasing the awareness of electricity usage for the end-user (Lo Schiavo et al., 2013). Because the tariff schedules are not known in advance in The Netherlands, ToU-optimization for the Dutch energy market is based on high production and low production of PV-energy. First, a description of figure 5.2 is given about the ToU-optimization BPMN.

Similar to the self-balancing service, the BPMN of the ToU-optimization service starts at the ad-hoc contract phase. However, for the ToU-optimization service the customer has to make a decision whether to use active-, passive- or a combination of active and passive ToU-optimization. Subsequently, the ToU-optimization is confirmed to RTE and activated (indicated with orange). The core service of the ToU-optimization service monitors the balance of the PV-installation, and collects price information from the APX and the energy supplier. Simultaneously (indicated with three horizontal lines), the information from the core service will be used to generate a continuous and guaranteed advice towards the customer about how to use the energy. In order to communicate the guaranteed advice, a traffic light will be implemented on-location. This traffic light will be used in communicating whether to shift load (indicated with blue) or not (indicated with green). Within this thesis the abovementioned description is classified as active ToU-optimization because the most economic attractive decision is continuously and ‘actively’ monitored. By focusing on efficiently using ‘cheap’ PV-energy, the active form advises the customer to shift its load to situations where the price of grid energy is lower, or when the PV-production is higher. The cheaper PV-energy can also be stored in the battery in periods of overproduction and used in periods of underproduction. Additionally, the ToU-optimization has a passive form. The passive form needs to be initiated by the customer when the he/she knows significant reductions of usage in advance (e.g. maintenance, workers’ holiday). The overcapacity can be sold to the energy supplier or traded on the APX (indicated with red). The BPMN ends with the monthly payment of the ToU-optimization service.

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5.1.3 An overview of the contextual characteristics

During the research several context specific observations are made which will be discussed in this sub-chapter. These context specific characteristics are derived from the design solutions of figure 5.1 and 5.2 and are an input for the conceptualization of OD-services in the explanatory phase of this research.

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33 Based on historical data RTE can forecast the potential benefits of the OD-flexibility services and calculate the potential variable incomes. Lastly, financial consequences can be identified when the OD-flexibility service is not available whenever needed: the customer unnecessarily uses expensive grid energy. Thus, when the OD-flexibility service is not available the customer has higher energy costs. The guaranteed availability of the OD-flexibility service advice prevents such situations by continuously monitoring what the most profitable way of energy consumption is.

5.2 Validation

In the validation phase of this research the two design solutions were presented to experts in the energy sector. The aim of the interviews was to identify whether the design solution would satisfy the requirements of a flexibility service, and identifying the key-characteristics of the OD-flexibility services. The interviewees have different roles within the energy system: the microgrid provider manages and optimizes the local energy system of a microgrid whereas RTE is typically labeled as an ESCo. Because the microgrid provider is experienced with flexibility in the RE system, his input was valuable to increase the quality of the flexibility service. Thereafter, the design solution was validated by employees of RTE in order to research the feasibility of both OD-flexibility services. The interviews were structured based on the chronological paths of the BPMN’s.

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34 decisions, and it protects yourself [RTE].” In situation where an OD-flexibility service is offered without a contract, “… the incomes of trading with overcapacity are the incomes for RTE, because we take the risk [RTE]. Within a microgrid, it is impossible to offer an OD-flexibility service without a contract “because OD-flexibility is the element that is needed in managing a microgrid effectively [microgrid provider]. From the perspective of the microgrid provider a contract allows them to force the customer to shut down (parts of) the processes.

Thereafter, the importance of the guaranteed availability was discussed. From both perspectives the interviewees agreed that when a flexibility service is provided, it needs to have an OD-character. From the perspective of RTE the guaranteed availability is important because “opportunities would be missed when the flexibility service cannot react directly.” For financial reasons it is of pivotal importance to have an guaranteed availability because it unknown when financial attractive opportunities appear, or flexibility is needed. From the microgrid perspective the guaranteed availability of the flexibility service influences the functioning of the microgrid. Within the microgrid “real time forecasting (even the effect of clouds) is used in calculating the flexibility of the network”. From this perspective fluctuations in PV-production increases the need for flexibility. “By forecasting adequately, the load can be shifted within the microgrid. It is important that a service such as ToU-optimization is directly available. If not, the performance of the microgrid decreases [microgrid provider].”

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35 [microgrid provider].” According to this statement, capacity management is important in anticipating on the unpredictable need for OD-services.

