Plugging in the Consumer: Innovating Utility Business Models for the Future

IBM Global Business Services

IBM Institute for Business Value

Energy and Utilities

Plugging in
the consumer
Innovating utility business
models for the future

IBM Institute for Business Value
IBM Global Business Services, through the IBM Institute for Business Value,
develops fact-based strategic insights for senior executives around critical public
and private sector issues. This executive brief is based on an in-depth study by
the Institute’s research team. It is part of an ongoing commitment by IBM Global
Business Services to provide analysis and viewpoints that help companies realize
business value. You may contact the authors or send an e-mail to iibv@us.ibm.com
for more information.

Plugging in the consumer
Innovating utility business models for the future
By Michael Valocchi, Allan Schurr, John Juliano and Ekow Nelson

Historically, the relationship between utilities and consumers has been rather
lopsided – utilities had the power, both literally and figuratively. But the
confluence of climate change concerns, rising energy costs and technology
advances leading to greater consumer involvement is now radically
redefining that relationship. Our recent surveys of 1,900 energy consumers
and nearly 100 industry executives across the globe reveal major changes
underway – a more heterogeneous consumer base, evolving industry
models and a stark departure from a decades-old value chain. We believe
companies need to prepare now for a participatory network that enables
customers to choose from a wide variety of suppliers, actively manage their
consumption and even sell back surplus power they generate.

Introduction supply decisions themselves. If utilities and
In decades past, as long as the energy flowed regulators allow them to be more active partic-
when and where required, residential and ipants, these customers are willing to shoulder
small commercial customers were satisfied more responsibility.
with leaving all the decisions about their
Given this shift in consumer attitudes and the
energy supply to their trusted providers, even if
rapid advancement of new technologies, what
they were unhappy with the bill.
will the industry look like in five to ten years?
But times have changed. Growing reliability How quickly will utilities and regulators respond
concerns, fear for the environment’s future, and to these emerging consumer needs? And how
ever higher energy bills have some consumers much control do consumers really want?
wanting to manage more of their energy


To help answer these kinds of questions, we tive markets. Also, based on both consumer
surveyed 1,900 consumers from six countries and utility responses, we expect utility demand
1
in mature economies. In our “consumer” management initiatives to expand dramatically
group, we included residential households and and electric power generation by consumers
small commercial customers, but excluded to make tremendous inroads within ten years.
large commercial and industrial companies.
We also interviewed nearly 100 industry execu- Leveraging the new technology ecosystem will
tives in Europe, North America and the Asia- help utilities harness innovation to meet key
Pacific region – one-third from large firms with objectives in coming years, including:
revenues greater than US$5 billion and the • Preparing for an environment in which
2
remainder from smaller utilities. customers are more active participants

Based on the insights from our consumer • Capitalizing on new sources of realtime
survey, interviews with utility executives and customer and operational information, and
our own industry experience, we anticipate deciding which role(s) to play in the indus-
a steady progression toward a Participatory try’s evolving value chain
Network, a technology ecosystem comprising • Better understanding and serving an
a wide variety of intelligent network-connected increasingly heterogeneous customer base.
devices, distributed generation and consumer
energy management tools. Although the The utility industry is fast approaching a
precise timeframe for reaching this end-state is tipping point beyond which consumers can,
unknown, our research suggests a few major and increasingly will, demand equal footing
milestones. Within five years, the percentage of with their providers. Those utilities that are
the world’s electric utilities that will be gener- fully prepared to share responsibility with their
ating at least 10 percent of their power from customers and help them meet their specific
renewable sources will have doubled. In that energy goals will have a significant competi-
same timeframe, we believe sufficient supplier tive advantage.
choice will allow meaningful consumer
switching to emerge in most major competi-


Innovating utility business models for the future

Does YouTube infer “YouEnergy”? But, in recent decades, the media and enter-
Thanks to technology advances and a tainment business has changed dramatically.
contagious groundswell of empowerment, Cable and satellite provided viewers with
industry by industry, “consumers” are taking hundreds of additional channel choices and
on much broader, more involved roles than niche programming. More recently, options
that term implies. Not only are they increas- such as digital video recorders, video on
Consumers have become ingly vocal and decisive about what they will demand, video programming on mobile
or will not consume, they are, in many cases, devices and online libraries of content have
increasingly committed
moving back in the supply chain – becoming emerged, giving consumers more control
to involvement in media over what, where and when they watch. Now,
designers, producers, marketers and distribu-
and entertainment, and tors of the products they once just purchased. pockets of media enthusiasts are taking on
may follow this example new, more participatory roles – even producing
If it’s difficult to imagine that trend moving to their own content. The evidence of this
in the energy industry.
the energy industry, consider the changes evolution is quite clear in media – and, with the
in the media and entertainment business in right conditions, a similar pattern could unfold
recent years. Although these two industries are in the utility industry (see Figure 1).
very different in many ways, consumer involve-
ment in the energy business could follow We believe the next five years will be pivotal
many parallel paths. for the energy industry. Consumer needs
and roles are expanding, influenced to a
Looking back, consumers in both industries large extent by the part consumers are now
started out as passive participants. Energy playing in other industries like media and
consumers used whatever type of energy their entertainment. For utilities, this means revis-
utility sent to the premises without worrying iting long-held beliefs about how best to serve
about how it was generated or the conse- customers and making fundamental changes
quences of their consumption. Television to their strategies and operations in prepara-
viewers acted just as passively – watching tion for a more participatory market.
whatever programs networks happened to be
broadcasting on one of the few limited channel
options at any given time. Control sat firmly in
the hands of utilities and broadcasters.


