The Age of the Prosumer

Do you remember when caveat emptor (buyer beware) was the predominant business attitude about customers? Over time, we’ve witnessed the evolution to what has been declared the Age of the Customer*. Companies that do well in the Age of the Customer will have to excel in their abilities to exploit realtime data to enhance interactions and embrace a customer-centric approach that is integrated across all interaction channels.

While re-orienting mindsets and operations for customers is a smart move, it’s only the first step in an evolutionary process that is unique to utilities and culminates in a new conceptual framework. For utilities, this is the Age of the Prosumer.

The word customer doesn’t adequately describe the relationship that utilities will increasingly have with the humans and assets on the other side of an electric meter. Consumer is a better, more encompassing term.   A residential or commercial customer has the direct bill-paying relationship with a utility, but multiple consumers, such as a family unit or multiple business tenants in an office building can be associated with that one customer. But the word consumer is also inadequate to describe the relationship with electric utilities.

Electricity consumers are transforming into prosumers capable of production as well as consumption. A prosumer can generate kilowatts in the form of rooftop solar or create negawatts in the form of participation in a demand response or EV smart charging program.   That’s why for utilities, this is the Age of the Prosumer. It’s a uniquely disruptive conceptual framework that will have significant impacts to utility business models.

Why is it unique? It’s unique on several levels. First, it’s not the typical Smart Grid disruption caused by technology, policy, or capital innovation although these drivers will heavily influence the responses that utilities can develop to deal with a world of expanding availability of prosumer choices. Second, it’s a unique designation in industry sectors. No other business sector has the potential for bi-directionality of the transacted product or service. We don’t have similar bi-directional transactions of buying and selling clothes from and to Bloomingdales or remodeling supplies from and to Home Depot. Prosumers can do that with utilities. And that bi-directional transaction is very disruptive. It will require transformations of utility business processes, metrics, best practices, and resource skillsets.

Although utilities will have to adapt in the Age of the Prosumer, they don’t have to reinvent wheels. There’s certainly experience from other business sectors that can speed their successful evolutions. One area that is particularly relevant is consumer value.  Consumer value is more than a formula. It’s a mindset that many businesses incorporate into their customer retention, acquisition, and value growth strategies. For example, the telecommunications sector invests considerable time and money to analyses of demographic and behavioral data to identify consumers with the highest real or projected value to them. That knowledge shapes their product and service development, influencer and partnership approaches, customer acquisition and customer retention strategies. The outcomes in increased revenue or customer satisfaction are carefully monitored and measured to ensure programs meet performance expectations.

Utilities need to take the lessons about how to assess consumer value and expand it into definitions of prosumer value that are leveraged in prosumer-centric operations. More on that in next week’s article.

*Forrester Research

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Three Important Takeaways for Success in the Smart Grid Ecosystem

The market opportunities are quite promising. The USA’s electricity ecosystem is transforming as new Smart Grid technologies, regulatory policies, and capitalization mechanisms disrupt the status quo. It should be a no-brainer for companies to enter this business sector, but there’s a troubling statistic based on actual history across many sectors.   For every success, there are about four failures. My consulting firm has conducted market assessments and implemented market entry strategies for domestic and international companies interested in breaking into the US electricity ecosystem. Here are three observations to help vendors ensure successful entry into this dynamic sector:

  • There is no “one size fits all” market entry strategy. The USA is a very large market. Energy opportunities and challenges are influenced by geography and meteorology. That in turn influences state energy policies and utility objectives. Regulatory policies are particularly balkanized, with state-based public service or utility commissions providing oversight of some utilities, but not all of them. Instead of a nationwide strategy, you may be better served with an entry strategy differentiated and prioritized by state and type of utility.
  • Demonstrate your interest with local investments. The USA has always been open to embracing new technologies from other countries, but a local presence in the states where you want to initially conduct business can be a real advantage, particularly after the Great Recession. Even in the state that contains Silicon Valley – which is geographically agnostic when it comes to innovation adoption – the California Energy Commission’s Electricity Program Investment Charge (EPIC) program evaluation process awards points to companies that have made investments in the state. This program provides funding to bridge the technology adoption chasms between innovators and early adopters, and it can be a critically important finance option when other sources can’t or won’t take the risks on emerging technologies.
  • It’s a marathon, not a sprint. The electric utility sector is very conservative in its embrace of new technologies or services, and its not alone. Water and gas utilities are similarly slow to adopt innovations. Your market entry strategy should be prepared to invest in education and evangelism, particularly if your solution is disruptive, or if your company is new to the sector.  Success in other business sectors is relevant, but not an absolute guarantee of success with utilities. Education develops familiarity with a solution and its provider. Evangelism helps find your initial customers.

