What is Prosumer Value to Utilities?

The Age of the Prosumer presents challenges for utilities accustomed to thinking of their customers in terms of kilowatthours consumed. The Smart Grid is responsible for these challenges, borne out of technology, policy, and capital innovations. These innovations are triggering many disruptions to the utility business model, and will eventually transform the historic dependency of electricity consumers on utilities into new prosumer relationships of interdependency.

Interdependency is the key distinction between a consumer and a prosumer and will be a significant factor in developing formulas to assess the total value of these relationships to utilities. A consumer is dependent on the utility and generates revenues. A prosumer has different value for utilities through an interdependent relationship in which the utility may rely on commitments to reduce electricity use (negawatt production) or supply electricity to the grid (kilowatt production) at specified times. At other times, the prosumer may be reliant on the utility to supply kilowatts.

The calculations of prosumer value are explicitly impacted by regulatory policy. Consider two different state regulatory commission decisions in 2014. In March the Minnesota Public Utility Commission approved a process to create the first “value of solar” tariff. This tariff includes non-traditional calculations such as the offset costs of other forms of electric generation and environmental considerations. In late December the Arizona Commerce Commission allowed two regulated utilities, Arizona Public Service and Tucson Electric Power, to offer programs that essentially let them seek authorized use of customer rooftops to deploy rooftop solar generation assets.

These two decisions herald the first steps that utilities will make to develop definitions of prosumer value that are unique to their business environments. Where another business sector may be satisfied with analyses of demographic and behavioral data, utilities must include geographic data, weather data, and solar irradiance data correlated with grid operational attributes and performance data to build a value of solar tariff. Similar data can help create prosumer value assessments.

In the Arizona scenarios, data analysis of this type will help determine if a certain number of rooftops outfitted with solar along a distribution line can postpone an expensive grid upgrade. The owners of rooftops with excellent solar potential on congested lines will have very different prosumer values to a utility than owners of rooftops with similar solar potential that are connected to areas of the grid that are problem-free.

Prosumer value will be different for each utility. It is also dynamic, with variable rates of change for key factors in formulas. While an address is fixed on the grid, the occupants at that address change, and their load patterns change too. Rooftops and vegetation change. Grid assets have always changed over time, along with the loads on them. The challenge for utilities is that the numbers of assets and variables that impact grid operations will vastly increase. Simulation applications can assist in creating different scenarios that become the frameworks for consumer or prosumer valuations. Today utilities benefit from condition-based maintenance – a predictive analytics approach to asset performance. Similar methodologies can contribute to prosumer value definitions by modeling historical consumption trends and correlating that data with projections for production to create predictive reports about multiple asset generation capabilities.

The Age of the Prosumer has profound implications for utilities as they venture into defining and managing new interdependent relationships with dynamic prosumer valuations. Smart Grid technologies, particularly sensing, communications, and analytics will play critical roles in defining and managing prosumer values as well as the assets that create these new values.

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Will US Utilities Offer an Electricity Triple Play?

Recent reports released by UBS, the largest private bank in the world and Citi Research, a division of Citigroup offer compelling investment guidance based on Smart Grid innovation trends that have been described in many previous articles from the Smart Grid Library.  The ongoing trends of decreasing costs for innovative technologies such as solar generation and energy storage; decreasing costs of manufacturing these technologies; and increasing effectiveness/efficiency of these technologies form the basis for many of their observations and recommendations regarding the future of the electric utility ecosystem.  Financial analysts aren’t known for wild proclamations.  That makes it even more noteworthy that UBS writes:  “Large-scale power generation, however, will be the dinosaur of the future energy system:  Too big, too inflexible, not even relevant for backup power in the long run.”  While the UBS report focuses on Europe, it’s reasoning and conclusions have equal applicability to North American markets given the similarities in supply chains as well as technology innovations, and to a lesser extent, policy drivers.  The report mentions that these trends create opportunities for utilities that are given the regulatory frameworks to deliver new services in end customer supply and distributed power generation.