The payment of flexibility services was discussed in order to identify whether an OD-flexibility service needs to be paid based on the guaranteed availability or on the actual consumption. Both perspectives agreed that the payment needs to “cover the risk of the flexibility provider [RTE].”. Besides, the “variable benefits of the service need to be paid based on the pay-per-use principle [microgrid provider].” These benefits “needs to be shared with the customer [RTE].” Both argued that the customer is only willing to pay for the availability when he/she is convinced by the benefits of the service. Therefore, trust in the functioning of the OD-flexibility service is an important criterion in determining the payment policy [RTE]. In determining a payment policy both argued that a decision needs to be made “…on how much risk the flexibility provider want to take. [RTE]” This, because when “RTE asks a low subscription fee, RTE needs to have higher a higher percentage of the variable incomes to cover the risks.”

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6. Discussion

This chapter translates the design solution of this research (i.e. substantive theory) into explanatory theory. The main focus of this chapter is to critically reflect OD-(flexibility) services against the service characteristics of table 2.1 and relevant literature. As a result, the key characteristics of OD-services can be conceptualized and the underlying research question can be answered. Finally, the functioning of the BPMN method within this research will be discussed.

6.1 Explanatory research

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Service characteristic

Core service Facilitating service Typical

OD? Degree of

inseparability

Similar to non-OD-services, the production and consumption of OD-services is simultaneously in the core service (e.g. when economic attractive moments occur the advice of the OD-flexibility service is produced and consumed at the same time; when the ANWB gives roadside assistance on location, the customer receives this services at the same time).

The facilitating service is continuously produced and mentally not continuously consumed. However, despite the customer does not activate an OD-service, it still consumes the guaranteed availability (e.g. because the flexibility service continuously monitors the current situation an advice is continuously consumed simultaneously; the guaranteed availability of the ANWB is continuously produced and consumed at the same time). Therefore, similar to non-OD-services, it can be argued that the production and consumption of the facilitating service of OD-services is simultaneously.

No

Degree of heterogeneity

Similar to non-OD-services, this characteristic can be placed on a continuum (e.g. the OD-flexibility service is structured in standardized processes which results in a homogeneous core service; the ANWB’s core service has a higher degree of heterogeneity).

The guaranteed availability needs to react when the core service is needed (e.g. reacting when economic attractive situations occur for OD-flexibility services). The guaranteed availability can only move through the standardized processes of the OD-service, which increases the degree of

homogeneity.

No

Degree of perishability

Similar to non-OD-services, the core service of an OD-service is not continuously delivered and perishes when not delivered. However, the interaction with the imperishable facilitating service is essential in guaranteeing the future availability of the core service.

Because the facilitating service is continuously delivered, this sub-service is not perishable (e.g. despite the advice in the facilitating service of the OD-flexibility service can change, the availability of the OD-flexibility service does not perish). This is unique for OD-services because non-OD-services are placed on a continuum from low to high

Yes

Degree of intangibility

Within the core service, the intangibility of OD-services can be placed on a continuum (e.g. the ANWB has a lower degree of intangibility in the core service compared to the core service of Netflix). Because this characteristic is similar to non-OD-services, this characteristic is not unique for OD-services.

The guaranteed availability is intangible because tangible objects do not foster the facilitating service. Similar to non-OD-services, however, the feeling of guaranteed availability increases by

communication tools that communicate the continuous availability (e.g. traffic lights in the ToU-optimization has a higher degree of tangibility compared to the facilitating service of the ANWB).

No

Nature of service encounter

The core service of OD-services can also be measured based on the degree of integral involvement of the customer (e.g. in the OD-flexibility service the customer can only react on an advice. The involvement of the customer decreases even more when the flexibility provider controls the energy consumption).

Similar to non-OD-services the guaranteed availability in the OD-service is towards the (object of the) recipient of the core service. The customer is in the OD-flexibility service not integrally involved while in a situation of an ambulance service the service client is integrally involved. Therefore, it can be concluded that the facilitating service of OD-services has no unique service encounter.

No

Nature of value delivery

The nature of service delivery in the core service of an OD-service is similar to non-OD-services (e.g. the ANWB comes physically towards the customer, advices of OD-flexibility services are delivered through electronic channels).

The guaranteed availability is delivered mentally and informational (e.g. for OD-flexibility services through electronic notifications and is back upped with physical computers and traffic lights). This is not different than the informational supplementary services described by Lovelock and Wright (2001).

No

Customization versus

standardization

Similar to non-OD-services, the core service of OD-services can be either highly customized (e.g. tailor made OD-flexibility advices for each specific customer) or highly standardized (e.g. Wifi).

