IBM Global Business Services

IBM Institute for Business Value

                                   Energy and Utilities
IBM Institute for Business Value
   IBM Global Business Services, through the IBM Institute for Business Value,
 develops ...
Plugging in the consumer
Innovating utility business models for the future
By Michael Valocchi, Allan Schurr, John Juliano...
To help answer these kinds of questions, we          tive markets. Also, based on both consumer
      surveyed 1,900 consu...
Plugging in the consumer
 Innovating utility business models for the future

                             Does YouTube inf...
Figure 1.
       The rapid increase in consumer choice in industries like media and entertainment will shape consumer
Climate change concerns                              Outside the United States, one out of every
Technology advances                                 Given this backdrop, we see smart meters,
     To make these improveme...
With the right programs, interested consumers can reach their energy goals
                               In cooperation w...
Regulatory incentives spark consumer adoption
       The spectacular growth of residential renewable energy systems in Ger...
                               Consumer interest in provider choice.
As consumers weigh the self-generation                                    Controlling their own destiny
      option, cost...
Industry impacts                                      • Passive Ratepayers – Consumers who are
Passive Ratepayers were the most populous             Energy Stalwarts are the trailblazers for
      group in our sample ...
Industry models                                           • Constrained Choice – In this industry model,
Despite the varying pace of change across                                    Businesses were defined by the part they
As the environment        FIGURE 9.
                                 Dramatic increases in information flow could result i...
Figure 10.                                                                             Utilities that find themselves in t...
holdups could be caused by a variety of              After these assessments, a utility may elect to
analytics. Based on the information that can        or participate in smart meter pilots. The
      be gathered from bill ...
Figure 11.
                                 Differing needs will drive different approaches for each consumer segment.

group (including possible financing of major       stated in a way that would catch Epicures’
      equipment purchases), ...
Plugging in the Consumer: Innovating Utility Business Models for the Future
Plugging in the Consumer: Innovating Utility Business Models for the Future
Plugging in the Consumer: Innovating Utility Business Models for the Future
Plugging in the Consumer: Innovating Utility Business Models for the Future
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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Plugging in the Consumer: Innovating Utility Business Models for the Future


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

  1. 1. IBM Global Business Services IBM Institute for Business Value Energy and Utilities Plugging in the consumer Innovating utility business models for the future
  2. 2. 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 for more information.
  3. 3. 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 Plugging in the consumer
  4. 4. 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- IBM Global Business Services IBM Global Business Services
  5. 5. Plugging in the consumer 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. Plugging in the consumer
  6. 6. 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. IBM Global Business Services
  7. 7. 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. Plugging in the consumer
  8. 8. 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
  9. 9. 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
  10. 10. 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). 8 IBM Global Business Services
  11. 11. 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. 9 Plugging in the consumer
  12. 12. 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 0 IBM Global Business Services
  13. 13. 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): Plugging in the consumer
  14. 14. 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. IBM Global Business Services
  15. 15. 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. Plugging in the consumer
  16. 16. 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. IBM Global Business Services
  17. 17. 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 Source: IBM Institute for Business Value. 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. Plugging in the consumer
  18. 18. 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 Source: IBM Institute for Business Value. 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 6 IBM Global Business Services
  19. 19. 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. 7 Plugging in the consumer
  20. 20. 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. 8 IBM Global Business Services
  21. 21. 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. 9 Plugging in the consumer
  22. 22. 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, 0 IBM Global Business Services