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.

Collusion Graphs for Utilities

Interestingly, the only Utility website where I found no other connection is of Ameren! Of course, there could definitely be others with no tracking that I have not navigated to...

Balanced Scorecard for AMI Program Management

Advanced metering penetration in the US has reached the point of transition when the rate of process innovation has started to surpass the rate of product innovation. An estimated 40 million smart meters have already been installed, and another 25 are making their ways to the cross-docks by 2015. The era of ferment is over; there is no more “piloting” by individual utilities, - the new entrants are gleefully implementing the best practices established by the early adopters. New business models have been enabled, and new markets have opened up. Utilities are venturing into leveraging AMI for business lines outside of Meter-to-Cash. Overall, AMI has been a grand success story, - so far.

Nevertheless, irrespective of the dominant designs established in technology and market, managing an AMI program is far from being simple. PMOs are challenged with meeting year-on-year regulatory commitments, sustaining customer favorability and steering organizational changes. In absence of a well-designed scorecard, they scramble through a random mesh of SLAs and metrics that do not line up to the overall objectives. Although it’s sort of an unconventional use of it, the classic Balanced Scorecard fits the bill extremely well if you look at the dimensions associated with an AMI program.

Below is an example of how the Balanced Scorecard approach can be leveraged for AMI program management. For the sake of simplicity, I have provided examples of only the aspects concerning meter deployment. Steady state parameters can be blended in pretty smoothly to this structure.

Smart Utility: A Dumb Story

Marcus always heard that your entire life flashes in front of your eyes the second before you die. First of all, that one-second is not a second at all. It stretches on forever…like an ocean of time. For Marcus, it was standing across his country river watching the unending transmission lines extending over the crystal water and straying into the woods. The proud face of his father on his first day at job as a trouble man at Smart Utility…the hard hat and the yellow vest…the glinting goblet that he raised in support of gun rights…

Marcus could be pretty pissed off about what happened to him…he was perceived an intruder as he approached a customer’s premise and was shot by the customer. But he did not obtrude; - he was merely there to investigate a trouble ticket. The customer did not inform the outage, but her smart meter did. So, maybe, just maybe, it was fair on her part to get scared of the uncanny apparition in the middle of the inky darkness and shoot in self defense. But how fair is that? Let it go...it’s hard to stay mad when it’s so much beauty in the world…it’s time to sleep…he closed his eyes as all his thoughts converged into a tiny singular dot of infinite locus just like the transmission wires lost into the horizon over the endless corn fields…

[After the last words of Lester Burnham in American Beauty.]

The Shift in Energy Consumerism

Few years ago, I published an article titled “Utilities 2.0” in Public Utilities Fortnightly where I proposed some tangible value co-creation opportunities for power utilities through the lenses of DART (a framework devised by Prahlad and Ramaswami). I am pleasantly surprised to see how the term “Utilities 2.0” has caught on since then, and more amazingly, how rapidly the concept has been becoming a reality.

The 2012 “Actionable Insights for New Energy Consumer” report from Accenture reveals some really fascinating data that perfectly align with the evolution of Utility 2.0. The shift in energy consumerism is not vaporware, - it is real - “…from isolated to connected, from unaware to informed, from passive to active.” And this shift is transforming the stale business models for traditional utilities.

Below is an example of how different opportunities shape up for Dialogue, Access, Risk Assessment and Transparency (DART) and their intersections.

Some random bickering over AMI Investment Cases

For reasons not-so-difficult-to-understand, power utilities are extremely conservative when it comes to making their investment plans. AMI being the case in point, if you exclude the non-operational benefits from the equation, the Net Present Value comes out gravely negative for most business cases for most utilities. And for the non-operational benefits, which are primarily attainable through broader consumer load participation via market based demand response or direct load control, some of key enabling policy instruments are yet to be instituted owing to the lack of political will and organizational momentum.

