Transformation in Utilities

IT Modernization

Digital business is transforming the utility sector from a model of dependent, captive customers to one where buyers both source and manage their household energy consumption. This creates a level of customer collaboration that the industry has not experienced in a century. Moreover, as renewable energy technologies advance in their economic feasibility and adoption, a more integrated energy provision model emerges.

In this piece from Razorfish, we explore how customer obsession in a digital economy is causing transformation in utilities:

  • The utility landscape diversifies
  • Empowered customers inspire new business models
  • The utility of the future
  • Conclusions and recommendations

 

The Utility Landscape Diversifies

A decade ago, the power sector was responsible for 29 percent of the anthropogenic CO2 emissions. If left unchecked, this statistic could rise to 38 percent by 2030. But adding more capacity with the traditional utility business model only contributes to excessive CO2 emissions and other pollutants.

The renewables movement accelerates 

The good news: current consumption trends are encouraging the development of wind, solar, hydro power, biomass energy, geothermal energy, wave power and CCS (carbon capture and storage). Policymakers in the U.S. have a goal to derive 30 percent of the country’s energy needs from renewable sources by 2025 and to reduce CO2 emissions by 80 percent by 2050. In the European Union, a plan has been announced to reduce CO2 emissions by 20 percent and to garner 20 percent of energy consumption from renewable sources.

Renewables emerge as demand grows at unprecedented rates 

Diversification in the utility sector comes at a time when demand for power is unprecedented. Today, the U.S. consumes 25 percent of the current global energy supply.  Add China (which is four times the size of the U.S.) and its addition of 100 million middle-class citizens per year, and the combined usage of these two countries alone could equal today’s global energy consumption. Progress is advancing across all types of renewable energy sources, albeit at uneven rates. The future scenario, however, grows more promising with each day. The following descriptions provide a high-level overview of several alternate energy sources that are being actively developed, including, but not limited to:

Wind and solar
The largest percentage of renewable sources is still wind power, having risen to about 318 gigawatts worldwide (forecast to double by the end of 2018). But growth in utility-scale solar is also on the rise. The U.S., for example, had a total of 17.5 gigawatts of solar at the end of 2014 and in 2015 joined Germany and Australia in the “million installation club.” Countries as diverse as Brazil and Japan are starting to deploy floating solar panel arrays.  The sunbaked Southwest region of the U.S. offers a prime spot for such floatovoltaic projects, where they could produce clean energy and prevent evaporation in major man-made reservoirs. Nations decommissioning nuclear generation assets are also turning to solar and wind at increasing rates (e.g., Japan, China and Germany).

Wave power
Wave and tidal techniques have the potential to contribute massive amounts of power to an energy-hungry future. But while the industry has made huge progress, it remains decades behind other forms of renewables, with large amounts of money and research required for it to catch up. A promising proof of concept was launched on the Portuguese coast in 2008, and in the U.S., Lockheed Martin announced its intent to create the world’s biggest wave energy project, a 62.5-megawatt installation slated for the coast of Australia that would produce enough power for 10,000 homes. Scotland’s location along the Atlantic and North Sea have also made it a promising source of wave energy. In 2015, its government approved a 40-megawatt wave energy installation in the Shetland Islands.

Carbon capture and storage (CCS)
Although CCS technologies have existed for years (Norway’s CCS program dates back to 1996), recent advances offer a more mature set of techniques for the viable capture of CO2 from fuel combustion and industrial processes. Once acquired, CO2 is transported via pipelines or ships. The International Energy Agency reports CCS could account for one-sixth of required emissions reductions by 2050. CCS projects are underway in Australia, Canada, Saudi Arabia, the United Arab Emirates and the United States, bringing the world toward the threshold of 10 million tonnes of CO2 captured and verified as stored every year.

Geothermal energy
Geothermal energy procures heat beneath the Earth’s surface through underground circulation of water. The steam from the resulting cavities is used to power an electrical generator. The Northwest region of the U.S. promises to generate more than 2,600 average megawatts of electricity from geothermal power (enough renewable energy to power 2 million average homes). California continues to host its geothermal energy event that brings key players in policy, technology and industry together. The event attracts at least 1,200 representatives from 25 countries spanning six continents. Given the organization’s rapid progress in creating actionable insight for policy makers and technology providers, an even larger and more diverse crowd is anticipated next year.