Figure 1.
The rapid increase in consumer choice in industries like media and entertainment will shape consumer
expectations for electricity providers.

Television consumer Electricity consumer

Passive • Passive receipt of content • Passive receipt of power
• Limited sources of content generation • Limited sources of power generation
• Major media companies exclusively control • Incumbent utilities exclusively control power
content generators
• Provider-customer relationship one-to-many, • Provider-customer relationship one-to-many,
driven by demographics and geography driven by demographics and geography

• Consumer interest drives new and more targeted • Consumer interest drives new and more
choices in content targeted choices in power supply
• More interest in and leverage of information on • More interest in and leverage of information on
Active quality indicators for content (e.g., TV program quality indicators for content (e.g., green energy
rating systems) standards)
• Broader choice of providers drives more active • Broader choice of providers drives more active
role in provider selection role in provider selection
• Consumer does not control content, but has • Consumer does not control generation, but has
stronger influence via choices stronger influence via choices
• Introduction of time-shifting technologies enables • Introduction of residential time-of-use programs
more active selection and management of content and green power options enables more active
at individual level selection and management of generation
deployment at individual level

• Interactivity and involvement with content and • Interactivity and involvement with generation
service providers increases and service providers increases
• Consumers active in producing content and • Consumers active in generating power and
Participatory influencing content distribution influencing generation planning decisions
• Rapid creation of new content types as technology • Rapid creation of new power supply options
change causes explosion in capabilities as technology change causes explosion in
• Dynamic, value-based pricing of content capabilities
• Provider-customer relationship dynamic is • Dynamic, value-based pricing of power (e.g.,
increasingly customized to specific entertainment time-of-use)
and information interests, with consumer • Provider-customer relationship dynamic is
analytics a key driver increasingly customized to specific energy
management goals, with consumer analytics a
key driver

Source: “The end of television as we know it,” IBM Institute for Business Value, January 2006; IBM Institute for Business Value analysis.

Converging catalysts energy consumers and the fundamental value
Climate change concerns, technology proposition of the industry itself. Though each
advances and consumer involvement are the of these trends has progressed independently
key factors driving the industry toward this for a time, they have all now reached a point of
new environment. Collectively, these drivers convergence where each is fueling the others
are overturning traditional assumptions about and the entire combination is catalytic.


Climate change concerns Outside the United States, one out of every
In recent years, the debate over climate four consumers we queried had computed the
4
change has become much more public. climate change impact of their energy usage.
Messages about the potential for dramatic The message is clear – more people are
climate change, at least in part due to green- willing to take personal responsibility for their
house gas (GHG) emissions, have started own energy consumption consequences.
to resonate with the average consumer.
This drumbeat has increased rapidly to Utilities are making major investments and
near-deafening levels. In 2003, 119 articles operational changes to respond to climate
on climate change appeared in the top 50 change concerns and policies. Within five
Almost 40 percent of years, both the percentage of utilities devoting
US newspapers. By 2005, that number had
consumers who can at least 10 percent of their capital expendi-
skyrocketed to more than 1,800. And in just the
choose renewable energy first seven months of 2007 more than 3,400
, tures to environmental compliance and the
do so – and more than 60 such articles have been published.
3 percentage of generating companies securing
more than one-tenth of their power from
percent of those who do
Around the world, governments are renewable sources will double (see Figure
not currently have those responding with new energy policies, 2). And where consumers are less inclined to
options would like them. programs and legislation. Governmental and take steps to limit the impact of their energy
regulatory pressures on utilities are particularly consumption on the environment, utilities may
intense in Europe and North America (where be increasingly forced by regulators to take
79 percent of executives rated the pressure on that responsibility – through better demand
as moderate to strong). In Asia Pacific, firms response, higher efficiencies, extending the
are feeling less pressure (only 38 percent lifetime of existing infrastructure through better
indicated pressure was moderate to strong) asset management, and other system-wide
– but this may change as sentiments from improvements.
other regions spread through the global
marketplace. FIGURE 2.
Industry executives’ estimates of total sales from
Consumers are clearly interested in the renewable power sources – five years ago, now
environmental practices of those they do and five years from now.
business with, from consumer brands to 00
energy providers. Seventy percent of the 90
consumers we surveyed said environmental 80
considerations were already an important 70
60
factor in choosing products other than
Percent

0
energy, and these concerns also influence
0
the energy products they buy. One in five 0
consumers knew about renewable energy 0
options available to them through their current 0
electric providers; of those, almost 40 percent 0
00-007 007 007-0
purchased some or all of their power under
such a plan. Among those who currently do None 0-10% 10%

not have (or are not aware of) the option of
Source: IBM Institute for Business Value/Economist Intelligence
choosing renewable power sources, more than Unit 2007 Utility Industry Executive Interviews.
60 percent expressed interest in doing so.


