Realizing the benefits of smart meters.
Michael Henry Price is a smart-grid systems integration specialist leader at Deloitte Consulting LLP. Jim Thomson is a principal with responsibility for Deloitte Consulting’s smart-grid activities in the United States.
The voice of the customer—often passive, but always powerful—has been part of energy providers’ strategic planning and program implementation initiatives for years. Whether through new rate- plan pilot programs, focus groups, or boards of directors representation, customers have expressed their concerns rationally and emotionally about commodity-price fluctuations, rising commodity prices, relative lack of control over consumption, and demand for renewable energy coupled with less reliance upon petroleum-based fuel sources.
Advanced metering infrastructure (AMI) and smart metering hold the promise of tangible cost, quality, and service improvements, but to realize those benefits, the customer will need to accept a new role by not just speaking out, but engaging with the utility and taking positive action. End users will have to move beyond passive input and take an active role in defining requirements for new and improved services, influencing operational improvements, and participating actively in programs and services that lead to improvements—all of which requires a change in long-established patterns of behavior.
Utility companies have been under pressure to address energy efficiency through AMI and smart-grid technologies. The implications of this shift create new mandates for utilities: to conduct strategic planning in an environment marked by patchwork legislation and non-integrated regulatory policy, to manage declining resource skill sets to address the demands of changing demand profiles, and to evaluate investment challenges for power portfolio diversification.
Rate cases submitted to public utility commissions often focus on operational improvements, but that focus typically is on low-hanging fruit related to reductions in infrastructure and overhead costs associated with manual meter reading and outage-management service operations. Some rate cases go a step further and suggest that technology improvements will add value through detailed data analysis that supports optimized grid control and improved load management, or through reduced commodity pricing for customers using demand-response programs.
The ideals and objectives are solid. It is timely and appropriate to advance them to improve customer service, utility cost structures, and the future viability of today’s utilities. Utilities must continue to drive operational improvements to meet regulatory, customer-initiated, and competitive challenges.
But action is required on both sides of the equation. The customer has a role to play, and utilities must educate the customer about new rate programs and the steps both sides must take to realize the benefits. Utilities should provide business intelligence portals to facilitate customer analysis. In fact, the utility has an obligation to make consumption information available to facilitate customer decision making and to drive customer interest, adoption, and behavior. On the other hand, customers must learn how to use these new tools, interpret data, participate in energy conservation and load-shifting activities, and understand the value that AMI brings.
Simply stated, utilities must re-engineer the customer’s perception of the utility relationship—in effect, re-engineering the customers themselves. The smart-grid value proposition cannot be achieved by the utility alone, so customers must participate in these new programs and technology solutions to realize and share the benefits with the utility. Energy prices traditionally have been described by inelastic demand curves, but now, the customer is in a more influential position to control the energy prices paid.
Information is Power
Although the focus of this discussion so far has been to communicate that significant changes are required on the part of the utility customer, two important points should be noted. First, better customer decision making requires timely, accurate consumption and pricing information. Second, customers need to understand the implications of their actions, both individually and in concert with other similarly motivated end users.
Perhaps the best way to continue this discussion is to provide some context to help understand the elements that affect commodity pricing. Fuel costs, global energy demand, and utility reserve requirements all have an effect on the prices customers pay for their electric, gas, and water services.
• Fuel costs: Even without the external pressure that regulatory and environmental policies exert, commodity prices for fossil fuels are on the rise in the aggregate, despite recent contractions in the price of oil. Rising fuel costs affect customers’ cash outlays not only directly, for fuels like natural gas that are delivered to them and consumed, but also indirectly, through electric rates affected by rising fuel costs related to electricity generation. Fossil-fuel increases combined with general price increases for raw materials required to construct, certify, and bring new generation facilities online are not getting cheaper, and will continue to drive costs higher.
• Energy demand: Global demand for fossil fuels is on the rise. Although the United States and Europe account for a significant percentage of total world demand, many developing countries and burgeoning eastern economies actually are responsible for higher comparative demand rates than are their western counterparts. Countries like China and India certainly understand the impacts of environmental issues, carbon emissions, and general supply and demand relationships, but their prevailing focus is on developing fossil fuel-based power generation infrastructures to support their growing economies and rising standards of living. China and India, for example, simply have prioritized their local improvement initiatives above the concerns of the global constituency. Increased global demand ultimately will lead to rising costs.
• Reserve requirements: Most utility companies are regulated by policies that mandate minimum reserve levels to ensure they can meet power demands during periods of peak demand—even though these peak demand levels are achieved only a few times during the year. Providers servicing regions that are experiencing growth in populations or power consumption typically have two alternatives to meet these requirements. One is to establish spot-market power-purchase contracts that can be engaged quickly to supply the required demand during peak periods. For example, demand rose so dramatically in California earlier this decade that predatory pricing practices were common, and the result was multi-fold increases in electric commodity charges. The second way utilities can meet reserve requirements is to invest in multi-million dollar projects for new or retrofitted generation facilities. Unfortunately, many of these plants go idle for long periods of time, and economies of scale never are achieved until general consumption patterns rise to threshold levels. Customers ultimately pay the price for these investments through rate-case adjustments, and the costs are always there regardless of plant utilization.
