Patty Durand | Jun 05, 2014
Many thought leaders agree that utilities need corresponding changes in the regulatory compact and to evolve their own business models in order to survive.
And the time for adaptation is now.
The twin genies of rising consumer expectations and technology innovation are out of the bottle and can no longer be contained.
Steve Wozniak, co-founder of Apple, gave the keynote at the Energy Thought Summit in Austin earlier this year. In response to the question “What’s it like to be privy to new technology before we all see it?” Wozniak said that he preferred the role of ordinary consumer, buying technology off the shelf and assessing its strengths and weaknesses as it reached the market.
Wozniak is known as an original thinker and inventor, and his work creating personal computing has inarguably changed our lives—yet he preferred the role of consumer over creator or insider. What a universal perspective that offers: We’re all consumers, no matter our expertise within certain domains. Of course, this aligns with my own professional domain as executive director of the Smart Grid Consumer Collaborative as we listen to, study and track consumer behavior.
Consumer expectations: rising
It is clear that the availability of affordable personal computing and mobile combined with telecom has empowered consumers across the entire socio-economic spectrum.Always-on, near-instant access to information and control over life’s preferences has set new expectations for service. This is a wake-up call for the power industry. The monolithic “ratepayer” has become the “valued customer” almost overnight. Utilities are each handling this sea change differently, from some doing nothing differently, to others leading the way with unparalleled consumer engagement and programs, and everything in between.
We know from the Smart Grid Consumer Collaborative’s (SGCC’s) own research that consumers are a diverse group falling into five broad categories of values with varied motivations regarding their electric service. Many consumers expect service options, including their energy use data and the means to manage their use.
What I think has been under-appreciated by many stakeholders is the speed and fundamental nature of market-based changes now underway, which could to overtake even the opportunity for utilities to reinvent themselves.
The speed of change
In a new, influential article, “The disruptive potential of solar power,” by David Frankel, Kenneth Ostrowski and Dickon Pinner at McKinsey & Co., the authors point out that although solar photovoltaics (PV) currently provide a tiny percent of overall power generation in the United States, it accounts for an increasing proportion of new capacity.This is a key realization this article drove home for me: By diverting new demand, that undermines the traditional driver for new investment in central generation.
The writers conclude: “In effect, though solar will continue to generate a small share of the overall U.S. energy supply, it could well have an outsize effect on the economics of utilities—and therefore on the industry’s structure and future.”
In an online poll related to the article, readers were asked how many years it will take for solar to seriously disrupt the power sector. The vast majority (82 percent) said 0-5 years. Only 17 percent chose a longer timeframe of 6-10 years. The implication is that utilities have five years to implement their future-oriented business plans.
One might be tempted to think that online readers may be overstating the case, but David Crane, CEO of NRG Energy, also refers to solar power as a “mortal threat” to the power industry in the guest essay “Keep Digging” in the January/February issue of EnergyBiz. The “pace of demand destruction … [will] accelerate” due to distributed generation and automated energy management options in homes and businesses, Crane writes. “The grid is ripe for the plucking by disruptive innovation.”
The result? According to Crane, whose Fortune 500 company currently provides power for two million customers in 16 states, consumers will only turn to utilities and the grid for “deep backup.”
Utilities: offense or defense?
One common reaction is to be defensive. Many utilities appear to understand the threat to their business model and the demand for centralized power and, accordingly, have attempted (or will attempt) to put constraints on net metering for distributed solar resources. Another defensive tactic is to charge fixed fees for interconnecting that distributed solar power. NRG’s Crane thinks that pursuing political lobbying for such constraints rather than innovating for market-based solutions would be a mistake.In fact, Jim Rogers, former Duke Energy CEO, in an interview titled “Threats to the Monopoly Model” (EnergyBiz, January/February 2014), even suggests that third-party opportunities for disrupting the current centralized power model are so strong and their effects so swift that utilities may not beat them to the punch through changes to existing regulatory and business models.
Crane, Rogers and others point out that such fundamental challenges require fundamental solutions, such as creating consumer value propositions and opportunities tied to the challenge, rather than simply warding it off. Crane suggests that utilities that offer both electricity and natural gas may come to favor distribution of the latter because it could serve to generate power on site in homes and businesses, which creates a new business value stream. And, in the face of the anticipated, greater frequency of extreme weather, the natural gas distribution system is already underground creating a new value stream around resiliency and hardening.
The power of consumer engagement
All of this craning to see into the future—even if it’s right around the corner, as some stakeholders suggest—can leave one with a stiff neck. In closing, I must return to one of SGCC’s fundamental research findings: An engaged customer is a more satisfied customer. And utilities have the front-line opportunity to engage their customers and shape the relationship. Even if third-party disruption leaves utilities as an option only for “deep backup” (which is unlikely) that fundamental security will be needed.Right now, dozens of utilities are adopting the U.S. Department of Energy’s Green Button initiative for providing customers with energy use data and encouraging third-party software applications that can help customers to understand that data and manage their energy use. Tens of millions of customers are taking advantage of new offerings for personal energy information, gaming and apps, and demand response programs.
The Smart Grid Consumer Collaborative is helping to create understanding around the value proposition for consumers by documenting thoughts and facilitating discussion around the consumer value proposition for the smart grid. We have gathered thoughts from hundreds of industry leaders and will have a formal draft available sometime this summer. We look forward to fulfilling a role as the organization that logically brings together disparate thoughts from all of you and creating a shared view into how consumers benefit from smart grid investments that we can all get behind.
Though fundamental changes to the power industry appear to be close upon us, utilities have access to the insights and the tools to shape their destiny—a destiny that must rely, in great part, on consumer engagement.
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