Technology advances Given this backdrop, we see smart meters,
To make these improvements, utilities will likely network automation and analytics, and distrib-
deploy advanced energy technologies such uted generation driving the most industry
as smart metering, sensors and distributed change, from a technological perspective, in
generation. Many of these have been available the near term.
in some form for years, but their business
cases have been rather lackluster. However, Smart meters can provide motivated
during the last three to five years, the tech- consumers with the decision-making informa-
nologies have continued to advance, and tion they need to better manage consump-
their benefits have strengthened dramatically. tion and energy costs. When combined
Several contributing factors are prompting with programs that leverage this information
greater interest in advanced technology (e.g., time-of-use pricing), shifts in consumer
deployment: behavior can be significant (see sidebar, With
the right programs, interested consumers can
• The combination of energy price increases reach their energy goals). In addition, remote
and consumers’ increased sense of respon- control of energy-consuming devices offers
sibility for the impact of their energy usage consumers an extra measure of convenience
on the environment have generated serious and control. Smart meters also benefit utilities
interest in managing consumption. in several ways, such as providing better
• The frequency and extent of recent demand management/load response capa-
blackouts are driving consumers, politicians bilities and allowing companies to turn on
and regulators alike to demand assessment or shut off service remotely, reducing labor
and upgrade of the industry’s aging network requirements.
infrastructure. In addition, the steady flow
of retirements resulting from the industry’s The movement toward an intelligent network
aging workforce makes it difficult to retain that leverages network automation and
the skills necessary to maintain today’s analytics in conjunction with grid data devices
labor-intensive network. such as smart meters provides further benefits
to both utilities and consumers. Sensors and
• Climate change concerns have invigorated automated monitoring mean fewer outages
research and capacity investments in small, and faster restoration. Optimized transmission
clean generating technologies. At the same of power can shorten transmission paths and
time, rising and unpredictable fossil fuel reduce losses, which lowers overall generation
prices are making these technologies more needs – all of which amounts to lower GHG
cost-competitive. emissions. A more sophisticated network also
• Technology costs have generally decreased enables new products and services that take
as lower-cost communications, more cost- advantage of realtime consumer information
effective computing and open standards and two-way interaction as these become
have become more prevalent. available.

6 IBM Global Business Services

With the right programs, interested consumers can reach their energy goals
In cooperation with Hydro Ottawa, the Ontario Energy Board recently completed a seven-month pilot that tested
consumer inclination to shift and reduce demand when using smart meters and time-of-use pricing. The 7
Hydro Ottawa residential participants were divided into three groups. Roughly one-third were assigned a basic,
off-/mid-/on-peak time-of-use plan (TOU); another third were on the same general plan but had a penalty for
critical peak usage (TOU+CPP); and the final third used the basic plan supplemented with a rebate for avoiding
Smart meters, network critical peak usage (TOU+CPR).
5

automation and To help with monitoring, consumers were supplied with monthly usage statements in addition to their regular bills.
analytics, and distributed They also received refrigerator magnets that outlined timeframes and associated prices for their particular plan.
generation are expected On average, 7 percent of participants shifted enough of their consumption away from peak times to save
to drive substantial percent per month on their energy bills. During four peak summer events, when penalties and rebates
applied, shifts in consumption led to even greater savings – 6 percent for TOU, percent for TOU+CPP and
industry change over the 6
8 percent for TOU+CPR. These results are particularly remarkable given that consumers were relying on
next few years. monthly usage statements; if consumers had a near-realtime view of usage, these reductions might have been
even more dramatic.
Participants not only shifted demand, but also reduced total consumption. This “conservation effect” amounted
to a 6-percent reduction in overall usage. When combined with the effects of shifting, this allowed 90 percent of
7
the participants to pay less than they would have paid on their prior plans.
When surveyed near the end of the pilot, 78 percent of the consumers said they would recommend this type of
8
program to a friend, and less than 0 percent wanted to revert to a traditional pricing plan.

Utilities are also adding smaller, renewable Among our industry executive respondents,
distributed generation facilities to their supply 64 percent believe at least one small, clean,
mix in an effort to further reduce the impact of advanced generation technology will become
power generation on climate. But the potential widely deployed among residential and small
for consumers to begin to generate power commercial customers within ten years.
locally is what truly positions distributed gener- However, we believe regulatory incentives
ation as a technology that can dramatically and support may be necessary to accelerate
change the way both utilities and consumers deployment in the short term; where they exist,
meet their energy, environmental and adoption has been impressive (see sidebar,
Regulatory incentives spark consumer
economic goals. Once meaningful numbers of
adoption).
consumers and utilities incorporate these units
into the overall supply infrastructure, availability
will increase, and outage risk will decrease.

7 Plugging in the consumer

Regulatory incentives spark consumer adoption
The spectacular growth of residential renewable energy systems in Germany demonstrates strong evidence
of the tangible impact of regulatory support for distributed generation. Through a combination of low-interest
loans and favorable tariffs for sale of power from renewable generation back to the grid, renewable energy
sources contributed over 70 billion kilowatts in 006, which is over percent of the nation’s total electricity
9
consumption.
In 999, the German government made available low-interest loans for renewable electricity generation
equipment. The following year, they put in place the Renewable Energy Sources Act (EEG), which allowed
homeowners and farmers to connect their power systems to the grid and provided them a fair price for their
surplus electricity. While this created some additional interest, an amendment to the EEG in 00 boosted
10
power sell-back prices by percent, causing investment to skyrocket. Between 999 and 00, the number
of residential installations of photovoltaic power systems grew steadily at a CAGR of 88 percent, but in 00,
11
installations shot up by percent.
In 006, Germans invested more than US$0 billion in new sources of renewable energy, setting a world record.
Germany now operates more wind-powered generation, more solar systems and more biogas plants than any
12
other nation worldwide.