It’s interesting to note that reliability gains are completely missed out from most AMI investment cases, with some notable exceptions (such as Connecticut Light & Power). In the base case, utilities can expect to save up to 10% of their outage restoration costs by leveraging the AMI events to reduce the average system interruption minutes (SAIDI). There are also achievable grid efficiencies delivered by business analytics with all the AMI and PMU (Phasor Measurement Unit) data.

At some point in the near future, utilities should sit back and perform a comprehensive value audit and recalibrate their transformation roadmaps. But, agreeably, that’s a broader subject.

AMI to Fix Connectivity Data

Big or small, almost all utilities have a chronic condition – data quality of their network connectivity models is less than desirable. For some, the device associations are inaccurate to the extent of 30 - 40%. In recent years, many utilities have spent tens of millions to physically walk the circuits to verify the connectivity data, but not many (if not any) have sufficiently leveraged the meter events to correct the model.

This, truly, is a low hanging fruit. Correlating meters that throw out power out events with the meters that are associated with the OMS created outage tickets can easily indicate the disassociation. Utilities can adopt a continuous improvement approach to analytically compare these two data-sets to identify the anomalies on a regular basis. This is a “slow and steady” strategy, but that’s the way to win the race at a time when commissions are holding tight to their wallets.

Leveraging AMI for Outage Management

By 2015, over 40 million advanced electric meters will be deployed by the US utilities. A significant number, however, it still makes up for only 25% of all electric customers. The good news is that almost all major IOUs, who are the traditional trend setters in the US electric market, have already dared the devil and are in the last laps of AMI deployment. Time has come to think “so, now, what?” All these utilities had compelling business cases to convince their commissioners, but now, billions of dollars later, the question remains whether they will really be able to offset the customer surcharge by achieving promised efficiency gains.  They have got some really cool toys, petabytes of data and some brilliantly fluffy ideas, - but they still need to figure out how to connect the dots.

I intend to write some fuzzy posts on these fluffy ideas in days (or months) to come, - but here is something that many utilities have already embarked on: enabling outage management process with AMI. There is a wide range of benefits - from instantaneous outage detection to nested outage determination to device analysis - but the biggest saver is the simplest: avoiding dispatch for those 30% to 50% of trouble calls for which there are no utility side issues.

Meter events can be leveraged to automatically determine when a meter suffers an outage and when it wakes back up. AMI systems can process this information, infer the outage and notify the Outage Management System (OMS). Upon restoration, OMS can auto-verify the restoration status by requesting AMI and detect nested outages, if any.

Implementation mechanics will vary largely depending on specific AMI technologies, but what I found thrillingly fascinating is the possibility that Meter Data Management Systems (MDMS), as they mature, will act as virtual Distribution SCADA. When it comes to outage notification, there is a huge hiatus between a SCADA-sensed breaker and a Customer-notified site – any intermediate fault location has to wait to be determined by the OMS. This gap can be potentially bridged by MDMS by utilizing the network connectivity model against the meter events. So far, most MDM vendors have been shaky about encroaching into the prohibited space of OMS, - but time will tell.

A Case for Channel Strategy around 3rd Parties

When the Groupon effect toppling regimes around the world and iphone apps attempting to aid confessions for catholics, some utilities are still mooning on how to integrate internet and mobile in their comprehensive channel strategy. [Bit of a out-of-context stat – internet penetration in Egypt and Tunisia are 21% and 34% respectively, compared to 77% in the US (according to www.internetworldstats.com)].

Here is one more case for channel strategy.

In my tiny town with the population of 205K, there are 23 (mini-) firms dealing in energy efficiency – Energy conservation consulting, Energy conservation products and services, Insulation materials, Appliance installers, Builders and so on. If you survey the entire territory of a major utility, there are hundreds of such firms. These companies want to be found by the customers, and if possible, when they focus on their core service areas, they would want someone to handle their billing and payment functions.