This advice applies to vendors of Smart Grid and Smart Infrastructure hardware and software products and services. There’s no overnight success in this ecosystem – it takes persistence and patience. The good news is that market entry success is definitely achievable for companies that build realistic objectives, budgets, and time expectations into their strategies.

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Disruptive Innovations Struggle with Broken Systems

A colleague working for a startup with an innovative solution for the US public safety sector recently gave me a status update on the sector, and dwelled on the difficulties for his company to find an entry point in this sector. He talked about how the procurement processes in small to large city governments were ill-suited to accommodating innovative solutions. “They are all broken,” said my colleague, summarizing the state of city procurement processes, although his terminology was more colorful but inappropriate to my editorial standards. The resources that created the requests for quotes and proposals were procurement process experts, but often unable to bend these rigid processes to accommodate innovative technologies or services that could be a perfect fit for the first responder agencies they represent. In other words, its tough to fit square pegs into round holes.

The issue of broken systems is hardly limited to procurement processes within the public sector for Smart Infrastructure innovations. It’s endemic in the Smart Grid sector, with many cash-poor startups failing to successfully endure the marathons that many utilities have made of their technology evaluation and procurement decisions.

The situation has to change. Utility grids are aging. The American Society of Civil Engineers noted in a report titled The Failure to Act, The Economic Impact of Current Investment Trends in Electricity Infrastructure” that by 2020, the US electrical grid will need an average $75 Billion per year investment to upgrade its generation, transmission, and distribution systems. The situation is equally dire for city infrastructures – transportation systems, water and wastewater systems, and more.

We typically think of improvements only in the context of how things are accomplished now. To paraphrase Henry Ford, if he had asked people what they wanted, they would have answered “a faster horse” as automobiles were a luxury item unavailable to the vast majority of consumers. Henry Ford did not invent the car. He invented a way to make formerly expensive cars affordable for the mass market through a highly standardized and automated manufacturing process.

Disruptive innovations in Smart Grid and Smart Infrastructure technologies and services are square pegs. They don’t always conform to standard procurement processes. How can we improve existing city and utility procurement processes to accelerate Smart Infrastructure and Smart Grid investments? It’s a question that utility and city executives should ask themselves so their processes don’t become barriers to innovations that would improve their operations.

It’s time to break the existing processes with an aim to simplify and streamline them.   One eye-opening exercise would be for senior managers to try to navigate their procurement processes as outside companies. Perhaps they would see ways to reduce costs, reduce friction, and reinvent procurement to accommodate a wider range of solutions than those offered by vendors that have perfected management of procurement processes.

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Talking Points for Thanksgiving Dinner

We all have one – a family member or friend who faithfully regurgitates the weird combination of fiction and paranoia dispensed by the US-based news channel that is anything but “fair and balanced”. The US Thanksgiving holiday is approaching, and perhaps you’ll be sitting next to this loved one for the traditional dinner feast. Here are useful talking points that will help you set the record straight about two hot Smart Grid topics.

  • Renewables like wind and solar shouldn’t get subsidies, all energy sources should operate from a level playing field. Vehemently agree that there should be a level playing field for all energy sources.   Then note that the oil and gas industries received $447 billion in subsidies and tax breaks from US taxpayers since 1918, and it continues on to this day. The average subsidization of these two extremely profitable and well-established industries is more than 13 times greater than what is available to the combined renewables industries today. Therefore, a level playing field really means that either fossil fuels cease to get their tax breaks, or renewables should enjoy the same subsidies as fossil fuels. The elimination of subsidies for fossil and nuclear industries would amount to about $111 billion saved for taxpayers over the next ten years.

Highlight the jobs creation numbers from the renewables sector too. The wind industry has about 75,000 permanent jobs ranging from US-based manufacturing and installation to maintenance, sales, and marketing. The solar industry employs about 100,000 Americans on a full time basis. Add in geothermal, biofuels, hydro, and green building sectors, and that’s over 1 million clean energy jobs in the US alone.