Consumer involvement Poorly implemented regulatory policies can
The move to renewable self-generation seen complicate the process for consumers and
under Germany’s EEG is but one indication new competitors. Other barriers include:
that consumers are striving to level the playing charges levied for switching, limited number
field with their energy providers. They are of competitors in a particular geography,
looking to a combination of four activities to lack of consumer interest (often from inad-
make this happen: leveraging provider choice equate information and education) and long
options, more actively managing their usage, notification periods (some countries require
moving toward self-generation of power and customers to notify providers of their intent to
making their opinions heard through multiple switch more than one year in advance).
channels, not just regulators.
In addition, our survey shows that a basic lack
Controlling their purchases
of awareness may still be holding consumers
In some regions with competitive markets,
back. Across our worldwide respondent
consumers are exercising the right to select
sample, one out of every five consumers did
their energy providers. In Great Britain’s
not know whether they could choose an alter-
market of 48 million electricity consumers, for
native electricity provider.
instance, more than 20 percent are switching
13
per year. Nevertheless, consumers were clear about
wanting a choice. Among those who could not
However, even where competitive markets are
change providers or were not aware of their
in place, most countries still lack adequate
ability to choose, the vast majority (84 percent)
mechanisms to encourage movement.
wanted the option (see Figure 3).


FIGURE 3.
Consumer interest in provider choice.
Can you currently choose a different electric If you did not answer yes, would you like to be
power provider than you have now? able to choose your provider?

Australia Australia
Germany Germany
Japan Japan
Netherlands Netherlands
United Kingdom United Kingdom
Unites States Unites States

0 0 0 60 80 00 0 0 0 60 80 00
Percent Percent
Yes No Don’t know Yes No

Source: IBM Institute for Business Value 2007 Utility Consumer Survey.

Consumers are While price will always be a factor, competition But with many consumers also assuming
asserting more control is also bringing to the fore a host of decision- their share of the responsibility for protecting
making criteria that consumers may not the environment, finding new ways to reduce
by choosing particular
have even thought about before. Our survey consumption has become a top-of-mind issue.
providers and products, results indicate that consumers now consider
actively managing their a utility’s ethical reputation, alignment with Although consumers have always been able to
community values, and environmental actions reduce usage through “brute force” measures
consumption, making
on par with traditional “buyer values” like – adjusting thermostats, switching off lights
their voices heard and the like – they are just now gaining the
customer service and reliability.
directly, not just through ability to truly manage consumption through
regulators – and, in some Along with choosing a provider, consumers greater awareness and better tools. As smart
have more choices about the type of energy meter deployment allows more consumers
cases, generating their
they buy. One-third of our respondents were not to obtain realtime usage data at the device/
own power. interested in paying more for cleaner power, but appliance level, households and small busi-
over 40 percent would agree to pay a slightly nesses will know which conservation actions
higher price (5 percent more). A significant really make an impact. This will enable better
minority – one in five consumers – indicated decisions and more permanent behavior
willingness to pay at least 20 percent more for changes.
an environmentally friendly product.
Controlling supply
Controlling the switch When providers are not willing or able to
Only 30 percent of the consumers we surveyed satisfy their needs, consumers have an
expect their electricity use to increase over the increasingly viable alternative…the technolog-
next five years – and yet 60 percent expect ical means to generate their own electricity.
higher electricity bills. In times of rising energy
costs, the motivation for conservation is high.


As consumers weigh the self-generation Controlling their own destiny
option, cost is clearly a significant driver, but Blackouts affecting millions of people, price
not the only one (see Figure 4). If self-genera- hikes driven by factors not understood by
tion could reduce energy costs by 50 percent, consumers and the pursuit of mergers and
well over half of the consumers we surveyed acquisitions without clear customer benefits
would be motivated to install, maintain and are all contributing to growing consumer
operate their own power generation systems. skepticism – not only about utilities and
And yet, among those same respondents, their motives, but also about the regulatory
reliability and environmental impact seemed process that’s been put in place to protect the
to matter more than a small (10 percent) cost public. Consumers are increasingly unwilling
reduction. to wait for regulators to act “in their best
interests.” Frustrated, they are going directly
Interestingly, getting paid for surplus power to lawmakers, the press and special interest
received the most favorable reaction from groups to force change.
our respondents. Besides offering a financial
payback that helps offset upfront investment For example, in January 2007 a 1997 Illinois
,
and operational expense, we suspect that this deregulation bill expired, ending a ten-year
response also reflects an underlying desire rate freeze. As the shock of a sudden and
to assert more control and influence over a dramatic rate increase set in, public pressure
purchase for which the conditions have histori- caused legislators to intervene – ultimately
cally been dictated to them. driving the state’s primary distribution utilities
to provide a multiyear, billion-dollar rate relief
Many of the industry executives we inter- package to help reduce the financial burden
viewed agree that widespread adoption of on ratepayers.
14

self-generation is not that far off. More than
half believe that the value from a low-cost, low-
emission generating technology could move
a significant percentage of residential and
small commercial customers to self-generation
within the next decade.

FIGURE 4.
Consumers interested in installing, maintaining and operating their own power generation systems.