Utilities have a tremendous opportunity to facilitate the relationship between these companies with the customers. When the utility websites can have their listings, utilities can insource their billing and payment capabilities to support these firms. Revenue model? – that’s a no brainer.

On Utility Branding

For last two years, IDC has been doing a remarkable job in ranking electric utilities by their Intelligent Quotient (IQ). I wonder if someone could do a similar ranking for utility branding. Traditionally, utilities are super rich in tangible assets, but how do they stand on intangibles? Moreover, with so much of investments (and hype and hoopla) around Smart Grid, has there been any change in brand asset value?

If you look through Y&R’s model for Brand Asset Valuation, it’s clear that Brand Strength must have been refueled by the smart grid investments leading to energized differentiation. However, have there been any boosts around Relevance, Esteem and Knowledge? How differently do the consumers really feel about their utilities now?

Twisted value net for utilities

An ominous theory has been wafting through the air for sometime – gypsies like Google will eventually shrink the utilities to some dumb wires. A utility company will be like a skinny skeleton wearing other people’s fleshes. Before my imagination rolls down the gory trail, let me come to the point...

Recently I had the opportunity to speak at a DeTech meet, facilitated by DEFG and hosted by San Diego Gas & Electric. The topic was how the inclusion of third party companies will change the current business models for electric utilities. Intensely intriguing.

Smart Grid and associated technologies are essentially unveiling the electric utility industry out of their burkas. In the last three years, venture capital spending in the advanced metering technologies has been over $1.5 B. In 2010 alone, about $2.75 Billion has been spent on smart grid products around advanced metering, demand response and distribution grid management.

In HAN (Home Area Network) ecosystem alone, there are more than 200 vendors. The network providers such as Verizon are opening up their backyards. Demand side aggregators like Enernoc and CPower are mushrooming with froggy leaps. Google is up on its mission to “organize the world’s information” through the PowerMeter. Microsoft is using Hohm as their homing beacon to make inroads. Do not forget Opower. Galvin  is up with Microgrids. The list runs on and on. Too many smarty pants in the room, - and utilities, like selfless hermits, are cannibalizing their sales through Distributed Generation, Demand Response and Energy Efficiency. Huh!

Remember the value net by Brandenburger and Nalebuff? It becomes really interesting as you start plotting the newbies against the four pillars of the net. Not only that the list for Complementors and Substitutors start hanging below the bottom, - but in cases, the line of demarcation seems really slim. Sometimes, an entity could fall into multiple pillars. Take the example of DR Aggregators – are they Substitutors or Suppliers? Both, really. How about Distributed Generation? Talk about twisted value nets.

The question is - what should be the go forward strategy for utilities - compete, co-operate or co-opetate? I think co-opetition will be the name of the game. We will wait and see.

Texas nexus on Electric Vehicles

The auto show at the State Fair of Texas was not an iota less fascinating than the one for livestock. Spanning across 30o thousand square feet, it’s an orgy of cool cars – 2011 models of Chevy, Cadillac, Buick, GMC, Hyundai, Nissan, Ram and Toyota. Chevy Volt was probably the cynosure of the exposition.

I had the opportunity to attend both the VIP Reception (sponsored by Chevrolet) and the Panel Luncheon (sponsored by TXU Energy). It was reassuring to see how sincere Texas dignitaries are about Electric Vehicles and how effectively market participants are interacting with one another to make EV an early success in Texas.

As I touted in my last blog, two things have to go hand-in-glove to make EV justifiable to the cause – (1) high renewable portfolio standards (2) consumer incentives for off-peak charging. Texas is on track for both.

By the next few years, Texas will have more than 20,000 MW installed capacity of wind power; and Texas is building about $5 Billion worth of transmission lines (CREZ) from West Texas and the Texas Panhandle to the population centers. TDSPs (Transmission & Distribution Service Providers) in Texas are currently deploying 6.5 million smart meters, - which will provide the platform for dynamic pricing. Because of high night wind, off-peak energy will be greener.

