Waiting digital-electrical-grid


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Despite significant hype, most of the benefits of a digital grid thus far have been reserved for utilities themselves, instead of consumers and business customers. However, the authors argue, it's only a matter of time.

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Waiting digital-electrical-grid

  1. 1. ONLINE AUGUST 12, 2013 strategy+business Waiting for the Digital Electrical Grid Why haven’t utilities made more progress? BY EARL SIMPKINS, JOSH STILLMAN, AND DON DAWSON
  2. 2. www.strategy-business.com 1 You’ve probably heard that digital technologies are revolutionizing electrical systems across the coun- try, promising new services and lower prices for customers. Your local utility may have installed a “smart meter” at your house. And maybe the power company is sending you monthly notices comparing your electricity consumption to that of your neighbors. But unless you work for an electric utility, you probably haven’t seen many, or any, concrete benefits from the smart grid. Your bills haven’t come down, power outages haven’t decreased, and nobody’s offering you any of those innovative services—like home automation—that the digital grid is supposed to spawn. What happened? Many in the utility industry won- der if the hype around digital grid technology outpaced individual utilities’ ability to deliver, or got ahead of reg- ulatory willpower to support the needed investments (through rate hikes). The first wave of smart-meter installations fueled expectations that falling rates and amazing new services would soon follow for businesses and consumers alike. Those expectations haven’t been met. So far, the main beneficiaries of the technology have been utilities. Automated metering infrastructure, where implement- ed, has made power companies more efficient, but those savings for utilities haven’t translated into significant reductions in customers’ bills. The lack of obvious customer benefits opened the door to a range of concerns, mostly unfounded, about the health effects, costs, and privacy implications of automated metering. Consumer backlash ensued, slow- ing smart-meter deployment in some states and under- mining utilities’ messages about the consumer benefits of the digital electric grid. The truth is that customers won’t see meaningful benefits until utilities fully digitize and integrate their infrastructure. Notwithstanding the hoopla, smart meters are only a starting point. A genuinely smart grid requires a panoply of new hardware and software throughout the power distribution network, where the real benefits of the digital grid will be realized. Utilities have only begun to install these network components. Full rollouts of digital grid technology will take several years. The pace will vary from state to state and utility to utility. Different benefits will materialize at different times for different customers, based on the type and timing of the technology deployed. To further com- plicate matters, the technology is still evolving as new systems, devices, and vendors offer integrated solutions. Much will depend on each utility’s inclination and ability to make the necessary investments. Industry studies suggest that full digitization of the entire U.S. electrical grid could cost between US$338 billion and $476 billion, many times the estimated $8 billion Waiting for the Digital Electrical Grid Why haven’t utilities made more progress? by Earl Simpkins, Josh Stillman, and Don Dawson
  3. 3. invested in digital technologies so far. Bigger utilities are likely to move faster and invest more than smaller ones, because the investments represent a significant portion of any utility’s balance sheet and equity. In most cases, the pace of investment must also be balanced against the value to the customer. But resources aren’t the only issue. Utility invest- ment decisions will depend to a great degree on the will- ingness of state regulators to add digital infrastructure costs to customers’ bills. Regulatory attitudes, in turn, will mirror public perceptions. Regulators who sense widespread demand for a digitized grid are more likely to approve cost-recovery efforts, and thus accelerate deployment. Utilities can stoke public demand for the digital grid if they do a better job of communicating the immediate and long-term benefits. Despite these hurdles, the digital grid is coming incrementally, and it will transform your experience as an electricity consumer in fundamental ways. Early ben- efits will include greater reliability and more-transparent pricing. Down the road, digitization will lead to supply– demand integration; rapid product and service integra- tion; and eventually a fully automated, resilient, “self-healing” electrical network. Benefits of the Digital Grid As a business or home utility customer, you are prima- rily concerned with reliability and price. You want lower electric bills and fewer, shorter power outages. The dig- ital grid offers real benefits in both areas. Initially, digi- tization will make your utility more efficient, and give you more and better information about your electricity use. Eventually, it will change your relationship with the utility and turn electricity from a commodity into a tool for making daily life easier. These changes will occur in several principal areas: Reliability. Preventing, mitigating, and resolving power outages is still a central challenge for utilities. Nothing angers customers more than a power failure. Digital technologies