There’s another compelling value proposition for renewables over energy sources like oil and gas. Price and supply certainty. Oil and gas prices exhibit regular price volatility, and have been subject to many supply disruptions – some deliberately caused and others resulting from natural catastrophes. The sun and wind don’t have a history of colluding to throttle back supply and drive up prices.

  • Remember Solyndra! If the conversation shifts to the bankruptcies of companies that received money from the Department of Energy’s Loan Guarantee Program, you can again agree that it’s a shame that these companies failed. However, even the most successful venture capital firms have some stinkers in their investment portfolios. Two recent studies of VC investments revealed that 65% – 68% of their investments were money-losing deals. In contrast, the Loan Guarantee program, which helps new technology projects and companies cross the chasm from promising solution to commercial market deployment is now making money for taxpayers, with a 98% success rate. Tesla Motors repaid its $465 million dollar loan 9 years early. A bonus talking point is to note that this program, designed to provide low-cost financing for innovations, was created during the George W. Bush administration.

There’s a convenient website where many additional talking points can be obtained thanks to the American Council on Renewable Energy (ACORE).   Happy Thanksgiving to my American readers!

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Three Global Utility Metatrends

European Utility Week serves as an excellent venue to obtain more global industry perspectives than what is typically found in most North American-based industry events. In the case of the 2014 event, it served to reinforce the conclusion that there are really three global metatrends in play for electric utilities. Three recorded interviews that I conducted during this conference highlight these metatrends, and some of the impacts to utilities.

First, the distributed generation (DG) genie is out of the bottle –centralized generation is no longer the only energy architecture. DG is one component of distributed energy resources (DER). The newly released Smart Grid Dictionary 6th Edition defines DER as Grid-connected or standalone generation, energy storage, or negawatt assets that are deployed in the distribution grid. DER assets can substitute for or supplement grid-supplied power. Jochen Kreuss, Head of Smart Grids Initiative, ABB discussed the challenges that DG, whether in the form of renewables, aggregated assets within a microgrid, virtual power plant (VPP), or independent asset creates for utilities in this interview.  He also noted that communications infrastructures must be capable of helping utilities manage large numbers of devices. This is a critically important metatrend impact. The Smart Grid requires dedicated bi-directional M2M networks that can deliver the necessary security, reliability and speed to support bi-directional electricity transactions.

The second metatrend is the growth of big data and the impacts to utility operations. The four Vs of big data – volume, variety, velocity, and veracity – are stressing the existing siloed operations and legacy solutions common to utilities. At the same time, these asset-intensive businesses continue to add more equipment that pumps out more data, exacerbating the problem. Peter Sigenstam, Vice President and Head of E.ON Innovation Centre Distribution and Daryl Rolley, Executive Vice President, Global Sales for Ventyx, an ABB company, discuss how E.ON’s proof of concept project called Smart Grid Control Center creates more flexible grid operations for both generation and demand in this interview.  This project finds inspiration for data management optimization in industries that range from consumer goods and financial services to automotive manufacturing (particularly robotics) and oil and gas operations. As one example, E.ON recognizes that the retail sector has extensive experience in creating customized suggestions to cross-sell or upsell customers, which could help this utility tailor its service offerings to customers.

The third and final metatrend is the rapid culmination of the impacts the first two trends exert on utilities. Xavier Moreau, Strategic Marketing Director for Schneider Electric reflected on these trends and other important drivers that are triggering fundamental transformations within utilities, as well as in how utilities view and value the grid edge in this interview.   What is particularly interesting is the combinatorial nature of some DER – it can include different forms of energy (think thermal as well as electrical), and controllable loads that are the subject of demand response (DR) solutions and services. That points to additional complexities to microgrid and other DER management as well as managing the data produced by these new assets. He mentioned an ongoing project with DONG Energy focused on island microgrids that integrate very high levels of renewables and incorporate data from sources including weather to provide reliable power. Utilities will have to become smart too, in terms of re-engineering processes, reskilling employees, and revising corporate cultures to accommodate de-carbonized and DER-based electricity grids.

The good news is that while these metatrends are common to utilities around the world, some utilities are finding the opportunities, and not just the challenges created by these trends.  These utilities are actively deploying pilots or full-scale implementations of DER and/or microgrids, exploring the use of sophisticated analytics to aid decision-making, and leveraging grid operations solutions for proactive, not reactive responses.

