The Customer Aggregation Threat to Utility Business Models

In October 2009 I wrote that there is a convergence of market, economic, environmental and regulatory forces underway that is changing the way investor owned utilities see renewable energy from something they must do to satisfy their regulators to something they MUST do to survive.  I described ten factors that lead me to this conclusion:

  1. Renewable Portfolio Standards are here to stay.
  2. Carbon emissions constraints are likely to happen.
  3. Consolidation is sweeping the wind and solar manufacturing industry.
  4. De-coupling rules are limiting earnings growth from commodity energy sales.
  5. Efficiency and Demand Response regulations open the door to aggregators.
  6. Home Area Network (HAN) technology threatens control of customer gateway.
  7. Congress allows utilities to earn investment tax credits on renewable generation.
  8. NIMBY is likely to limit or kill most new transmission construction.
  9. Without transmission access renewable energy developer failure rates rise.
  10. Maybe a distributed generation business model based upon renewable energy owned by the utility is not such a bad place to be for an investor owned utility.

I argued that this convergence of forces is engaged in a battle to kill the economies of scale for large central station generation. While wind has captured the most renewable energy market share, it is solar power that is the most pernicious threat to the utility business model because it represents the foundation for a distributed generation alternative to the traditional utility. The only thing standing in the way is cost.

Customer Aggregation Threat Ahead

Today I want to add an additional threat to the utility business model to consider: customer aggregation. What got me thinking about this is the report that PG&E was backing a June 2010 ballot measure in California to require 2/3 voter approval of aggregation programs undertaken by cities and counties in the state. In due diligence, I should tell you that my former firm, Global Energy Decisions, was hired by PG&E to assist in evaluating the reasonableness of the proposed annexation of PG&E’s Yolo County service area by the Sacramento Municipal Utility district (SMUD).  Our analysis found that this proposed annexation made no sense for the people of Yolo County because their rates would go up to purchase the energy to serve them.  But perversely, the annexation also made no sense for SMUD because it lacked the energy and capacity to serve the new territory without buying those additional resources at substantially higher costs thus raising the rates and the portfolio risk for all its Sacramento ratepayers. Working for PG&E in this assignment cost me SMUD as a client, but I still believe today our independent analysis did the People of Sacramento a good service by exposing the financial risks.

Down in the San Francisco Bay area there is rumbling of new challenges to PG&E service territory by the City and County of San Francisco and Marin County.  This action by PG&E in passing petitions and securing sufficient voter signatures to put the matter on the ballot suggests the utility takes the threat seriously. Why the voters of San Francisco or Marin would willingly subject their energy future to the whims of the Board of Supervisors requires more psychoanalysis than I am qualified to provide, but PG&E thinks they might be crazy enough to do it or they would not be passing the petitions.

Right Threat Assessment but Wrong Enemy

Will all due respect for my friends at PG&E I think they got the threat right but the enemy wrong.  Customer aggregation is indeed a potential threat to the utility business model, but the real threat is not the muni challenge but this same convergence of forces that is likely to bring us smart grid, Home area networks (HAN), efficiency and demand response services and the quest to be more responsible energy consumers.

In short, the real threat is from the likes of EnerNOC, Oracle, Battery Ventures or IBM or similar services firms who see the potential profit from leveraging energy information from smart meters with energy efficiency/demand response/distributed generation to game the dynamic pricing rates structures likely on the horizon to control the gateway to customers. Meanwhile, aggregating commercial and industrial customers around energy efficiency, energy management, green building solutions and the like proves the concept.

Need more examples of this at work?

  • Oracle believes building energy management will be a big market. A recent story reported that Oracle’s Energy and Environment Group was asked to find out why a grocery store customer experienced peak power hours at 5am. Quite unusual since peak power typical happens in the heat of the afternoon when air conditioning is going. Some detective work found that the demand surge happened when the bread bakers arrived and turned on all the ovens at once. Oracle worked out a staging of energy use based upon production to reduce the peak and lower demand charges.
  • Tracking energy by time of use. A similar example from Mike Dauber at Battery Ventures showed a pattern of high energy demand at a warehouse grocery chain in the middle of the night. Equipment checks and sensors showed no malfunctions. On site, the inspector found delivery trucks unloading at the same times and workers were opening all of the freezer doors at once and leaving them open until the delivery was complete. Changing the procedures solved the problem.
  • EnerNOC hired by Morgan Stanley to manage energy at HQ. EnerNoc bought Cogent Energy in December 2009 to accelerate its diversification from demand response to energy management.  It won a contract from Morgan Stanley to analyze its offices for savings using its newly acquired commissioning software to harvest data at five minute intervals at 8,000 nodes at the bank and devise efficiency strategies. Press reports said that EnerNoc claims it has identified $100,000 in initial savings.

So why is this a threat to the local utility?  Because few utilities offer to help these clients save energy because most are still in the business of selling energy as a commodity.  PG&E is different in that its rates are decoupled meaning PG&E profits from the effective management of its portfolio against performance targets not commodity energy sales, but you can bet that few utilities have the software and solutions that these examples indicate to help customers solve their energy problems.  Not yet that is!

There’s an App for that!

Time is not an ally for utilities. Patently Apple reported recently that Apple filed patents for an easy to access energy management solution that uses devices plugged into power outlets to capture energy use information using power line networking and sends it to an App on your I-Phone or maybe that new Apple tablet you are lusting over.  The App reportedly would let you turn lights and appliances on and off on your I-phone.

So what?

The real threat to traditional investor owned utilities is not from mischievous municipal utilities or their politicians, it is from the convergence of energy, entertainment, information technology and the services needed to integrate and manage them that transform commodity products into value added services we never knew we needed and now cannot live without.  And with that transformation goes control over the home area network (HAN) gateway to the customer –and life for the utility will never be the same again.