hold the promise of fewer, shorter, and less-extensive outages. For example, automated notification of outages is one of the first digital grid technologies to be deployed by utilities around the country. No longer do power companies have to wait for customers to call in and report a loss of service. The network infrastructure itself detects outages and alerts the utility, which can imme- diately dispatch service crews to restore power. This avoids the costly and time-consuming process of send- ing restoration crews into the field to patrol power lines in search of trouble spots. At the same time, notifica- tions automatically go out to customers through the Web and social media, followed by progress reports and estimates of when power will be restored. Over time, utilities will implement self-healing capabilities that reduce the frequency, scope, and dura- tion of power outages. Sensing mechanisms in the net- work will sniff out trouble before it causes an outage, enabling the utility to take preventive steps. Other tech- nologies will limit the number of customers affected by an outage by eliminating the need to shut off power in adjacent areas while crews work to restore service. Digitization also facilitates better voltage manage- ment, which should cut down on outages, especially in industrial areas where power use is heavy. Pricing. Digitized electrical networks will give cus- tomers the information to manage their power con- sumption and cut their electric bills. The system tells 2 Earl Simpkins earl.simpkins@booz.com is a partner with Booz & Company based in Dallas. As part of the firm’s energy, chemicals, and utilities prac- tice, he specializes in helping electric and gas utilities address strategy and opera- tional issues, including busi- ness transformation/ performance improvement, mergers and acquisitions (including integration), supply chain, utility operations, and customer operations. He also co-leads the practice’s cus- tomer service platform. Josh Stillman joshua.stillman@booz.com is a senior associate with Booz & Company based in Dallas, and is part of the firm’s energy, chemicals, and utilities practice. Don Dawson donald.dawson@booz.com is a partner with Booz & Company based in Dallas, in the digital business and technology practice. He leads the firm’s energy, chemicals, and utilities digital business and technology practice in North America, as well as co-leading the energy, chemi- cals, and utilities customer service platform. Also contributing to this article were Booz & Company partner Joseph Van den Berg and sen- ior associates Art Davidson and Jag Mukherjee www.strategy-business.com
  4. 4. www.strategy-business.com customers how much power they’re using at various times of the day, and how much electricity costs at each time interval. This information reveals opportunities to save money by shifting more power usage to the hours when rates are lower. Although few consumers relish the prospect of turning on the dishwasher at 3 a.m., home automation technology eventually will take over the chore of managing power consumption for optimal pric- ing. And as more people spread out their consumption, price spikes at times of peak demand could moderate. Skeptics may scoff, but digital grid technology is already saving money for some consumers in Texas. Energy companies in the state have set up a Web portal, Smartmetertexas.com, that provides pricing and usage data that consumers need to monitor and manage their electricity consumption. Winners of an energy saving contest sponsored by the companies say the website helped them take steps that cut their electric bills. Supply–demand integration. Digitization turns tra- ditional one-way power distribution channels into two- way streets. Today, most electricity is generated at a utility’s power plant and sent over the grid to customers. That will change as new technologies enable power to flow back into the grid from alternative energy sources. Customers who install solar panels on their roof or erect windmills on their property can offset electricity costs by selling some power back to the utility. At times of heavy demand, customers with on-site generating capabilities can also save by switching to their own power source, in response to a signal from the utility warning that rates are peaking. Product and service innovation. The interactive capabilities of intelligent electrical networks open the door to a range of new products and services that will help customers use electricity in new ways. A closed loop that ties customers to utilities will become an open- ended system encompassing a range of vendors who will provide hardware, software, and services for the digital grid. They will help customers understand their electric- ity use and capitalize on digitization to squeeze more value from the watts they consume. Although home automation hasn’t caught on in many markets, this area is ripe with possibilities for con- sumers and third-party suppliers. Already, electrical service is merging with home security systems to remotely activate alarm systems, turn lights on and off, and change thermostat settings. Moving forward, demand will grow for devices, software, and smart- phone apps that use the communications capabilities of the digital grid to automate household appliances. Whether it’s remotely turning off an air conditioner in an empty house on a hot summer afternoon, or timing a dishwasher to run in the wee hours when rates are low, these tools will give consumers a degree of control they’ve never had