Pilot projects are demonstrating the potential of smart metering and smart rates to make the most of supply and demand resources. But as empirical studies show, not all pricing designs are equally...
Energy Strategy: Flat Bills, Peak Satisfaction?
Why a risk-hedging product for small customers isn’t the gamble you may think.
year, but that is less accurate, since weather conditions will always blur the results. Because a flat bill is based on weather-normalized behavior, any change in demand will be accurately quantified in the customers’ next year flat bill offer. In addition, improved efficiency will be rewarded by a lower offer regardless of the weather. If the program is marketed correctly to inform customers of how they could be more efficient and how the program can measure and reward them, it could provide the means for customers to become more energy-efficient.
Norm 2: Customers Won’t Pay For It. The commonly held belief is that electricity is a true commodity and consumers will always choose the lowest-cost option. But flat bills should not be the cheapest pricing package for the customer in the long run due to the significant cost and quantity risk the programs place on energy retailers. It is hard to argue this point when simply looking at marketing factors such as price, place and promotion. But what about the fourth element of the marketing mix, the package?
We wanted to learn if customers would recognize the value of an electric service package that provides convenience and “peace of mind,” and if so, would they be willing to pay a premium for it? To test this issue, we researched the price sensitivity of residential customers through a survey. As mentioned, we also launched a pilot program and surveyed actual participants.
Reality Check. The survey results showed that many customers valued predictability and convenience and were willing to pay a premium in their electric bill. The results were run through an optimization model to determine how the premium would provide the optimal financial impact for the energy company. Because our previous market research predicted that pilot participants would use more energy, the forecasted additional energy was built into the price of the flat bill offer.
Public interest in the pilot program far exceeded our expectations. The day after the pilot was filed, news of it made the front page of the Atlanta Journal-Constitution’s business section. Soon, it was reported favorably on both national radio and television—all for a 500-customer pilot, which hadn’t even mailed promotions about the product yet. It certainly confirmed our research that there was a need in the market. Later, the high penetration rate gained from the mailed offers indicated that the customers purchased the flat bill to meet their budgeting needs. In a follow-up survey of pilot participants, 95 percent reported that the flat bill either exceeded or met their expectations.
Norm 3: Risk Would Be Unmanageable. Risk is frightening, and it exists everywhere. But risk is transferable. Here the financial risk can be deflected from the customer to the supplier, Georgia Power.
We wanted to see if this risk could be dissected and managed. The major risk is the weather impact. If the summer is hotter than normal and the winter is colder than normal, the result is that the amount collected from the flat bill would be less than the bill amount otherwise paid by