Value Co-creation: The Case of Price Based Demand Response

In their book, The Future of Competition: Co-Creating Unique Value with Customers , management gurus C.K. Prahalad and Venkat Ramaswamy described a dramatic change in the way companies interact with their customers. “The most basic change has been a shift in the role of the consumer—from isolated to connected, from unaware to informed, from passive to active. Increasingly, consumers engage in the process of both defining and creating value.”

Prahalad and Ramaswamy proposed a framework called DART for value co-creation. Fundament on four key aspects - Dialog, Access, Risk Management and Transparency, - DART inspired me to apply the concept to the industry context of Power Utilities to understand how Utilities can co-create value with their customers. As I submitted the paper to Public Utilities Fortnightly, they published it with the title “Utility 2.0”.

No other example is more befitting to the concept of utility value co-creation than Demand Side Management, especially, Demand Response, and even more so, Market or Price Based Demand Response. The concept of Market based DR is pretty simple: increase the price elasticity of demand by inducing customers to the realm of carrot and stick. Few forms of Market based DR existed for decades (e.g., Inclining Block rate, Seasonal Rate, Time of Use) for load shifting and valley filling, but they were not adequate enough for dynamic energy management to shave peak loads in real time. AMI / SG made it technologically possible to induce a dramatic change in consumer’s behavior, with tariff options purely based on Risks and Rewards – Critical Peak Pricing, Variable Peak Pricing and Real Time Pricing.

Coming back to the point, - the entire operating model of Market based DR hinges on customer participation in the “win-win” (call it value co-creation) quadrant of economic transaction. So, utilities needed a strong emphasis on all the four pegs of DART to shift the role of customers “from isolated to connected, from unaware to informed, from passive to active”. However, today, about 50% of all US households have Smart Meters, but less than 2% participate in time varying rates. Back in 2009, the case for Market based DR was made on the assumption that the achievable participation would be attained by making dynamic pricing as the default tariff, with over 60% customers opting into the programs. For residential class of customers, the technical potential to lower the peak demand was assumed to be 43%. Six years later, however, we are moving on. In order to balance cost structures with revenue models and to integrate DG into the tariff, the industry is already discussing different rate designs under the umbrella of Demand Response 3.0.

So, what went wrong? More than regulatory, economic or technological barriers, the major impediment came from the customer perception of demand response programs and their willingness to enroll. It is an imperative that the Utilities integrate their Customer Campaign Programs tighter to their AMI / Smart Grid initiatives. For AMI business cases substantiated on DR benefits, determining appropriate DART strategies for different customer segments based on vectors such as Behavioral Traits, Profitability, Usage and Risk should be a compelling proposition.