The Electric Utility’s Consumption Conundrum

Every business wants to grow the sales of their product or service – telecom carriers want you to consume more minutes of smart phone use, restaurants want you to eat out more often, and retailers love to see repeat customers walk into their stores.  It would be counterproductive to have, for instance, restaurants invest in promotions that encourage people to eat more home-cooked meals.  But that is what utilities do through energy conservation and efficiency programs that encourage reductions in consumption of electricity and/or gas. 

Twenty-four states have Energy Efficiency Resource Standards (EERS) that define annual energy efficiency targets sustained over time, not single events like Demand Response programs.  Each EERS mandates that energy consumption be reduced by a certain percentage through energy efficiency programs.  These programs can be aimed at residential, commercial, industrial, and agricultural customers, and incentives are tailored to meet different needs.  But unless the regulatory agencies that govern utilities provide support in the form of revenue recovery for these energy efficiency programs, utilities are naturally reluctant to invest time, money, and resources into reducing their revenues.   One form of support is a policy called decoupling, in which utilities are assured a rate of return that is equivalent to sales of electricity. 

However, given the current economic downturn and a continued trend in improved energy efficiency in home and business appliances and equipment, utilities are facing a stall in consumption that mirrors the classic S-shaped curve of growth, and are at the point where growth slows.  There are no policy mechanisms like decoupling to protect utilities from these economic realities, but there are strategies that utilities can deploy to change their business model from revenue reliance on one service to a diversity of services and new metrics for consumer value. 

Utilities should consider new business models that are enabled by Smart Grid technologies as opportunities to protect and grow revenues even as electricity consumption falls.  Subscription-based services to manage electricity, such as Home Energy Management Systems (HEMS) software and devices are one possibility.  Similar to the business models successfully used by telecom carriers to increase the Average Revenue Per User or ARPU, an array of energy management services could help boost utility revenues.  But while ARPU is a useful metric for classic consumer/service provider relationships, it falls short in valuing some of the most exciting opportunities with the Smart Grid.  If we consider that electricity consumers may become prosumers – both consumers and producers of electricity or services, then we need a metric that reflects services that are sold back to a utility as well as purchased.  That metric is Lifetime Consumer Value (LCV). 

LCV accounts for the consumption and production values of a consumer.  For instance, a recent Texas law requires the state’s grid operator, ERCOT, to devise a market model whereby residential, commercial and industrial consumers can bid conservation (energy savings called negawatts) into the wholesale electricity market.  Sales of energy produced from customer-owned generation sources or energy storage assets may also be factored into LCV calculations.  This is a far different metric than kilowatthours consumed, and it requires significant re-engineering within utilities to create consumer-centric operations that can build lifetime consumer value.  I’ll be discussing how utilities can build consumer value at a webinar on October 10, and you’re invited to attend.