If you could sell power you do not consume back
to your utility?
If the total cost of electricity were 0% lower than
that from your utility?
If the system had 00% reliability and the cost was
roughly the same?
If the system had zero impact on the environment
and the cost for the electricity from each source
was roughly the same?
If the total cost of electricity were 0% lower than
that from your utility?
0 0 0 60 80 00
Percent
Source: IBM Institute for Business Value 2007 Utility Consumer Survey. Likely Neutral Unlikely


Industry impacts • Passive Ratepayers – Consumers who are
We expect these three converging trends relatively uninvolved with decisions related
– climate change concerns, technology to energy usage and uninterested in taking
advances and growing consumer involvement (or unable to take) responsibility for these
– to have far-reaching consequences for the decisions
utility industry. Companies will be forced to • Frugal Goal Seekers – Consumers who are
look at their residential and small commercial willing to take modest action to address
customer population in discrete segments specific goals or needs related to energy
instead of as a largely uniform block of rate- usage, but are constrained in what they are
payers. Engaged consumers and advanced able to do because disposable income is
technology will pull the industry toward a limited
When it comes to energy participatory network model in which informa-
decisions, consumer • Energy Epicures – High-usage consumers
tion flow will multiply. This, in turn, will create
who have little or no desire for conserva-
behavior seems to hinge a host of opportunities for achieving greater
tion or active involvement in energy control;
most on personal initiative efficiency, providing additional products and
these consumers are more likely to own a
services and pursuing new business models.
and disposable income. large number of high-consumption devices
This kind of examination A new kind of segmentation for gaming, computing or entertainment

reveals four major Historically, residential and small commer- • Energy Stalwarts – Consumers who have
cial customers were generally viewed as specific goals or needs related to energy
consumer segments:
homogeneous groups, distinct from large usage and have both the income and desire
Passive Ratepayers, commercial and industrial customers, but not to act on those goals.
Frugal Goal Seekers, typically categorized any further. Our research,
Energy Epicures and however, suggests this practice may no longer
be appropriate. Figure 5.
Energy Stalwarts.
Emerging segmentation among residential and
In our consumer survey, two main attributes small commercial electric power customers.
were associated with the greatest variances in
High

consumers’ behavior patterns:
• Personal initiative – The willingness of a Frugal Goal Energy
consumer to make decisions and take Seeker Stalwart
Decision-making
initiative taken

action based on specific goals, such as cost
control, reliability, convenience and climate
change impacts
• Disposable income – The consumer’s
Passive Energy
financial wherewithal to support energy-
Ratepayer Epicure
related goals; in early adoption phases, only
those with sufficient resources will be able to
Low

implement new technologies and buy more
expensive products. Low Disposable income available for High
energy choices
Using these two differentiators, we divide the Source: IBM Institute for Business Value analysis.
residential and small commercial customer set
into four main consumer segments (see Figure 5):


Passive Ratepayers were the most populous Energy Stalwarts are the trailblazers for
group in our sample – and will likely remain so competitive choice, conservation and tech-
in most countries for the foreseeable future. nology adoption. They typically exhibit one
This group has the highest percentage of or more of the following characteristics: are
“don’t know” answers by far. They also have environmentally conscious; have high reli-
the most pessimistic outlook about future price ability needs, for instance because of home
increases; while only 24 percent believe their electronics or healthcare monitoring devices;
usage will increase over the next five years, 51 or express interest in long-term savings and/or
percent expect to see their monthly bills rise. less dependence on their utilities. In every
This could be because their “passivity” makes benefit scenario we asked about, between
them feel powerless to hold energy prices 30 and 50 percent of this group said they
down. These two results, in combination, were “very likely” to deploy self-generation
seem to suggest significant opportunities for technology, which is a higher rating than any
educating this segment of consumers. other segment. Interestingly, Energy Stalwarts
actually outnumber Passive Ratepayers in two
Frugal Goal Seekers value short-term conser- of the six nations where we surveyed – Japan
vation as a means to achieve some energy- and Germany (see Figure 6).
related goals (e.g., reduce carbon footprint),
but only when it can be achieved at little or
no expense. By default, many low-income FIGURE 6.
Number of Energy Stalwarts as compared to
consumers fall into this category, but environ- number of Passive Ratepayers.
mentally focused middle-income households
60
end up here as well because of the high cost
of renewable energy options. Understandably, 0
because of income constraints, the respon-
0
dents in this group were the least likely to
Percent

consider installation of a distributed genera- 0
tion unit, regardless of the benefits posed in
0
each question.
0
Energy Epicures have little motivation to limit
consumption. In fact, over 75 percent of this 0
Japan Germany Australia United United
group expects their consumption to increase States Kingdom
over the next five years, as compared to 25 Energy Stalwart respondents Passive Ratepayer respondents
to 35 percent in other segments. More than Source: IBM Institute for Business Value 2007 Utility Consumer
half of this group falls into the typically higher- Survey.
spending age bracket of 25- to 44-year-olds. Note: The Netherlands could not be included in this chart due to
insufficient data.


Industry models • Constrained Choice – In this industry model,
Based on our research, we believe the two consumers take decisive steps toward more
factors that will have the most influence over control, but are limited to certain “levers”
the future of the utility industry are technology (technologies, usage decisions or choices
evolution and the degree of consumer control. in providers) by regulatory and/or techno-
At the lower end of the technology spectrum, logical constraints.
Over the next decade,
power generation is centralized, and informa- • Participatory Network – This environment is
we believe the industry tion and energy flow in only one direction. At characterized by a wide variety of grid and
will be an amalgam the upper end, smart metering, enhanced network technologies that enable shared
of four different network sensing and communications, and responsibility. Consumers’ strong interest
models, but will move self-generation technologies create a dynamic in specific energy goals creates entirely
consumption/generation network where infor- new markets (virtual and physical) and
steadily toward the
mation and energy flow in both directions. In new product demands, which balances the
Participatory Network. terms of consumer control, one extreme repre- benefits of new technology deployment more
sents a completely “utility-determined” relation- evenly between consumers and utilities.
ship, in which consumers have very little say.
The opposite extreme is a “customer-driven”
Figure 7.
experience, with consumers controlling major
Four industry models, 2007 to 2017.
aspects of how they meet their energy needs.