There’s an implied threat in the UBS report – if utilities cannot or do not change their business models, their direct relationships with consumers will be intermediated by new entrants coupled with reductions in electricity revenues.  The Citi Research report spells out that potential for confrontations between tech giants (notably Google and Apple) and utilities in value-added services (specifically energy management services) to consumers.

In North America, these trends enable the emergence of a new class of consumer – the prosumer.  As noted in our previous articles, prosumer actions challenge existing regulated utility constructs by democratizing generation of both kilowatts and negawatts.   Progressive regulatory agencies are taking notice of this erosion of the monopoly position – the New York Department of Public Service published The Reforming the Energy Vision document that starts discussion about how regulators can help utilities adapt to changing technologies and market expectations, and the California PUC is requiring its three regulated utilities to present plans for distributed energy resources and appropriate valuation of DER assets by mid 2015.

Utilities can no longer count on revenue growth based on centralized generation – Citi Research indicates that demand for utility-provided power will flatten or even decrease as a result of energy management technologies, improved energy efficiency and prosumer activity.  The strategy for utilities is to create new services that deliver new revenue.  Taking a page from the communications service providers’ playbooks and experiences, could utilities create a value-added service that combines solar with fixed energy storage (both individual and community) and electric vehicles (EV) into an energy triple play?  It’s an idea floated in the UBS report.  This combination of technologies leverages solar power to “fill the tanks” of the fixed and mobile batteries.  The EV gets charged with solar power creating another potentially-recognizable carbon reduction benefit for utilities.

Many consumers would like to add solar panels and energy storage, but without the hassle of sourcing, financing, deploying, managing, and maintaining the equipment.  A triple play electricity service certainly offers possibilities to address the Smart Grid benefits gap experienced by consumers in multi-family residential and rental situations.  Utilities would be well-positioned to organize and manage these types of services to ensure grid reliability and safety.   Many of them are already experienced in working with contracted third parties who deliver energy efficiency and other demand reduction services.  An extension to generation wouldn’t be a huge stretch.  However, it will take regulatory revisions to create the playing field that allows this type of development.  The good news is that the first regulatory agencies are starting that investigatory process.  Which utility will be the first to make a move into an electricity triple play?

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Grid Resiliency As a Social Benefit

When it comes to grid modernization, understanding some history can help us map the best path forward – particularly in ensuring that the Smart Grid is both reliable and resilient for everyone.

For instance, the transformations that occurred in the telecommunications sector within the past 25 years offer cautionary and instructive lessons.  In the past, everyone received universal service or phone dialtone from a monopoly called American Telephone and Telegraph (AT&T).  You leased your phone and phone number from them.  Then Private Branch Exchanges (PBXs) became commercially available and created dialtone for their owners.  Businesses could buy their own equipment.  Calls that occurred within their four walls never left the premises and never used the AT&T phone system, reducing their revenues.   Calls that occurred to the outside world used AT&T’s system.

AT&T’s monopolistic business model was disrupted and disintermediated by new technologies and entities that enabled consumers become prosumers.  This term, invented by Alvin Toffler in his 1970 book Future Shock, defined a new dynamic relationship for producers and consumers*.

But while you could be a dialtone prosumer within a building, it wasn’t feasible to sell excess dialtone back to the phone company.   That’s not the case with electricity.  It is feasible to sell excess electricity back to a local utility when regulations such as Feed-in Tariffs (FiTs) create the mechanism for it.  Grid modernization offers tempting prosumer opportunities for commercial and residential consumers to enable at least some degree of self-sufficiency and reduce their payments to local electric utilities.

The electric grid could evolve to be a patchwork of areas with privately owned distributed energy resources (DER) and local distribution grids upgraded to allow a two-way or bidirectional flow of electricity.  Under existing cost recovery mechanisms, all ratepayers would have helped to pay for the upgrades to these parts of the grid.  But would all ratepayers benefit?

