Recently, I wrote about the threats to the traditional utility business model. It was a story about how the forces of creative destruction were converging to ‘steal the copper from the wires’ to turn it into gold from customer aggregation, energy management and demand response, cleantech gadgets and networks, and the feel good bonus of solar and wind renewable energy supply.
The forces of disruptive technology are at work today reinventing the energy future.
This is not one contest but a series of battles that seek control over the gateway to customers. Because few players have the ability to take on Goliath directly they will sling rocks at his ankles not his head—at least for a while. The result will be a many small cuts that bleed away C&I direct access customers, prevent the utility from new large scale central generation power plant construction, and erode the most important core competency of the traditional utility—the ability to dominate the regulatory process.
This insurgency will not be about energy directly, but will tantalize us with the ‘toy store’ of communications, entertainment, broadband access and the networked use of information to provide security, mobility, convenience and value. The hit and run attacks will largely be behind the scenes in the meeting rooms of NIST over interoperability standards, IEEE over tech trends and geek speak of networks, architecture, software and applications or NERC over critical infrastructure protection.
Preparing for the Distributed Energy Resources Future
What is at stake is the traditional utility business model of central station generation and its average cost economies of scale. We are nearing the tipping point where the politics of energy are driving up the cost and stringing out the opportunities to build new baseload fossil fuel or nuclear power plants. To replace that supply proponents argue for distributed energy resources (DER) that combine clean, renewable energy sources with energy efficiency, demand response, dynamic pricing, and smart grid to create a more sustainable energy balance for the future.
The role of the utility in this approach is to deliver the clean energy supply and get out of the way of demand reduction. Deploying their regulatory management core competency utilities are accepting the politically correct reality of this situation and employing new tactics such as “decoupling” rates to mitigate the damage. Decoupling shifts the regulatory basis for allowing the utility to earn a rate of return away from selling commodity energy.
The old standard saw the PUC approve a return on invested capital in large power plants. The new decoupling approach ties the utility return on equity to key performance indicators such as efficiency, meeting its RPS targets and not resisting political correctness too much since no one wins if the utility gets into financial trouble.
Will the Utility be a Leader or a Victim of Change?
The gravest threat to the utility future in this passive-aggressive decoupled energy model is it will be stuck as the one trick pony commodity vendor of last resort in a multi-tasking world driven by apps and options. This rate regulated wires and pipes energy delivery business gets stuck with all the hassles while the growth shifts to other market players from all those DER, managing those net zero energy buildings and offering a dizzying array of gadgets, applications and value-added services.
The Utility Empire Can Strike Back!
Don’t be depressed. The empire can strike back if the leaders of America’s utilities take lessons from the insurgency and do the thing least expected of them—-get close, I mean REAL close, to customers.
Here are a few crazy ideas to keep the utility CEO up at night:
- HELP ME SAVE ENERGY AND MONEY: CREATE AN OPEN SOURCE ENERGY+ ECOSYSTEM. Volatility is a wonderful thing for consultants because it keeps customers coming back for help. This can also true for utilities if they leverage their reputation for reliability and the trust from long standing customer relationships to help their customers have a good experience in the brave new converging world of energy and all that other stuff ahead. If the utility no longer gets rewarded from selling commodity energy, it can still benefit from facilitating the access to its customers and serving as a DER marketplace for the services they need. To do that the utility must puts its bureaucratic traditions to work creatively to create an ecosystem to provide easy access to utility customers for all these new vendors of smart-grid enabled gadgets and services as well as renewable energy suppliers. Think about the Apple business model of creating an ecosystem where all the components are plug and play and vendors who use it gain easy access to customers. Think about the Amazon superstore business model of retailing providing easy access to every service your customer can possibly need. But this ecosystem is different from Apple or Amazon because the utility wants to use open source standards and create a marketplace just as sticky as iTunes, Apple Apps Store or Amazon’s recommendations BECAUSE the utility makes it easy for customers and vendors to work together. The advertising revenue, sales commissions and product or services sales revenue works for all. The utility wants to continue to be the gateway to customers and this is one way to do it which builds goodwill and creates additional revenue streams from decoupled services. The utility can recommend options to customers who might save money from making better choices. There are also opportunities for this platform once developed to be franchised to other utilities.
- INVEST IN ME: VIRTUAL POWER PLANTS are a mashup of distributed energy resources combined with doses of energy efficiency, demand response and energy management. They are being used by players such as Schneider Electric, EnerNOC, Comverge and others to aggregate commercial and industrial customers. These players are shifting their business model away from manufacturing solar panels or wind turbines or power plants to survive in a consolidating market environment capturing revenue from valued-added services. What does this have to do with the utility? The most pernicious threat to the central station utility business model is the grid parity of solar and wind because they accelerate the shift to the distributed energy future. But if the utility cannot build a new coal plant or nuke it can still invest in DER and play the DER game by creating an auction market for the utilities own C&I customers to participate in virtual power plant pools. The utility capitalizes the installation of solar panels and signs contracts with C&I customers directly or it serves as an aggregator itself and buys contracts from vendors to achieve the same goal of maximizing the potential of DER in its service territory and maintaining control of the gateway of customers for other service available from its own ecosystem.
- TEACH ME TO FISH: BE THE DATA ANALYTICS SUPER HERO. California utilities will soon be required to disgorge the data collected from smart meters to customers. Other states will likely follow soon with similar requirements. But just because this tsunami of data is available does not mean it will be useful. The utility is well positioned to use its infrastructure and knowledge of the smart meter capabilities to develop value added data analytics services it offers to its customers to improve their ability to shop for services and to vendors in search of customers in need. Teaching customers and vendors to fish is a critical part of the smart grid future in any DER world. If utilities doe not perform this function they not only will waste a good opportunity to improve their customer relationships, offer value-added services, and maintain control of the gateway to customers in a level-playing field way. The data are your friend, but they can also eat your lunch if you ignore them.
- BACK ME UP! RISK MANAGEMENT SERVICES CUSTOMERS. Volatility may be good for business but customers hate it. Stuff still happens and any move to dynamic pricing will create a tornado alley of risk exposures each of which offers opportunity for revenue from risk management, risk mitigation or risk insurance services. The utility of the future can maintain its sticky relationship with customers by offering a menu of risk products and services that help manage that risk. If you don’t do it someone else will. The product possibilities are endless ranging from pre-pay services, more dynamic pricing flavors than Baskin & Robbins, back stop, hedging, and other risk management services the utility is probably already using for its own book of business now re-purposed to help your customers manage the volatility you just created by agreeing to all this change.
As long at the traditional utility thinks traditionally it will be consigned to its low growth commodity sales business model until, that is, the regulators and new entrants decouple rates and throw you under the bus of DER.
The question for the utility CEO is do you want to drive the DER bus or be run over by it?