The facilitating service of OD-services is highly standardized and solely guarantees the availability of the core service (e.g. the only option that the customer has is yes or no to the OD-flexibility service; Spotify provides a standardized guaranteed availability).

No

Nature of service demand

The nature of service demand in the core service of an OD-service is an unique characteristic for OD-services because the service demand is typically unpredictable and fluctuating (e.g. it is not known when the customer needs the flexibility service or its Netflix account).

Because of the continuous need for the facilitating service, the nature of service demand can only be predictable and stable in the facilitating service of an OD-service (e.g. the need for the flexibility service is not known but it needs to be always available).

Yes

Nature of the service act

As already mentioned, the core service of OD-services can be placed on a continuum from tangible to intangible. Besides, the service can be towards people or objects. Therefore, similar to non-OD-services, the core service can process four types of service acts: people (ambulance), possession (ANWB), mental stimulus (online education), and information (OD-flexibility service).

The facilitating service processes information concerning the availability of the core service. The communication of availability can be intangible communicated towards the customer (e.g. trust in the guaranteed availability of the ANWB) or communicated with tangible objects (e.g. traffic lights in OD-flexibility services).

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38 Table 6.1: identification of the key characteristics of OD-flexibility services in the context of the design solutions.

Degree of interaction

Similar to non-services the degree of interaction in the core service of OD-services can be placed on a continuum from a low degree of interaction (e.g. advice of the OD-flexibility service) to a more physical interaction between the service provider and service recipient (e.g. ambulance).

The interaction in the facilitating service is typically arm’s length. Similar to non-OD-services the degree of interaction is high when the availability is continuously tangible guaranteed (e.g. traffic light of OD-flexibility services) or low when the guaranteed availability is intangible communicated (e.g. ANWB; Netflix).

No

Degree of labor intensity

Similar to non-OD-services, the core service of OD-services can have a low degree of labor intensity (e.g. advice is fully automated in the OD-flexibility service) or a high degree of labor intensity (e.g. core service of the ANWB has a high degree of labor intensity).

In many examples the facilitating service is fully automated and no involvement of humans is needed to guarantee the availability of an OD-service (e.g. guaranteed advice in the OD-flexibility service; guaranteed availability of Netflix ). Thus, the combination of core- and facilitating service of the OD-service can have a low- or a high degree of labor intensity.

No

Nature of value creation

Similar to non-OD-services, the value is created through use and by interaction in the core service (e.g. car-repair by the ANWB, listening to music on Spotify, using the flexibility advice of an OD-flexibility service).

In the facilitating service value is not created through use but by being available when needed. No interaction is apparent in the facilitating service when creating value. Value creation through guaranteed availability is typical for an OD-service (e.g. when connected to internet, Spotify can play music whenever needed; in case of a car breakdown, the ANWB can provide roadside assistance in the Netherlands whenever needed).

Yes

Nature of quality creation

Similar to non-OD-services the nature of value creation is different for every single context. In the context of OD-flexibility services responsiveness is important in the core service because an advice can constantly change when the contextual variables change. In the context of the ANWB assurance of help creates value.

For OD-services the reliability and assurance is of pivotal importance because the facilitating service guarantees the availability (e.g. for OD-flexibility services the assurance of the advice can be back-upped with additional hardware and software. By increasing the assurance, the reliability of the guaranteed availability is subsequently being increased).

No

Nature of service guarantee

The OD-service needs to deliver the predefined service quality of the core service. Typically, OD-services are distinguished from other services by the presence of agreements between a service client and service provider. Consequently, the difference between identified and unidentified service clients is related to the service guarantee of the OD-service (e.g. longer waiting times for members versus non-member of the ANWB).

The guaranteed availability of the core service is only delivered to previous identified service clients (e.g. need to register for Gmail), or with a quality difference between paying and non-paying service clients (e.g. advertisements in Spotify). Thus, the availability is only guaranteed towards previous identified service clients that have an agreement with the service provider. As a result of the interaction between the core- and facilitating service, the optimal guaranteed availability is delivered towards service clients with an agreement with the service provider.

Yes

Nature of relationship with customer

Because OD-services are typically characterized with an agreement between the service client and service provider, there has always been contact between these two parties. Therefore, the core service is only provided to previous identified service clients. As a result, the nature of relationship with the customer is unique for OD-services in the core service.

The guaranteed availability mainly has a transactional relationship with the service client in the case of a Gmail account. Conversely, in guaranteeing the availability of the OD-flexibility service the customer needs to be known because of the capacity constraints of flexibility services. Nevertheless, there has always been contact between the service client and service provider in guaranteeing the availability of the OD-service.