We need to ensure that the sum total of ratepayers enjoy shared benefits for grid upgrades through business models that support grid resiliency. How can this be done?   Here is one suggestion.  Utilities could be allowed to manage privately-owned DER assets with agreements that identify emergency scenarios where DER-originated electricity would flow back to the grid rather than remain onsite.  DER asset owners would not pay fees to tie their equipment to the grid, and would enjoy all the monetary benefits of a transactive energy market on blue-sky days.  But when an emergency occurs, be it natural or human-caused, those assets would be managed to benefit the greatest number of beneficiaries.  Scenario definitions should be modeled on the coordinated inter-agency planning activities that identify disaster events and responses by utilities, police, fire, and other emergency services.  The utility becomes the arbiter of a social DER compact that leverages grid resiliency to deliver energy and economic security for all.

But this can’t happen under current investor-owned utility (IOU) operations, organized to satisfy dual stakeholders – regulators and Wall Street.  State regulatory commissions would do well to ask utilities to design distribution grid upgrades for shared benefits of resiliency in addition to reliability.   Regulators would also serve their constituents best by thinking how utilities should be re-organized to continue to deliver the broadest service coverage for customers.  Otherwise, we might end up with a grid patchwork that resembles nationwide wireless networks or broadband service coverage that doesn’t come close to the universal service ideal.

*  The Smart Grid Dictionary definition  of a prosumer is:  A term coined by Alvin Toffler to describe a producing consumer.  From a Smart Grid perspective, it would apply to distributed energy resource situations in which the owner of electricity production or storage assets may also have a consumer relationship with a utility, aggregator, or other energy services provider.

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The Smart Grid Means Changing Expectations

The recent Smart Grid Roadshow in Vancouver covered interesting ground in terms of how electric utilities must transform to meet expectations of stakeholders – be they consumers, regulators, or shareholders.  BCHydro resources discussed the unprecedented scope of ambitious grid modernization projects that their utility had underway to achieve two objectives:  become more efficient and consumer-centric in their operations.

These are excellent objectives for any utility to thrive as Smart Grid technologies and services transform electricity ecosystems and create new market opportunities.  BCHydro’s operational efficiency projects range from substation and distribution automation technologies to distributed storage pilots and smart meter deployments.  All of these projects require re-engineering business processes and oftentimes re-skilling of existing resources to fully leverage all potential technology benefits.  And while all of these transmission and distribution (T&D) deployments present unique tests for utilities, the biggest challenge for every utility will be building consumer-centricity in their customer service operations. Greg Reimer, EVP of T&D at BCHydro, noted that the utility expects that its delivery of customer services will be compared to telcos and cable companies.  That’s a significant paradigm shift for utilities, which historically haven’t dealt with customer service expectations gauged against highly competitive businesses like wireless communications service providers.

This paradigm shift presents nearly equal challenges for regulators or other entities that oversee budgets for electric utilities as for utilities themselves.  Imagine being on the regulatory receiving end of a utility request for a rate increase to improve customer services, when the historical metrics for quality of customer service have been based on the number of customer complaints.  It’s sadly reminiscent of the reliability metrics for allowable downtime (SAIDI, SAIFI, CAIDI, etc.) instead of expected uptime.  Regulators of investor-owned utilities (IOUs) have to consider a very different landscape that includes new, nimble competitors to slow-moving monopolies, courtesy of Smart Grid-enabled technologies and services.  And that means changing expectations about utility investments in customer service technologies and processes.

For instance, competitive businesses can justify investments in customer service operations (ie contact center hardware/software upgrades or acquisition of tools to manage social media interactions) through quantification of customer acquisition versus retention costs.   As the old marketing saying goes – it is cheaper (and easier) to keep a customer than get a new one.  Utilities, being accustomed to monopoly environments, aren’t operationally or culturally structured to compete to acquire or retain customers.

