A new business plan for capturing big saving.
Steve Mitnick is a partner in the strategy consulting firm Oliver Wyman, a Marsh & McLennan company, and is based in the firm’s New York office. Email him at: email@example.com. He acknowledges the assistance of Nadia Pierce, an associate in the New York office.
From the president on down, America expects a virtual revolution in energy efficiency. When investment in efficiency increases, people assume we’ll see dramatic cuts in electricity consumption growth, ultimately to zero or perhaps negative growth.
Is a letdown imminent? Legacy efficiency programs have accomplished admirable savings in recent years, yet increasing evidence suggests these kinds of programs might not easily scale up to the much higher rates of performance that are expected. Their cost-effectiveness (i.e., kilowatt-hours of consumption cut per dollar invested) might seriously suffer in the process.
Particularly troubling is the demand side of efficiency. The products and services to cut consumption are ample. But demand for efficiency, the desire of businesses and individual consumers en masse to spend their time and money to buy efficiency products and services, appears insufficiently robust.
Indeed, businesses and consumers can be remarkably blasé about efficiency, even when the prices of efficiency goods are heavily subsidized and discounted. For example, when Americans buy electrical devices every day, efficiency typically isn’t the decisive factor. Functionality, power, options and aesthetic appeal commonly drive purchases. Price also drives purchase decisions, but rarely is the efficient device the lowest priced.
Legacy efficiency programs interest and excite too few to action. The compact fluorescent light bulb is their lone killer app. Non-lighting efficiency products and services suffer buyer disinterest and resistance.
Sensing these problems with efficiency’s demand side, some utilities now are rethinking and recasting efficiency. The programs of the “Efficiency v.1” era had as their animus to broadly make available the supply of efficiency products and services.1 This they have done, clearing the path for motivated businesses and consumers to become more efficient.
The central intent in the “Efficiency v.2” era will be to incite unprecedented numbers of businesses and consumers to seek out and actually go down that path. This means the value proposition of efficiency needs a serious makeover to engage and inspire people for the first time. Fresh branding, marketing and selling strategies will aim at making efficiency far more compelling. Customer science—intensively listening to the voice of the efficiency customer—will quantify what it might take to interest and excite real people.
What might be called the “Best Efficiency Business” (BEB) will employ these business essentials to drive up customers’ propensity to desire and buy efficiency. Once demand is turbo-charged, the BEB then has the potential to perform at the much higher levels that are expected (i.e., cutting kilowatt hours of consumption at unprecedented rates, while maintaining acceptable per-dollar invested ratios).
But what exactly distinguishes a BEB? How can a BEB protect—and possibly increase—utility shareholder value while satisfying the stated aspirations of political and regulatory leaders? And how would a utility transform its legacy efficiency programs into a BEB? Answering those questions will allow efficiency to begin its new role as a primary energy resource for America’s future.
Enthusiasm, Meet Reality
Political and regulatory leaders have set unprecedented goals as to what can and should be accomplished in energy efficiency. U.S. Secretary of Energy Steven Chu aptly summed it up: “If I were emperor of the world, I would put the pedal to the floor on energy efficiency and conservation for the next decade.”2 The pedal is now being floored. Several billion dollars of new funding is on the way via February’s economic stimulus legislation, more than doubling the country’s rate of investment in efficiency.
Scaling up performance so rapidly will be challenge enough. Adding tepid demand for efficiency among broad segments of the American people raises the question, can we truly be confident the Efficiency v.1 modus operandi is up to the task? Further, efficiency programs work uphill against persistent streams of electricity consumption growth, as each year population increases and penetration of new electricity applications increases too.
California frequently serves as a role model for efficiency. The state’s overall per capita consumption has indeed stabilized, though per capita industrial consumption has dropped dramatically. Per capita commercial and residential consumption has grown.3 Nationally, legacy programs have engaged a small fraction of the total population and impacted but a fraction of these participants’ electricity usage. The result, a fraction of a fraction, can be unspectacular.4 So, legacy programs encounter many headwinds. Another concern is price. Electricity prices strongly encourage consumption. Using a 100-watt device for an hour costs a lowly penny, hardly worth a moment’s thought. Then, when electrical devices are made more energy efficient, usage becomes cheaper still, potentially encouraging wasteful consumption. Using efficient devices can become a “free good,” in economists’ parlance, at which point businesses and consumers quite naturally become oblivious about turning them down or off.