before. Network automation and utility efficiency. Grid digi- tization improves operating efficiency at utilities. Smart meters are already reducing the need to send technicians out for routine matters such as service activations and shutoffs, and, of course, meter reading. As utilities become more efficient, they can respond faster to cus- tomer needs. Greater efficiency can also slow the rise of electricity costs over the long term. That’s because in some cases, savings from efficiency reduce the need for capital investment that has to be recouped through cus- tomer rates. Network automation has a similar effect, by maxi- mizing the capacity of existing infrastructures and cut- ting the frequency and duration of outages. Self-healing technologies such as automated fault detection and advanced voltage management also ease stress on the system, extending the useful life of network assets. Digitization thereby reduces the need for utilities to build new plants and backup generators—big-ticket investments that are typically financed by raising rates. How Utilities Can Get There To make the smart grid a reality, utilities must balance their customers’ needs and work to understand them better. This means allocating investment priorities to emphasize full network digitization over a reasonable time frame, while continuing to reap internal operating efficiencies. And it requires a more effective campaign to reconnect with consumers who have come to doubt the promise of the digital grid. Considering the long and sometimes strained relationships between utilities 3
  5. 5. and their customers, these changes may not come easi- ly. However, several areas should be priorities among utilities. Investing in customer benefits. Despite their tradi- tional wariness of new technology, most utilities have by now embraced the inevitable digitized future. About 33.5 million smart meters have been installed national- ly, representing 25 to 30 percent of residential utility customers. Installation rates approach 75 percent in some areas, and full penetration across the country could happen by 2020. That said, much of the invest- ments have come in the front-end communications and data-gathering technologies. It’s time for utilities to focus on the capabilities that create customer benefits. They must now invest in back-end analytics that make sense of front-end data, translating that data into mean- ingful customer insights. These insights, in turn, will help utilities tailor products and services to better meet customers’ demonstrated and potential electricity usage. Regaining customer trust. Digital grid technology won’t live up to its potential unless customers believe in it. The first step is building awareness. A survey of U.S. consumers last year by the Edison Electric Institute found that only 45 percent of respondents knew the term smart grid, and barely half of those familiar with the term felt they understood how digital grid technol- ogy worked and what it could accomplish. Consumers often take a skeptical view of new tech- nologies they don’t fully understand. Utilities can count- er this skepticism with a stronger marketing mind-set, along with messaging that sets realistic expectations for the timing and nature of smart grid benefits. At the same time, they must address several concerns, some of them misplaced, that have arisen from the smart grid debate. For example, utilities have faced lawsuits over the alleged health hazards of smart meters, even though studies purporting to show harm from radio frequencies have largely been discredited. Other lawsuits have chal- lenged the costs and accuracy of smart meters. A major issue for utilities will be control and access to smart-grid data revealing the usage patterns of indi- vidual customers. Consumers may consider such infor- mation private and object to the sharing—and particu- larly the sale—of their data among third parties. Rules for data privacy and sharing are evolving on a state-by- state basis, but a federal court ruling may be necessary to clarify the issue. Although the privacy debate is like- ly to continue for some time, as it has in other indus- tries, data integrity must be a top priority for utilities. Conclusion Despite a slow start, the digital grid will bring real ben- efits to utilities and their customers. Utilities need to shift their investments from technologies that improve internal operating efficiency to those that focus on the network capabilities that will deliver on the promise of the digital grid for customers. To build customer trust and support for digital grid investments, they must communicate and market the benefits more effectively. Businesses and households, meanwhile, should pre- pare for digital grid advances that will change their experience as electricity users. To capture those benefits, customers must take advantage of data flowing from the digital grid. Understanding usage patterns will enable customers to use electricity as a tool to manage their business and run their household better, and maybe even sell some power back to the electric company. + 4 www.strategy-business.com
  6. 6. strategy+business magazine is published by Booz & Company Inc. To subscribe, visit strategy-business.com or call 1-855-869-4862. For more information about Booz & Company, visit booz.com • strategy-business.com • facebook.com/strategybusiness • http://twitter.com/stratandbiz 101 Park Ave., 18th Floor, New York, NY 10178 Looking for Booz Allen Hamilton? It can be found at at www.boozallen.com© 2013 Booz & Company Inc.