So how can utilities change expectations? Adoption of the lifetime consumer value metric can help utilities and regulators transform existing operations into consumer-centric operations.  Lifetime consumer value provides an industry-standard measure of consumer participation as prosumers – producers of negawatts and/or kilowatts.  (A negawatt is a reduction in electricity use  – usually through deliberate time-shifting of electricity usage as structured in a demand response program.  Kilowatt contributions come in the form of local renewable electricity generation or energy storage sold back to the utility.)  Establishing lifetime consumer value helps set expectations of topline and bottom line impacts to business cases for wise investment decisions that build consumer-centricity as well as operational efficiencies in utilities.

The Smart Grid has the capacity to dramatically change our expectations of what services electric utilities deliver, and how these services are delivered. Building consumer-centric operations based on lifetime consumer value can be a potent motivator for utility transformations that go well beyond customer services and exceed our expectations.

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The Smart Grid – Shifting Paradigms for Consumers

Resiliency.  It’s important for people (how well do we survive challenges), cities (how quickly can urban environments rebound from an earthquake or major weather event), and nations (how effectively can a country recover from a widespread catastrophe).   As discussed in previous articles, today’s electricity grid lacks resiliency, which impacts the number and time length of power outages.  Evolving to a different electricity value chain can build resiliency, but it means changes for utilities, markets, and consumers in terms of roles, expectations, and valuations.  For consumers, it means the opportunity to become prosumers – consumers who produce electricity as well as consume it.  For utilities, it means the opportunity to leverage new assets from these consumers.  This is a real paradigm shift for utilities, regulators, and residential, commercial, industrial, and agricultural consumers.

Today, utilities and regulators focus on negawatts through energy efficiency (EE) and demand response (DR) programs.  These types of programs are designed to reduce demand for electricity on a permanent or temporary basis.  But prosumption can be factored for kilowatts too, and that’s particularly important to build grid resiliency.  Smart Grid technologies create the potential for individual consumers to produce kilowatts of electricity and become additive rather than subtractive participants in electricity markets. Local, highly distributed generation, through various forms of renewables such as microwind, rooftop solar photovoltaic (PV) systems produce kilwatts that can be tied to the grid and sold back to utilities.  Electric vehicles (EVs) and home batteries let consumers leverage energy storage into time-shifted electricity generation.  These types of technologies can reduce the severity or scope of major power outages and make the grid more resilient.

But that means that prosumers must get a new and different valuation by utilities or other energy service providers.  While we have some limited reckonings on the value of consumer participation in EE and DR programs, there’s little understanding of the lifetime consumer value that full participation in both negawatts and kilowatts can offer to a utility.

What is lifetime consumer value?  It’s a concept that is used in many other business sectors to provide a numeric value – usually monetary – of individual or consumer segment contributions to the business bottom line.  For example, a retailer may determine that one category of consumers has a lifetime consumer value of $10,000, but another consumer segment who participate in a “frequent shopper” program have a lifetime consumer value of $20,000.  For utilities, consumers who participate in EE or DR programs will have a lifetime consumer value that factors in the avoided costs of peak power plants or peak purchases.  Consumers who are also prosumers will have a higher lifetime consumer value because of the positive impacts on utility resiliency and reliability metrics.  It may take some time, but smart utilities will build consumer-centric operations and programs to build the lifetime consumer value in their customer base by encouraging transitions from consumer to prosumer.  Those that don’t will risk consumer intermediation as other alternative energy service providers become the trusted entity for electricity services – especially if they can promise better grid resiliency and reliability.

The Smart Grid is inspiring many innovations in technologies, services, policies and business models.  A prosumer-based business model can inject resiliency into the distribution grid.  Regulatory policy has the capacity to be an accelerator or a brake on creating a new prosumer paradigm within utilities.  But policy will have to contend with forces beyond its control as various consumer segments recognize new possibilities for market participation and opportunities for top line and bottom line benefits.

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