Steve Ballmer’s first reaction to the Apple iPhone was not his best moment.
During a TV appearance in 2007, the then-Microsoft CEO and current owner of the NBA’s Los Angeles Clippers, mocked the market potential of the iPhone. With a $500 price tag and no keyboard, the executive felt comfortable saying that Apple’s latest whiz-bang invention was more sizzle than substance.
We all know how that turned out. David Rowan, editor-at-large of WIRED UK, brought that example up at a conference about energy efficiency and the future utility model last year to warn against the perils of ignoring even the oddest-seeming innovation. “Crazy stuff is happening — mining asteroids, 3-D printing of cars, interacting with machines via virtual reality goggles,” Rowan told the audience at the CLEAResult Energy Forum in Austin, Texas. “How do you stay on top of all these changes? How do you change the way your organization thinks? You need an innovation culture.”
Rowan’s call for those working in the utility industry and the broader energy sector to be nimble and innovative is one of the nuggets included in the recently released report, “Innovation Outlook: The 2017 State of Energy Efficiency.” Geared primarily toward an audience of utility workers, the report’s findings are culled from conversations and speeches about topics ranging from electric vehicles and demand response to energy efficiency and distributed generation, all of which took place at the 2016 conference in Austin. The event and the report were spearheaded by CLEAResult, a consultancy that provides energy efficiency guidance to utilities and others in the energy sector.
The need for the utility industry to evolve and embrace innovation is only accelerating. “I’ve been in the utility industry, the demand side management industry for 10 years now,” said Colin Gibbs, CLEAResult’s director of business analytics and author of the report. “90 percent of the change has happened in the last 18 months. It has been rapid.”
The need to be customer-centric
In the electricity sector, the need to adapt in order to avoid a Ballmer-esque stumble is being driven by a wide range of factors, including policy and regulatory activity, particularly in New York and California. Technologies like electric vehicles, rooftop solar and smart thermostats that give customers increased awareness and control of their energy use is also driving change. And, somewhat paradoxically, the success of energy efficiency programs threatens traditional utility business models by contributing to dampening load growth in large swaths of the country.
The report urges utilities to avoid complacency and embrace tools such as the Internet of Things (IOT), big data and a wide range of new technologies in order to flourish in the future. What is most important is for utilities to put customers at the center of their business models to an unprecedented level — which involves expanding on the lessons learned from past energy efficiency efforts
“In the report, we say that the idea of customer centricity has always been the focal point of the energy efficiency industry,” said Gibbs. “A lot of programs serve as marketing vehicles and customer engagement vehicles.”
The foundation of a customer-centric utility begins with a focus on customer satisfaction, the report states. Fortunately, energy efficiency programs have been a driver of satisfaction, and they provide a platform to build on. The report’s other suggestions on ways to bolster customer satisfaction and empowerment include:
Personalization: Robert Cialdini, a social psychologist at Arizona State University, studies the most effective ways to get Americans to reduce their energy consumption. Among the best approaches is to show people how their energy use compares to their peers. The report notes that including a personalized note in a bill that outlines how a customer is doing relative to their peers has been an effective way to increase engagement in energy efficiency efforts. The larger point, however, is that the utility industry needs to embrace new, interactive technologies and platforms as a way to engage customers on an individual level.
Incentives: It’s no mystery that financial incentives are a big driver of customer participation in utility energy efficiency programs — particularly in areas of the country, like New England, where electricity rates are as high as 16 cents per kilowatt-hour. But incentives also pose a challenge to utilities wanting to improve the customer experience: if they’re too high, a program can quickly become oversubscribed, forcing a utility to close it and disappoint customers. Avoiding this requires careful crafting of program rules and incentive levels.
Commercial ROI: There are a wealth of energy efficiency opportunities in the commercial and industrial sectors, but the report notes that it’s much harder for utilities to get commercial customers to pursue them than residential. In these instances, being more customer-centric requires utilities to make a more compelling case around return on investment. “If you can make a case that energy efficiency is a better use of capital than investing in a new salesperson, they are on it,” said Tilak Subrahmanian, an executive at the utility Eversource, in the report. “So, we need to understand how commercial and industrial customers evaluate opportunities. A university may accept a 10-year payback, but a real estate company wants a payback of 3-5 years. Green is not a benefit: ROI is.”
Outreach: Customer-centricity is also about finding and contacting the customers who are genuinely interested in energy efficiency. This requires the use of data and analytics. “One utility found that the propensity to invest in energy efficiency depends on three variables: annual usage, home value and home equity. Advanced analytics tools helped this utility dramatically increase energy audits and reduce the cost of customer acquisition for their programs,” the report said.
Embracing data, evolving the business model
All of these approaches to putting customers at the heart of utility operations can be enhanced by an improved use of data, the report argues. The past data needs of utilities were somewhat limited, while the increasing prevalence of two-way communication between customers and utilities has dramatically changed that. “The person at the top of the organization no longer decides what happens — decision-making is increasingly distributed, and utilities’ customers are more empowered every day,” said the report.
This puts a premium on utilities employing big data and analytics to improve the customer experience and provide benefits that were unheard of just a few years ago. For example, the report describes how a manufacturer could be guided by a utility on the need to invest in more chillers. With the help of big data, the utility can provide insight about whether the existing equipment could be used more efficiently, potentially eliminating the need to purchase expensive new technology.
Tapping into customer data in order to provide ideas and insights that benefit customers is one way utilities can evolve to become more customer-centric. Rather than simply providing kilowatt-hours to businesses and residents, utilities take on more of an advisory role, helping their customers make better decisions around electric vehicles, demand response and other potentially energy saving activities.
For this to be economically viable, the report notes that some important things have to change. For one thing, there need to be compelling financial reasons for customers to pursue energy efficiency, so that utilities aren't relying on the traditional business model where increasing load translates into increasing revenue. “If we hope to incentivize utilities to lead the way with energy efficiency, we need to articulate and institutionalize a utility business model that rewards energy efficiency,” said the report.
This can mean providing more services to customers. It can also involve working with regulators to improve the return utility investors receive for pursuing energy efficiency — something that is already happening in Utah and is being considered as part of New York’s Reforming the Energy Vision (REV) initiative. Scaling defined performance incentives properly can encourage utilities to make energy efficiency a priority — the report highlights a survey of Wall Street analysts that said performance incentives must raise earned returns in the 10 percent range to change behavior.
“Over time, these increased earnings will translate into a more highly valued utility with higher equity value per share,” said the report. “Increasing return on equity approximately 1 percent — that is, raise return on investment from an average of around 10 percent to perhaps 11 percent, would attract investors, raise stock prices and provide management incentives that will motivate further investment in energy efficiency.”
Whatever the changes, be they regulatory or internal shifts within utilities, they must ultimately result in a break from the past approach of rate base dependent earnings. “What’s needed to break that gridlock is a new 21st century model focused on customer value, generating customer engagement, deploying new technology and creating more value for utilities’ shareholders,” said the report.