Hail Texas! Here I come.

BTW – here’s Andy’s commentary on the panel discussion: http://smartgridsecurity.blogspot.com/2010/09/blazing-ev-and-v2g-trails-at-texas.html

Valuing Electric Vehicles...

Electric Vehicles have compelling value propositions in the US market. First, it can direct the dough away from OPEC to the pockets of US electric utilities. Second, it can create some cool jobs. Third, it will reduce demand for gasoline to further jack down oil price.

However, most people will not buy Electric Vehicle thinking – “Aha, let me bolster the US economy. Hey OPEC, you like the pinch, yeah?” Some of those saintly folks will buy EV because they are deafened by the carbon cry of our moribund planet, - and some of my miserly buddies will do it to save on fuel cost.

Well, emission continues: not through the tailpipes, but through the plant chimneys. Until renewables become a dominant mix in the generation portfolio, EV will only make just a little sense from the environmental standpoint.

But I think my cheap buds are wiser. EV, even in its diapers, can drive you up to 40 miles for less than 2 dollars. With dynamic pricing, this cost may go down to as low as 32 cents. If you are in Austin and you never have to drive more than 40 miles a day, your monthly fuel cost will be about $10. Pretty neat, indeed!

Coffee is not green

The buzz around greening has reached a point when it has become outright annoying. A year back, words like “environmental sustainability” and “carbon footprint” carried a lot of weight. If you could spit out those words in any coherent or even semi-coherent construct, people would look back at you as if you were a returning messiah. Now, - sigh!

I think “greening” is rapidly losing its cool as it has been taken as a silly excuse by many companies to reduce their OpEx. It's all about their green business case. It’s almost like – if you love your wife, give me a dollar.

If you are a habitual habitant of Sheraton, you must have seen those green tags tacked against your pillows. Well, at first sight, I was damned impressed. I get a $5 green coupon if I refuse a day’s room service. Cool! I went for it, with a simmering pride that I can save the planet a tiny bit through my towels and linens. Behold, the upshot – no coffee in my room! They did not replenish coffee in my room for green sake! I thought it was only about washing and drying, - what does coffee have to do with greening, anyway? Coffee is not green, it’s plain coffee!

I’d be curious to know Sheraton’s activity based costing for room cleaning. That’ll tell me their green business case.

Captain Haddock on Dynamic Pricing

“Thank you contacting Smart Utility. This is Smarty Pants. How can I help you today?” 

“Billions of bilious blistering barnacles, - my bill has ballooned three times.”

“Sorry to hear that, Sir.” Smarty Pants gets ready to tap on the mute button. “May I have your name and address, please?”

“Captain Haddock. 1234 Smart Lane. Smart City.”

“I see that your bill for this month is $450, and your average for the last 12 months was $150.”

“Tell me why, Vampire!” Captain roared.

“Hmm, your usage looks a little higher.”

“So, you numb-skulled fuzzy-wuzzy, why is my usage so ramshackle high if my usage is just a tiny-miny higher?”

“Can I place you on hold?”

“No. I am sick of that bleeping music. I was holding for last 20 minutes.”

“No problem, Sir. Just to comfort you, - lots of people have the same complain. So, don’t feel that you are alone, OK?”

“OK. Thank you.”

“Sir, I found the problem. We replaced your electromechanical meter with a smart meter.”

“Darn good. Why do I pay more?”

“Two reasons. First – your previous meter was very old, and so was recording readings lower the actual. Now you have an electronic meter which actually works.”

“I thought I am the only one losing my pace. Balkan Beetle! You have been subsidizing my whisky for all these years?”

“You should feel good about that. Second, I notice that you are in real time pricing. And you seem to be swimming in your heated pool between 8 and 9 AM every morning”.

“Gibbering ghost, how do you know that?”