A Washington Post writer’s experience with an advanced utility meter is telling:
“The message for me wasn‘t how expensive our appliances are to use, but how cheap. The third line of the monitor kept a running total: After about 1-1/2 hours of heavy use, we had spent all of 34 cents. When I told [the utility representative] that the power monitor made me want to use more electricity, not less, she ruefully agreed that in Virginia, it‘s hard to get people to conserve based on price alone, because our rates are below the national average. It seems arguable that Americans don’t pay enough for energy, even in more expensive states, and we‘d have to pay a lot more to curb our use.”5
For all these reasons, it’s entirely plausible that Efficiency v.1 programs are no match for the unprecedented expectations about what efficiency is to achieve. If and when the ambitious goals for efficiency are not reached, difficult questions may arise. Did utilities drag their feet? Are they not creative enough? Or, are they just not capable, generally, to entrust with the efficiency mission?
Utilities may find themselves in the penalty box if adjudged as falling short of efficiency goals. Indeed, utility shareholder penalties are at the ready in several states, to be applied by regulators against inadequately performing utilities. Ultimately, utilities can be cut out of the game completely, replaced with third-party administrators.
Listening to Customers
Too many customers are unconcerned about efficiency. To even come close to the numbers tossed about by political and regulatory leaders, many more Americans must come to embrace—enthusiastically—a current or retuned efficiency value proposition.
In the Efficiency v.1 world, we’ve been told any business or consumer can cut utility bills and help the environment—simultaneously—by buying efficiency. The problem is, for many Americans these twin benefits are perceived to be too marginal.
A Wall Street Journal article pointed out that customers may not be motivated by the value proposition that participating in efficiency programs can save money since savings often are minimal. The article illustrated the experience of Lori Villarreal of Sherman, Texas, who purchased two $359 Kohler-brand dual-flush toilets and two water-efficient showerheads that range from $75 to $100. In the end, her savings were very small; in January and February, she saved just $2 and $5 compared to the same period in 2008.6
Customer apathy is reinforced at all three stages of the efficiency-purchase decision. In the first stage, before a purchase, a customer can find it hard to visualize efficiency. After all, efficiency is an elusive abstract term and just one of many attributes that a customer considers when purchasing an electrical device, rarely the most consequential.
A further complication is that efficiency can have a negative connotation in American culture, implying a kind of humorless frugality or abstinence. Business models encouraging Americans to live large or enjoy guilty pleasures are more commonly successful. As Chu has observed, a $1,000 investment significantly would increase the efficiency of the typical home, “but the American consumer would rather have a granite countertop.”7
The second stage, the efficiency purchase itself, is fairly uneventful; almost nothing changes. The customer has little to point to, to signify and celebrate a purchase. And in the third stage, after purchasing efficiency, few customers eagerly will rip open and proudly look over the monthly utility bill. Unlike the neighbor’s rooftop solar panels, the efficiency customer’s good deeds start out remarkably inconspicuous and fade from memory over time.
Lack of excitement begets lack of excitement, sidelining one of the most potent of marketing tools, word-of-mouth recommendations. In the Efficiency v.1 world, businesses and consumers hear too little excitement about positive efficiency experiences from fellow businesses and consumers.
Breaking down and analyzing the efficiency-purchase decision, the BEB will recognize the diminishing returns of a supply-centric approach and instead go demand-centric to meet aggressive efficiency targets. But making this leap means embracing the differences between legacy programs and Efficiency v.2 (see Figure 1).
Legacy programs took the first critical step in ensuring widespread availability of efficiency products and services. And these programs succeeded, making efficiency less expensive and less of a hassle to buy. The next generation is about revolutionizing how businesses and consumers perceive these products and services. To considerably broaden and deepen efficiency’s appeal, innovative strategies must now be developed and fielded, repositioning efficiency, generating word-of-mouth buzz and speaking plainly and directly to the efficiency customer.
To illustrate, a set of strategies addressing customers’ fundamental needs, called “Cool Your Carbon,” includes branding, marketing and selling strategies that leverage customers’ inclinations to help the environment to motivate them to seek out and buy efficiency (see Figure 2).
Targeting consumer-facing businesses and consumers, these strategies recast the efficiency value proposition. The objective is to offer customers a practical rewarding action to cut their carbon footprint, making efficiency purchases highly conspicuous, even cool. For example, the smart-grid meter can be transformed in customers’ minds into their carbon-footprint scale. Customers’ attention can be directed to the meter, and the meter used to drive recognition, contests and prizes, all in the name of cutting carbon.