Consumers accelerate the renewable movement’s pace 

New sources of clean energy, along with increasing awareness of consumer involvement, can only help today’s battle cry to move to a low-carbon energy future. Environmentally conscious consumers, for example, are participating in energy efficiency programs and deploying their own renewable distributed energy resources. By the end of 2015, 35 percent of new residences and 15 percent of those that already exist had participated in efficiency programs. The SmartGrid is partly responsible for fueling this trend, with its innovation and support of several operational and energy measures, such as smart meters, smart appliances, renewable energy sources and energy efficiency techniques. 

Empowered Customers Inspire New Business Models

As consumers embrace their role as energy producers, they become producing consumers, or prosumers (a term coined in Alvin Toffler’s Future Shock, 1970).  Prosumers challenge the one-way utility model that delivers power to passive customers (measured and billed by kilowatt-hours consumed) as the industry and its customers collaborate to create a clean-energy future. For example, in a distributed energy resource environment, a prosumer who owns and operates electricity production or storage assets also has a consumer relationship with a utility, aggregator or other energy services provider. 

Given today’s online social networks and communities, prosumers also contribute their expertise and experience to a product’s future direction, often in the role of both advocate and critic. While this characteristic of the empowered buyer has seeped into virtually every industry (powered by social networks), no one ever imagined it would happen in the utility business.

Emerging Consumer Technologies.
Figure 1. Emerging consumer technologies are giving rise to the producing consumer, or prosumer.

The Utility of the Future

Increased global demand for power, along with emerging trends in clean, renewable energy and an empowered consumer, is diversifying the industry in ways it hasn’t experienced in a century. 

Empowered customers inspire utilities to rethink their business models  

As prosumers increasingly adopt alternate, off-grid energy resources, a smaller pool of customers is left to cover the traditional grid’s fixed costs. This, in turn, pushes utility prices up, making alternative energy sources more attractive. But the argument transcends economics. As noted by a UBS energy analyst, “Large-scale power generation will be the dinosaur of the future energy system:  too big, too inflexible, and not even relevant for backup power in the long run.”

Changing political winds and a challenging regulatory environment 

As customer demands shift due to technology advances, politics and regulatory oversight from the states and federal government will play an increasingly crucial role. The energy industry is highly regulated, with a mostly unionized workforce, creating tremendous hurdles that must be cleared to increase customer prices or to negotiate organizational cost reductions. Elected officials also use the industry for political gain in attempts to score points with constituents (e.g., by calling out an energy provider that is slow to recover power after an outage).

Utilities assume multiple roles  

An integrated energy company has distinct entities where it acts as both energy provider and distribution network operator. Until now, such division has been driven by a desire for competitiveness in retail energy markets. Today, it is driven by a need to provide equal access to the grid for all resources, whether the utility or the consumer owns them. Grid operators will now manage energy flow using insight they collect on network congestion and with variable delivery prices at local levels. Similar to transmission-level locational marginal pricing, this approach will gather information provided by solutions inspired by the industrial Internet of Things (IoT) as well as from the consumer IoT. 

Finding gold in energy consumption data 

In our global connected economy, providers in all sectors are exploring ways to monetize data that has become digitally visible for the first time. The good news is that customers are increasingly responding to opportunities to learn from their own consumption behavior (and in many cases are willing to pay for such insight). In McKinsey’s study on the global impact of connectivity, 37 percent of survey respondents said they would switch to a brand that offered better connectivity features (an 85 percent increase from the previous year). Moreover, 32 percent said they would be willing to pay for connectivity features through a subscription service (a 52 percent increase from the previous year).

McKinsey Consumer Surveys on Connectivity 2014 and 2015.
Figure 2. Consumers are willing to pay for connectivity through subscription services.

In the insurance sector, customers are starting to embrace telematics, which quantifies their driving behavior to inform premium prices or to reward good driving with discounts. Telecommunications services provide another example where customers get insight about the timing and usage of SMS, data, voice and location services. In the booming fitness industry, an athlete wearing smart clothes is alerted to movement that could lead to injury and is given advice on how to correct such habits.

In utilities, solutions that leverage access to customer consumption data are starting to emerge from third parties. Duke Energy for example, offers customers an innovative billing tool known as PayGo, which gives customers access to their own consumption data over a web portal. PayGo’s leverage of consumption information helps both utilities and customers, for example, adhere to programs that mandate energy efficiency. 

For $300, the TED Pro attaches measuring devices onto main conductors inside a home’s breaker panel. Data captured by the home’s devices is sent over the home’s power lines (requiring no extra wiring). Users can store and track a decade’s worth of energy data, which they can view on any web-enabled device (such as a smartphone or tablet). Customized alerts are sent via text or email. Colored LEDs alert users to different parameters, as well as the option to turn loads on and off based on the cost of electricity.