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Want Green Power? Try Community Choice Aggregation

The recent Business of Local Energy Symposium in Petaluma, California had a rare degree of fervor that isn’t typically experienced at Smart Grid industry conferences about electricity.  Community Choice Aggregation (CCA) or municipal aggregation, is defined in the Smart Grid Dictionary as an energy policy that can promote distributed and/or renewables generation through community-based contracts with electricity suppliers. The community acts as an aggregator, and residents within it are automatically part of that CCA unless they opt-out, which serve to continue the customer/supplier relationship with the regional IOU (investor-owned utilities). The IOU is still responsible for delivering power to the CCA members. This policy is available in several states, including California, New Jersey, Massachusetts, Ohio, and Rhode Island.

Two neighboring counties in Northern California – Marin and Sonoma – have CCAs operating on a county-wide basis. That’s one distinction of how a CCA is different from a municipal utility, which typically operates in conjunction with a political jurisdiction that provides other governmental services such as police, fire, and the collection of taxes to support those services. There are a couple other key distinctions.

First, the CCA essentially “rents” the wires from the utility that owns and operates the distribution grid. The CCA sources its own power, and for CCAs in California, the emphasis is on finding clean renewable sources of power. The distribution utility is still responsible for customer service, billing, service restoration, and all grid operations. In other words, the CCA becomes the default, not-for-profit provider of the sources of electricity.

Second, the CCA is hyperlocal. Common success factors identified by Sonoma Clean Power and Marin Clean Energy – the two CCAs most discussed at the conference (although other states were also included) put an emphasis on local. The power is local whenever possible. The financing to get the CCA off the ground is provided by local community banks. The jobs to develop and maintain local power remain in the community. Even the energy efficiency programs can be tailored to specific zipcodes or neighborhoods, achieving levels of granularity that often elude larger IOU-sponsored programs.

CCAs have traditionally been viewed with trepidation or outright hostility by IOUs. Certainly, the erosion of the customer base has a downside to utility revenues. However, CCAs have some intriguing possibilities – with the assistance of innovations in technology, policy, and finance – for utilities. States are the laboratories for democracy and utility business model revolutions. California is requiring their IOUs to develop Distribution Resources Plan (DRP) proposals that incorporate distributed energy resources (DER) into their plans and grid operations. New York is boldly exploring complete revisions to the existing regulated utility business model. CCAs are interesting models to consider to determine the locational value of DER assets like generation and energy storage, and develop formulas for the monetization of DER assets within distribution grids.

In the future, CCAs could function as autonomous nodes of distribution grids. The CCA acts as the manager of its own node on the distribution grid, and the utility negotiates with the CCA to meet defined performance targets. This arrangement addresses a significant challenge of embedding distributed intelligence and control in distribution grids. By leveraging the local control provided by a CCA, specifically the support of its political and community leadership, the distribution grid operator could gain more predictability about consumer behaviors and asset activity than less organized geographic territories.

CCAs could also morph into autonomous microgrids or include autonomous microgrids within their boundaries. Microgrids that contain combined heat and power (CHP) assets, energy storage, and distributed generation in the form of renewables, electric vehicles (EVs), and demand response (DR) could contribute kilowatts and negawatts to the distribution grid.

CCAs could also be leveraged by distribution grid operators for more intensive energy efficiency (EE) activities that address grid problem areas. Since CCAs have the advantage of local control, they may deliver better results than existing EE programs. New regulatory policies that reward negawatt production on the part of CCAs might encourage more activities here, including recognition (carbon credits) for reductions in CO2 emissions. After all, the cleanest watt is the watt that is never consumed.

These possibilities would require policies that allowed for entities other than existing utilities to have some level of control for selected portions of the distribution grid. CCAs, as managers of DER assets, would also benefit from revised standards that enable bi-directional electricity flows while still maintaining safe grid operations. New technologies and services are also needed. A couple of speakers noted that turnkey arrangements would definitely make it easier for more communities to consider adoption of CCA models.   And finally, the finance community has to be educated on the benefits of CCAs.

CCAs are one interesting way to add more clean renewables or green power to the grid and accelerate as well as supplement existing renewable portfolio standards in every state. Let’s see which state step up to make that happen.

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