Yes

Nature of service pricing and -payment

Similar to non-OD-services, OD-services can be paid based on the pay-per-use (e.g. OD-flexibility service; ITunes) or the flat fee (ANWB; Netflix) principle.

Because the facilitating service is always available, it could be imagined that this sub-service is typically paid with a flat fee (e.g. ANWB, Netflix). However, the OD-flexibility service is paid per use. Therefore, it can be concluded that OD-services have the same nature of service payment compared to non-OD-services.

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The results that are summarized in table 6.1 identified five characteristics that are typical for OD-services. The first key characteristic that will be discussed is the degree of perishability which can be placed on a continuum in order to compare services with each other (Lovelock and Wright, 2001). The core service of an OD-service is not continuously delivered and cannot be stored for future consumption. Thus, the perishability of this sub-service is not different compared to non-OD-services. However, in this research it is found that the facilitating service of OD-services is imperishable because this sub-service is continuously delivered and available whenever needed. As a result, the availability of the core service can mentally be stored for future consumption. This is in line with Edvardsson et al. (2005) who state that the perishability from the producer’s perspective differs from the customer perspective. Examples are widespread when applying the imperishability on OD-services: the guaranteed availability of the ANWB does not perish and roadside assistance be consumed whenever needed, the guaranteed availability of Spotify enables the service client to listen to the music whenever needed and OD-flexibility services continuously gives guaranteed advices towards the customer regarding the decisions he/she needs to make when managing its own energy balance or energy consumption. Regarding the example of OD-flexibility services it could be stated that the content of the guaranteed advice regarding the energy consumption changes over time. However, such a counterargument is based on the implications of guaranteed advice instead of the overall characteristic of the guaranteed availability. Overall, it can be concluded that the OD-services are imperishable in guaranteeing the future availability of the core service.

The second key-characteristic of OD-services is the unique nature of value creation. In the core service of OD-services the value is created through usage, which is similar to non-OD-services according to the view of Grönroos and Voima (2013). In the facilitating service of OD-services value is created because the customer has the ability to consume the service whenever needed (Bitner, Ostrom, and Morgan, 2008; Grönroos and Voima, 2013). Hence, for OD-services the value is created through the guaranteed availability (Buyya et al., 2008; Marston et al., 2011) without using the core service. Therefore it can be concluded that OD-services have two modes of value creation: the actual consumption of the core service and consuming the guaranteed availability of the core service.

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40 the different sub-services is unique for an service. This, because all examples of OD-services have the same nature of service demand in the core service (e.g. for the ANWB it is unknown when a customer needs roadside assistance, Netflix does not know when the customer will listen to a song and RTE does not know when the customer needs flexibility) and a stable need for the facilitating service because this sub-service needs to be always available. Because the need for the core service of OD-services is unpredictable and unstable, capacity management and forecasting is important in managing the volatile demand fluctuations (Jacobs and Chase, 2008). This, because the OD-service cannot be guaranteed when the capacity is insufficient. Consequently, because the value of OD-services is partly created in the guaranteed availability, the quality of the service decreases when the OD-service cannot be guaranteed. Therefore, OD-services such as the ANWB forecast busy periods and increase the capacity of the core service in order guarantee the availability and reduce the waiting times (which could be considered as a quality determinant of the ANWB service).

The last key characteristics of OD-services are the nature of service guarantee and the nature of relationship with the customer. OD-services are typically characterized by the presence of a contract or an agreement. While some OD-services make use of SLAs (e.g. Gmail) others make use of contracts (e.g. Netflix). Although the type of agreements differ, all OD-services have in common that there is an agreement between the service client and service client. Besides, because there is an agreement between these two parties all OD-services have in common that the service client is previously identified. Examples of this nature of relationship with the customer in relation to an agreement between both parties are widespread: Gmail guarantees the availability to registered service clients, Netflix offers the guaranteed availability to paying customers, and a signal is sent to the ANWB in situations of a need for roadside assistance. The last example of the ANWB is interesting because the ANWB will also help a non-member in cases of a car breakdown. However, the non-member will not receive a similar service level (e.g. longer waiting time) compared a contracted service client and needs to become member for one year. Nevertheless, the non-member communicated the need for the OD-service (i.e. the non-member is identified before the core service is executed) and needs to conclude a contract.

6.2 Reflecting the results of the BPMN

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“On-demand services: The flexibility in energy systems from a service perspective”