“Ho ho. I can tell a lot about your personal habits looking at your data.” Smarty Pants continued boastfully, "We got our home area network, Sir. Let me see. You had a 10 days vacation last month after which you hosted a series of bacchanalia at your place...you gotta pay for all that, Mr Haddock.”

“Yes I went to Tibet. Holy moly, I have been violated. I don’t understand this... what pricing?”

“Dynamic pricing, Sir. You apparently opted for the most risky category – Real Time.”

“Yes, yes. I am the captain, I love risks... but explain this thing to me, baboon!”

“Ummm...I don’t know anything beyond this screen, Sir. But if you hold, I can transfer this call to my supervisor. She has just completed the train-the-trainer course. But I can tell you that your bill will be significantly reduced if you take your laps after midnight.”

“You fuzz-headed profiteer, you are not getting away with that. I will have my razor-toothed piranhas cut your wires.” Captain hung up.

Tiger Woods Scandal: Loss in Shareholder Value?

John Edwards, ND Tiwari, David Letterman, and Tiger Woods; - yes, I am thinking scandals, - the most highlighted sex scandals of 2009. Admittedly, that's quite an atrocious phrase to be linked to these very stalwartly individuals. But, unfortunately, that’s how our society, our minds and our media work. Despite their phenomenal accomplishments at different points of their lives, Google trend shows that number of hits on each of them has gone up manifolds after the scandals broke. The only exception was for John Edwards when Kerry picked him for Vice Presidency in 2004. That’s the power of a sex scandal.

Let’s put things in perspective. How do we value Martin Luther King Jr., Bertrand Russell and Albert Einstein? King was quoted to have a “compulsive sexual athleticism”, Russell allegedly suffered from "galloping satyriasis", and Einstein was a “prodigious lover with a string of mistresses”. And then there are FD Roosevelt and JF Kennedy and B Clinton and many more. We know them as people who defined our world as we live it. How would it detriment having Picasso as the iconic brand ambassador for Google or Electronic Arts?

I am not trying to justify or criticize anybody’s sexual acts beyond or far-beyond marriage. The point is that personal life is personal and effects usually stay personal (unless you are in politics). For public figures, it’s natural that any aberration from societal norms stirs up public excitement, but then they fade away quite quickly. People value what matters to them and discard what does not. It's a matter of time.

I was amused by the recent study carried out by UC Davis concluding that the Tiger debacle resulted in destroying $5-12 Billions in Shareholder Value.

The fundamental flaw in this study is that the concept of “Shareholder Value” has been brutally abused. Assuming shareholders are not only day-traders, assessment of shareholder value destruction is strategically insignificant 15-days after any event - an earthquake or a security alert or a car crash. It may even be insignificant 15 days after a one-off poor quarterly performance report. “Shareholder Value” is a long term thing, and must not be associated with short term market volatility.

Without juggling the esoteric model that spit out the strategically significant evidence of the demonic destruction, let me run a common-sense hypothesis test. Assume for a moment that you are the CIO of a Fortune 500 company venturing into an enterprise-wide technology transformation initiative and Accenture (ACN) is at the top of your bidder’s list. In your right mind, would you stop awarding the project to ACN just because Tiger allegedly slept with multiple ladies?

Well, understandably, an overly sensitive buyer planning to buy a Nike may go buy a Reebok instead on an emotional impulse. So, if this is worth any financial analysis, it should be done bottom-up, accounting for the shifted consumer behavior. However, these behaviors would be very short-lived because of fading excitement and discontinued endorsements. I think it’s too ambitious to assume that our market is efficient enough to capture this information so quickly with any reasonable accuracy.

I am a big fan of statistical models, but then I agree with this quote by Gregg Easterbrook: "Torture numbers, and they'll confess to anything." Screening models through commonsense is the first step for any financial analysis. Otherwise, someone can even claim that it’s not the stimulus funds but the prodigious Portuguese dog that is working on the economy. Indeed, there is an amazingly high correlation between the growths of S&P index and Obama’s Bo since April 2009.