Today, energy monitoring is limited to reviewing a utility bill followed by educated guesses to shut off the lights and other trial-and-error techniques. New technology makes the process much easier and far more accurate, eliminating guesswork since customers know how much energy their home is using and when it’s using it. Armed with this data, consumers can respond to usage trends to take control of their costs.

Conclusions and Recommendations

Utilities catch digital business fever  

Today’s emergence of the Internet of Things embeds products and services with sensors, intelligent logic, memory, communications and power — creating smart products that digitally communicate their location, status, usage data and other contextual information to optimize their performance (often aided by M2M, or machine-to-machine communication). In the utility sector, much of the innovation from connectivity is coming from innovative start-ups that possess the imagination and creativity to monetize data, digitally visible for the first time in history. It’s why many business leaders call data science the new creative.

A new utility model for a connected economy  

For utilities, digital business is inspiring networks of traditional grid power, solar panels, and other renewable sources — all controlled by software and data systems. The transformed utility for a connected economy will reduce customers’ energy demand at peak hours and provide renewable energy supplies in targeted areas, offsetting some of the needs for power from conventional sources while minimizing or even avoiding grid disruption.

As an economic model, digital business extends the Information Age to the Connected Age (McKinsey studies show that linking the physical and digital worlds could generate up to $11.1 trillion a year in economic value by 2025; see Figure 3).

The Internet of Things Chart.
Figure 3. The Connected Economy Could Add $4-11 trillion annually to the global economy by 2025.

Plan for customers as energy producers  

Grids are already transforming to structures that accommodate consumer-owned and operated resources. And as policy makers focus on a low-carbon energy future, utilities will improve monitoring and control of their networks to enable end-user energy efficiency.  

This new model will join prosumers with energy service providers, aggregators, utility companies and market operators in a decentralized energy-provisioning model. Utilities will also need to provide information about the cost of grid-provided energy (based on production and local congestion prices), asset operation cost, and incentive pricing. All will impact consumer behaviors, such as when and how to charge an electric vehicle, when to rely on grid power and when to use on-site DERs.

Organize a dual, or bimodal, approach to operations   

If left unchanged, the current utility business model could lead to a phenomenon known as the utility "death spiral,” a trend that could also compromise equitable access to modern energy sources, resulting in an energy poverty that will be especially felt in developing countries. 

Hence, utility executives need to maintain their current operating conditions, while preparing for digital transformation. This dual approach will help ensure the stability and reliability expected from providers of necessary societal services. It also supports innovation efforts to modernize the current energy-provisioning model. Meeting mandates for reliability and universal service while actively addressing the need to transform requires a two-dimensional approach — such as bimodal IT — and the use of architectural models —such as pace layering and microservices. For a deeper explanation of this organization model, see the piece by Ray Velez called Dueling the Digital Dragon.

Be mindful of the politics  

In industries like energy and utilities, executives need to be mindful of the changing landscape as it relates to the regulatory frameworks in which they operate. Executives should work closely with other members of the industry to understand and negotiate which regulations and policies should persist, and which should be amended or retired, in an effort to allow for innovation — all this while ensuring a decentralization of the energy industry does not disrupt every other industry that relies upon it. 

Innovate the customer experience  

The effort by the utility to integrate all of this information, operational, communication and consumer technologies into a seamless experience will be an important component of establishing and maintaining system stability and resilience. Unfortunately, the utilities' legacy information systems (which focus on billing and call center support) put them behind other sectors that derive 360-degree customer views of interactions and transactions that are conducted in person or over voice, web or mobile. For utilities, the business case for investing in a more robust, self-service consumer experience is compelling: as noted in many studies, modern digital channels can greatly reduce much of today’s $12 per call in the contact center.

Hire a chief customer experience officer  

While a few vanguard utilities have C-Level executives in place to own and manage the customer experience, most are assigning the role to the head of customer service, whose primary responsibility is call center operations. This only confounds the situation. Utilities should consider adopting a common enterprise practice in hiring a C-level officer charged with an enterprise-wide customer experience that goes beyond traditional customer service. 

Step up your investment in analytics  

In the utility sector, implementing the new interdependent relationship caused by connectivity will require innovation in information management and analytics practices, which unfortunately have not kept pace with the data tidal wave created by a connected economy. Hence some of the anticipated benefits of consumption data will take time. Nevertheless, acquiring the capability to apply analytics to create operational insights for customers represents a major opportunity that should not be wasted with a wait-and-see policy. 

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