On the surface, AMI technology represents a maturation of communications and data technologies for the utility industry. AMI meters take automated meter reading (AMR) to a new level, facilitating two-way communications between utility control center operations and installed end points. While much of this technology has existed for years in supervisory control and data acquisition (SCADA) solutions, AMI represents a coming of age for the utility industry and its participants.
In its most simplistic sense, AMI initiatives have the capability to transform utility operations, utility cost structures, customer services, the cost of services, and decision making through a new flood of data that wasn’t readily available before. However, data alone will not improve the situation for the customer. Smart utilities should be able to improve efficiencies and drive down some system costs by implementing smart-metering systems and infrastructures. Examples include: reductions in labor and overhead expenses associated with manual meter-reading operations, remote connect and disconnect capabilities and missing meter reads and estimation procedures; increases in productivity gains associated with the shortened cash-conversion cycles and accounts receivables; and decreases in unbilled energy costs associated with revenue protection and energy monitoring.
Are these cost savings enough to justify the cost of AMI and meter data management (MDM) systems implementations? Probably not, given the many other competing pressures, regulations, and issues presented so far. This change by itself alters only the utility’s approach. Completing a successful transition to the new paradigm and realizing the hoped-for return on investment (ROI) is where the residential and commercial customer comes in.
Reducing Costs with DSM
As noted previously, customers continue to voice their displeasure with rising costs, unpredictable variances, and overall service. Regulators continue to voice concerns and enact regulations designed to further reduce operating costs through less costly, alternative energy sources and improvements to infrastructures. Because customers have the potential to reduce overall and event-specific consumption, demand-side management (DSM) theory and programs have risen to the forefront of solution discussions. If they can reduce overall demand, utilities may be able to limit or postpone the huge investment in additional generation sources that otherwise would be required to meet peak demand and regulatory requirements.
But DSM tactics rely upon actions to reduce or shift demand. AMI and smart-metering processes can provide the visibility that both customers and utilities require to take action, but the critical response actions must come from the customer. Drawing inferences from other industries such as consumer products, healthcare, and financial services, one can see that combining a rich flow of data with the ability to use it has contributed to the transformation of both cost structures and customer behavior. The utility industry is no different—perhaps just a bit behind other industries in implementing these solutions. Utilities do, however, face some complications and challenges associated with re-engineering customer behavior and action.
• Education: Utilities must educate customers so they can make more informed decisions based on how the amount and timing of their consumption affects prices. But not every utility truly understands how important it is to develop and execute a communications program that effectively brings this information home to customers and makes their options clear. To this end, any AMI project—already one of the largest and most important undertakings a utility can embark upon—also must include a program-management function specifically focused on the customer experience.
Change management principles and programs often are overlooked or assumed to be less important than technical issues and process re-engineering efforts, but they deserve just as much concentrated leadership and vision.
• Overcoming aversion to change: Although change, flexibility, and acceptance often are regarded as necessary contributors to the advancement of new ideas and technologies, people do not inherently accept change. They often fight it. One of the most prevalent and important challenges to be addressed is the customer experience itself. Move-ins and move-outs are perhaps the most intense customer interactions with the utility (and its fee structure), but for most customers, it is the routine monthly bill cycle that reflects consumption, commodity, and distribution charges—and attracts their interest as cost-conscious consumers.
When AMI comes to town, the customer experience must address basic elements of communication that explain why these changes are needed. Customers need to understand that they are part of both the problem and the solution. How do I take action? What do I need to do to lower my immediate and longer-term costs? What decisions should I be making to help lower my overall costs? An informed consumer is often the best consumer.
Customers who understand how their actions affect anticipated outcomes are in the best position to change and improve the overall situation. But they have concerns beyond the pocketbook that must be addressed as well. Some early focus groups have uncovered concerns about the utility’s potential capability to peer into customers’ lives, Big Brother-style. Other concerns surround the prospect of giving up control—such as when AMI enables the utility to reduce consumption by turning off equipment, lowering heating settings, or raising air-conditioning settings.
The answer to these concerns lies in other behaviors with which customers are better acquainted. Most people have become comfortable registering for automated bill-pay services through banking institutions to prevent late payments and their associated fees, installing spyware software to run in the background to protect from intrusive and damaging hacking actions, or setting limits for purchases or sales of equity positions with online trading accounts to limit financial exposure. In effect, it is an accepted value proposition that certain technologies and control features can limit exposure to risk, reduce costs, and improve service. The anticipated benefits of AMI and its related technologies aren’t all that different from these other scenarios. Even more important, customers who understand them can better understand how their actions ultimately affect their pocketbooks.
In this respect, the situation requires not only a smart consumer but also a smart utility—one that educates the consumer and offers online information tools, demand-response programs, and new rate structures that better align decision making with consumption and pricing.