Distributed and
Analyzing the impact of combinations of

dynamic
different levels of progression in these two Operations Participatory
areas suggests four industry models (see Transformation Network

Technology evolution
Figure 7). Though each one is described
distinctly here, the industry as a whole – at
least in the near term – will be an amalgam of
all four.
Passive Constrained
• Passive Persistence – In this part of the
Persistence Choice
industry, traditional utility market structures still
and one-way
Centralized

dominate, and consumers either accept or
prefer the historical supplier-user relationship.
Low Degree of consumer control High
• Operations Transformation – Here,
some combination of grid and network
Source: IBM Institute for Business Value analysis.
technology evolves to enable shared
responsibility, but consumers either cannot
(or elect not to) exert much control. The
balance of benefits from new technology
deployment favors the utility.


Despite the varying pace of change across Businesses were defined by the part they
regions, we see the movement toward a Partic- played in getting electricity to consumers:
ipatory Network as inevitable – technology generation, transmission, distributors, et al.
advancement and consumers’ appetites for The entire value chain was structured around
control only march in one direction. However, power flow (see Figure 8).
the path the industry – both collectively and
as individual companies – takes will be deter- But as generation decentralizes and smart
mined in large part by how rapidly techno- meters and intelligent networks enable
logical, market and regulatory barriers fall. The realtime data exchange, utilities will be forced
evolution along the technology and consumer to manage increasingly voluminous and
control axes will occur at varying rates in each complex new information flows in addition to
market, with various regions operating under energy flows. Historically, a utility’s primary
different models at any given time. For this information exchange with consumers was
reason, a utility with a service territory that related to the monthly bill. But in a fully
spans multiple geographic areas might have implemented Participatory Network, realtime
to manage more than one model simultane- data on consumer usage will be available,
ously – at least until a Participatory Network enhancing utilities’ ability to forecast and
structure becomes widespread. balance loads and offer targeted products and
services to customers on a more individual-
New information flows and new business ized basis. Where distributed generation is
model possibilities in the mix, power from multiple sources will
As consumers sort themselves into segments have to be metered, reconciled and billed.
with distinct needs and wants and the For these reasons, information flow will play
industry is pushed toward Participatory a much greater role in shaping the industry
Networks, the fundamental nature of the utility value chain (see Figure 9). With the right regu-
industry is changing. latory framework, this information-rich environ-
ment could spawn a range of new products,
In the past, electricity was primarily generated services and business models.
in a centralized location, transmitted to the
grid and eventually distributed to the end user.

FIGURE 8.
The traditional industry value chain.
Power for device
Bulk power Retail power Power for premises load consumption

Power delivery
Power Power Sales and Devices/ Customer
and connect/ Metering
generation transmission marketing appliances service
disconnect

Generation Transmission Distribution Consumer and services
Usage for billing
Physical flow Information flow

Source: IBM Institute for Business Value.


As the environment FIGURE 9.
Dramatic increases in information flow could result in new business opportunities.
becomes more
participatory, utilities will Power flow from utility generation and grid Third-party
need to manage more – energy
Power delivery Sales and
Power Power management/
and connect/ marketing
and increasingly complex generation transmission
disconnect (Energy)
other services

– information flows. But,
with the right regulatory Metering
Devices/ Customer
and energy
framework, a host of new Power flow portal appliances service
from distributed
business opportunities generation unit
could emerge. Sales,
Power
Sales and
Distributed
marketing and marketing
generation generation
financing (OEM/Third-party
(Generation units)
aggregation/
services)
resale
Energy
information
services
Generation Transmission Distribution Energy information management Consumer and services
Physical flow (Local power) Physical flow (Excess generation sold) New business opportunity
Physical flow (Grid power) Information flows

Recommended focus areas Even though some utilities may choose not
So how can energy companies best prepare to provide all of the capabilities inherent in
for this very different future? We suggest a complete Participatory Network (ceding
starting with development of long-term those roles to rivals or other specialized
business and regulatory strategies for tran- players) – they will still be part of the network.
sitioning to a Participatory Network, the key Consequently, utilities of all scopes and sizes
elements of which will be creating a plan for should be prepared to be swept along into
capturing value from new consumer informa- this consumer-driven, technology-enabled
tion flows and using customer analytics to environment.
gain a deeper understanding of consumers.
In the short term, various regulatory, economic,
Transitioning to a Participatory Network market and technological barriers will prevent
Based on our research and analysis of the many utilities from moving directly to a Partici-
utilities industry, we believe a full-fledged patory Network. The particular combination
Participatory Network will ultimately emerge. of factors a specific utility faces will instead
Elements of such a network are already push it toward one of two transitional paths:
in place within several major markets. The through Operations Transformation or through
question is not if a fully participatory environ- Constrained Choice (see Figure 10). Just like
ment will emerge, but when. the electrons they deliver, utilities will move
along the path of least resistance toward the
ultimate destination: Participatory Networks.


Figure 10. Utilities that find themselves in this type of
Most utilities will be blocked and forced down environment can still benefit from moves
interim paths before reaching a Participatory
toward a Participatory Network by leveraging
Network.
available technologies to make operational

Distributed and
improvements. For example, network analytics

dynamic
and automation can help utilities:

Consumers and
Interim Eventual

Regulators
Operations Participatory • Decrease maintenance costs and improve
Transformation Network
Technology evolution worker productivity
• Enhance asset performance and extend
Technology Deployment asset life
• Manage load more effectively and decrease
Today Interim
Passive Constrained
long-term capital costs
Persistence Choice • Improve reliability and shrink outage
and one-way
Centralized

durations, reducing potential penalty costs

Degree of consumer control • Improve power quality
Low High
• Reduce transmission and distribution costs
by lowering power losses.