An efficiency and conservation contest at the University of Georgia exemplifies how a Cool-Your-Carbon approach can interest and excite participants. Two residence halls competed for prizes, the contest hosted by comical and memorable mascots, “Energy Hog” and “Efficiency Dawg.”8
Similarly, BrainShift’s Energy Smackdown is a reality television contest pitting neighbors from the Boston area against one another in a battle to see who can make the biggest energy reduction in 12 months. Participants are motivated by lowering their utility bills, but especially by prizes and getting seen on television. In the middle of season two, one family reduced household energy use by 66 percent.9
Transforming to a BEB
A BEB can become a material contributor to utility shareholder earnings. Political and regulatory leaders increasingly articulate the need to progress beyond decoupling to policies in which utilities who perform in efficiency with excellence can receive material incentives for shareholders.
In 2008, several states moved forward with decoupling-plus policies, which seek to yield rate-base equivalence for efficiency investments (see Figure 3). Increasingly, utilities will be able to produce material shareholder earnings from their investments and performance in efficiency just as they traditionally do from their investments in power generation, transmission and distribution. This regulatory approach, pioneered by the California Public Utilities Commission, has become a positive model for legislation and regulatory decisions nationally.
Utilities that make the transformation will structure a business model that fits and leverages their own differentiated strengths and service territory characteristics. A first step will be to assess peer models (e.g., alternative mixes of in-house versus contract-out).
The BEB will assemble a management team that is well-suited to operate in the Efficiency v.2 world. It might tap talent from the non-utility community with relevant marketing and sales development experience. And the BEB will leverage its current talent pool to identify high-potential employees who, with training and development, can lead a best-in-class business. To scale up quickly, the BEB may consider acquisitions, alliances and partnering.
The BEB will be measured by new performance metrics to hold it accountable and closely track progress against ambitious regulatory targets. Management information systems will provide transparency and report progress monthly, quarterly and annually.
On the softer side, the BEB will require a reformed organizational culture. A more flexible learning and innovative organization is needed than what made sense in the Efficiency v.1 world. Appropriate reward systems will encourage management and staff to be demand-centric, and resist temptations to fall back on legacy approaches like serial discounting.
Efficiency v.2 is a quantum leap from the Efficiency v.1 world. Efficiency v.2 will be just as demand-centric, focused on growing demand for efficiency products and services, as Efficiency v.1 was focused on efficiency’s supply side. In the Efficiency v.2 world, providers of efficiency will look more like businesses and less like government agencies. Efficiency v.2 will be characterized by dynamic branding, marketing and selling strategies, driven by customer science, whereas potential savings studies and annual program reviews characterized Efficiency v.1.
The utility Best Efficiency Business (BEB) will play an essential irreplaceable role in the Efficiency v.2 world. A utility, uniquely, has a relevant relationship with every customer in its area and so has the potential to thrive in a demand-centric world. And a utility, uniquely, has the ability to be dynamic like a business while attending to the public service obligations of regulation.
1. Disclaimer: References to “Efficiency v.1” and “Efficiency v.2” in this article bear no relationship to any specific company or product name.
2. “Climate Change Affects California Water Supply,“ Reuters, May 10, 2007.
3. “State-level Spreadsheets 1990-2007, 1990-2007 Retail Sales of Electricity by State by Sector by Provider (EIA-861),” released Jan. 29, 2009. www.eia.doe.gov, U.S. Department of Energy, Energy Information Administration. U.S. Census Bureau provides California population estimates, to express electricity consumption on a per capita basis.
4. See Mitchell, Cynthia, “Stabilizing California’s Demand,” Public Utilities Fortnightly, March 2009.
5. “Can One Household Save the Planet: No, But the Planet Can’t Be Saved Without It,” Washington Post, Feb. 15, 2009.
6. “Eco-Friendly … and Frugal: Paying $1,299 for a Dishwasher in Order to Save $90 a Year,” Wall Street Journal, Feb. 12, 2009.
7. “The New Team: Steven Chu,” New York Times, Dec. 5, 2008.
8. “Current Activities,” University of Georgia, Office of Energy Services, Feb. 7, 2007.
9. “Utilities Turn Their Customers Green, With Envy,” New York Times, Jan. 30, 2009.