Even where consumers cannot yet operate
Operations Transformation
distributed generation, utility deployment
A utility is likely to initially move to Operations
of these units can help firms improve peak
Transformation when consumer control is
power availability and power quality and
blocked or impeded in some way. This could
reduce total generation costs (especially if
be as a result of a highly regulated market,
carbon constraints impose high costs and the
insufficient competition in an open market or
distributed generation technologies are low- or
simply a lack of consumer education about
zero-carbon generators).
available options. If primary fuel costs and/or
carbon pricing are low, the price of fossil- This transitional period, while moving through
generated power will flatten or drop, making Operations Transformation, is a window of
renewables much less competitive and giving opportunity in which utilities can work to
consumers less incentive to move from the improve efficiencies and lower costs. The
status quo. Regulators may also be reluctant ultimate goal is to improve their competi-
to provide adequate incentives and rate tive standing in preparation for increased
structures for technologies that encourage consumer involvement and the eventual move
consumer involvement if there is a perception to a Participatory Network.
that consumer acceptance will be weak or
that widespread deployment of technologies Constrained Choice
that enable greater consumer control might Utilities may be pushed toward Constrained
not yet be viable. Choice in the short term if technology deploy-
ment is delayed in one or more areas. These


holdups could be caused by a variety of After these assessments, a utility may elect to
financial, technological or regulatory reasons. pursue one or more of the following actions:
For instance, certain technologies could • Position itself as an energy educator,
be deployed more slowly than anticipated advising interested consumers on how to
because of capital constraints or insufficient navigate complex regulatory or market
business cases. The lack of standardiza- structures to meet their needs or showing
tion could make the integration of network consumers why certain behavior changes
elements difficult. In addition, the regula- benefit them.
tory environment may not be conducive to
consumer involvement. For example, tariffs • Experiment boldly with new programs,
may not have tax breaks or sell-back provi- particularly to address the needs of profit-
sions that promote self-generation. able consumers who may be lost to new
entrants.
In this environment, consumers may want • Take the lead in pushing forward regulation
more control, but their choices and capabilities that gets the Participatory Network rolling;
are still limited. Although competition from new where more active consumers are the most
entrants will intensify, rivals will face the same profitable ones, this helps gain their trust
barriers. This, in some sense, gives incumbent and support – and subsequently their future
utilities “priority access” to the consumers business.
In the short term, that will be most receptive to new products
regulatory, economic, and services. While temporarily confined in By building brand and meeting as many
a Constrained Choice environment, utilities needs as possible under the existing regula-
market and technological
will need to take advantage of this access to tory regime, utilities in Constrained Choice can
barriers may block strengthen their brands and prevent customer position themselves as the provider of choice
movement toward a defection in the long run. for their most profitable customers as new
Participatory Network, in products and services become feasible.
Customer analytics become critical in this
which case, utilities must state. Utilities will need to use whatever data Leveraging new information flows
migrate through either is available to determine which consumers As the industry moves toward a Participa-
Operations Transformation are most valuable and which are most likely to tory Network, information will grow increas-
take advantage of participatory opportunities ingly more critical. As they transition through
or Constrained Choice.
as they emerge. different industry models, utilities must
consider what information is available and how
Utilities will also have to evaluate new competi- they can best use it.
tors and offerings. If the offerings are easily
replicable by the utility, a rapid response can In Passive Persistence
keep the utility “relevant” in consumers’ minds. Utilities operating in this environment
If the offerings cannot be replicated, substitute lack much of the technology deployment
offerings must be developed – or revenue necessary to capture realtime consumer
models must be adjusted to reflect a world in usage data. Thus, they will generally be limited
which these customers have moved some or to information available from more traditional
all of their business elsewhere.


analytics. Based on the information that can or participate in smart meter pilots. The
be gathered from bill analysis and in-place usage information collected from a limited
customer information systems, utilities can set of highly active consumers can help
design programs that appeal to a broad base firms build business cases for new products
of consumers. As different programs are and services and technology deployment.
piloted, firms can collect customer feedback Customer data analysis can help utilities
and track the profile of those interested to identify and reach consumers who may
determine future direction for both technology be more profitable or more loyal if they are
deployment and customer programs. allowed to become more actively involved in
their own energy management.
In Operations Transformation
In this environment, utilities still have limited In a Participatory Network
consumer involvement, but do have tech- When consumer participation is high and
nology in place to access realtime energy sophisticated technologies have been widely
data. These consumer load profiles can help deployed, utilities will be able to develop
utilities determine base-load and peaking rich and useful customer segmentation and
needs for optimal generation, transmission and behavior pattern data over time. They will also
distribution capacity planning. This data can have realtime usage information from appli-
also be used to optimize consumer pricing ances, devices and distributed generation
(peak/off-peak) as well as wire-use charges units that can communicate with the network.
levied on other bulk transmitters. Utilities Customer analytics will become even more
can use improved location-specific outage important as the wealth of information and the
and power quality information to proactively pressure from competitors and new entrants
address incipient problems before they for the most profitable customers grow. These
become customer satisfaction issues. capabilities will allow utilities to develop
valuable insights that lead to new programs
In Constrained Choice and products that appeal to an expanding
Under this model, some utility consumers
number of increasingly involved consumers.
are interested in actively managing energy
usage, but the necessary technologies may Understanding consumers
not yet be deployed. Utilities should consider Each evolving consumer segment has
ways to involve these motivated consumers specific needs and wants, which means
in early adoption programs once consumer utilities need different strategies, and most
commercialization of the technologies begins. likely different offerings, for each (see Figure
For example, they could allow consumers to 11). For Passive Ratepayers, utilities will need
explore distributed generation options facili- simple, uncomplicated offerings that require
tated by the utility or its business partners little effort on the part of the consumer. For
example, a time-of-use pricing plan structured
in large blocks of time (like mobile phone
plans that offer cheaper rates after 9:00 p.m.)
might encourage some of these customers
to make slight adjustments in their typical
consumption patterns.


Figure 11.
Differing needs will drive different approaches for each consumer segment.

Passive Ratepayers
Frugal Goal Seekers Energy Stalwarts
Energy Epicures
• Traditional generation • Utility-owned renewables • Self-generation
Technology • Traditional distribution networks • Low-cost (to consumer) • Utility-owned renewables
leveraged intelligent network capabilities* • Full-spectrum intelligent network
capabilities*

• Traditional utility service • Time-of-use program • Green power packages
Service • Remote notification (Energy • Efficiency incentives • Grid power with backup power
packages Epicures) • Subsidized programs system
• Time-of-use program
• Remote notification

• Targeted bill inserts (best • Public education/mass media • Direct marketing
candidates from customer outreach • Special interest media
analysis) • Association/interest group (magazines, Web sites)
Communication • Public education/mass media messaging • Association/interest group
outreach • Financial incentives/assistance messaging
• Product tie-ins • Product tie-ins
• Corporate social responsibility
publicity

* Intelligent network capabilities include smart meters as well as network automation and analytics
Source: IBM Institute for Business Value analysis.

A one-size-fits-most Passive Ratepayers usually require little For Frugal Goal Seekers, utilities will need
customer strategy will attention from their utilities. However, some offerings and programs that require little or no
utilities may decide it is worthwhile to attempt financial investment from the consumer. This
no longer be sufficient –
to move some Passive Ratepayers into another might include education on voluntary energy-
utilities will need different more energy-conscious category (Frugal Goal efficiency actions (the use of high-efficiency
approaches that take into Seekers or Energy Stalwarts). For instance, if light bulbs, programmable thermostats and
consideration the nuances a utility’s transmission capacity is constrained other conservation techniques) and low-cost
or generation levels are approaching ceilings information devices. Because many Frugal
of each segment.
imposed by fixed capacity or emissions Goal Seekers are interested in minimizing the
penalties, it may be advantageous to environmental impact of their energy usage,
encourage a shift. Where this is the case, utilities have an opportunity to access govern-
companies can either use mass-market tech- ment subsidies for green energy choices that
niques such as general public awareness would be popular with this group. Time-of-use
campaigns or more precise actions such as programs for this segment could have a more
targeted bill inserts. For these more targeted complex design, since these consumers are
techniques, companies can use customer more committed and willing to be actively
analytics to identify those consumers most involved. Offerings that include financial
likely to change if given sufficient education assistance or incentives would appeal to this
and incentives.


group (including possible financing of major stated in a way that would catch Epicures’
equipment purchases), as would product tie- attention and appeal to their desire to possess
ins such as energy savings associated with the latest in technology innovation.
the purchase of a high-efficiency washing
machine. This group may also be more Energy Stalwarts are arguably the most
attuned to public education and messages demanding of the four segments – but likely
channeled through associations and interest the most attractive customers in the long run.
groups. Many in this group are concerned They want options and choices. They’re often
about corporate social responsibility, and interested in green power packages, self-
positive publicity in this area will be particu- generation, realtime pricing programs – and
larly important to retain these consumers in a perhaps even access to the spot market
competitive market. to cover a shortfall in their own generating
capacity. Their interests and higher disposable
Energy Epicures typically require very little income also translate into a high likelihood
effort to serve and could be a source of of emerging as early technology adopters,
revenue growth as upper-end, digital homes which can be leveraged to bring costs down
proliferate. Utilities likely will want to stay over time and make new technologies more
the course with these happy and profitable economically accessible to a broader base of
consumers – unless transmission, environ- customers. One of the most valuable services
mental or other constraints are confronted. If a utilities can provide to this segment is infor-
utility has reason to convert Energy Epicures mation – what options are available, where
into Energy Stalwarts, special programs will be equipment can be purchased, how to estimate
needed to reach these high-use but conserva- savings and costs and so on. Utilities can also
tion-averse consumers. For instance, a utility offer this segment nontraditional services, such
could partner with manufacturers of high-end as financing, installation and maintenance
consumer electronics to bundle an energy-effi- for solar panels, micro-combined heat and
ciency package into the equipment purchase, power devices and other distributed genera-
effectively lowering the cost of the equipment. tion equipment. To reach this audience, power
This group might also be intrigued by “leading- companies should consider direct marketing,
edge” convenience features enabled by the special interest media and social networking
intelligent network, such as remote notification approaches.
and control capabilities. To reach this group
with conservation messages, companies But before utilities can begin tailoring their
will need to utilize specific channels these approaches to particular segments, most will
consumers frequent, such as mobile and need to invest in tools and capabilities that
Internet channels as well as clubs, events, help them collect and analyze consumer
social networks and media programming data, particularly new information streams.
associated with gaming or sports. Promotion Using these advanced analytical capabilities,
of distributed generation is feasible for this firms can begin to calculate the profitability
group, but the benefits would need to be of particular segments. With these insights,


Plugging in the Consumer: Innovating Utility Business Models for the Future

Plugging in the Consumer: Innovating Utility Business Models for the Future

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