• A new relationship: A third complication associated with customer adoption of AMI involves the new relationship the utility has with its customers—and how both sides prepare for it. Utilities must be aware of three critical tenets that drive customer behavior and adoption.
Utilities need to manage the expectations of both customers and internal stewards. Properly designed AMI implementation strategies must include pre-, during-, and post-implementation communications programs. Customers, service technicians, installation vendors, and customer-service representatives all need to understand what can be achieved and, more important, how. If the focus is purely on compliance with policy and regulation, the full potential of AMI likely will be missed.
Internal stewards and business leaders must understand that at the heart of AMI, use of smart metering, and smart-grid programs allows for a reliance upon improved data acquisition, modeling, and decision making—all of which can help improve operations and increase customer satisfaction through improved services. By shifting and reducing loads to flatten spikes in demand, utilities can improve service levels, power quality and offer new rate programs and demand-response programs that lead to optimized energy-supply management, lower system costs, and pricing contractions for customers.
Beyond working out the full mechanics of an AMI program implementation and internalizing the changes customers will experience, the utility must ensure that the AMI value proposition clearly is understood throughout the organization and by the customer.
Customer benefits must be clearly identified for both the immediate and longer-term horizons. Customers need to understand, “what’s in it for me?” While many people genuinely are concerned about societal benefits and their roles in helping to achieve them, customers are much more responsive to the prospect of benefits for themselves.
Finally, the value propositions must be reinforced multiple times and by multiple methods. The selection of various messaging mediums—including focus groups, town-hall meetings, segmentation-specific messaging, field communications during deployment, and ensuing billing statements—should provide continuous reinforcement of goals and objectives, progress, and performance. Clear and insightful information about how demand-response programs work, including calculations of baseline demand levels and capacity reservation charges, can help reinforce how customer performance is measured and benefits are achieved.
Success Factors and Practices
With any major technology or program implementation, especially those associated with disruptive technologies and major transformation efforts, many strategies exist that can make or break the successes experienced both internally and externally. Not all strategies and tactics will have the same result or anticipated results. Following are some suggested approaches that utilities should consider as part of their AMI program implementations to increase the probability of high customer adoptions.
Utilities must understand that a phased approach can yield many more benefits than an all-consuming set of program, process, technology, and communication initiatives all implemented at one time. Proper design, sequencing, and timing of program components all are important.
AMI technology is developing at a quick pace, and vendors constantly are upgrading their products and offerings in response to utility-led and customer-led functional and technical requirements. Although some vendors are moving more quickly than others, some early solutions only address partial functionality. Although these companies devote substantial resources to the development of future release schedules and roadmaps, utilities need to balance investments and schedules by considering the effect of waiting for standard integration offerings against the pros and cons associated with custom development approaches.
Given the complex nature of system implementations and the broad effects they can have on company operations and customer experiences, many utilities should consider the value of allowing technology and process changes to settle and prove themselves before moving forward with implementation of demand-response programs and additional technologies such as home-area networks and load-control devices. Taking smaller, focused steps toward full transformation and building upon early successes can yield better results than implementing a larger number of designed solutions that ultimately may not work in an integrated fashion. Unless it works flawlessly, an all-at-once approach actually may substantiate customer fears and fuel negative customer perceptions of the program. Additionally, the utility may experience increased, yet avoidable, costs due to unproven integration and execution issues.
The utility should make the transition for the customer as simple and effective as possible. If something isn’t easy, people often take the approach that it isn’t worth the effort to learn and participate. This is exactly the kind of reaction that should be avoided—otherwise the utility and the customer will not be able to realize the purported benefits that AMI and smart-metering programs are designed to achieve.
Seven demand-side program-management design points should be considered as part of any implementation. Each will have an impact on the level of customer adoption.
• Rate design: Rates will become more complicated and customer inquiries likely will increase. Effective communication programs and scripted scenarios for customer-service representatives should help customers understand the objectives, format, and design of rate programs. Rate structures like peak- time rebate that provide incentives for participation through reduced commodity charges during demand-response events and discounts for smart-device installations can motivate customer participation. Penalties for non-participation should be reflected in higher energy charges, not as fees for not installing load-control devices or device overrides.
• Communications: The frequency of updates and selected communication mediums must be clearly planned for. Value propositions must be clearly understood. Pricing structures must be easily comprehended. Demand-response events need to be easily communicated and executed.
• Enrollment: Although three primary options for program enrollment exist (mandatory enrollment, opt-in enrollment, and baseline enrollment with opt-out participation), only mandatory enrollment or baseline enrollment with opt-out capability provides the largest pool of candidates to participate in demand-response programs. Opt-in programs require the utility either to take a passive position of customer education with reliance upon customer inquiry and action, or to enact a formal sales campaign to identify prospective candidates, contact them, and recommend enrollment and participation. This approach likely will cost more and take more time.
• Benefit quantification and general support: Customers need reinforcement of the benefits to continue in these programs. Real-time consumption and savings recommendations provide additional reinforcement and commitment. Reinforcement mediums may include personal savings statements, quantification of the societal benefits a customer’s participation has generated, and real-time pricing communications via in-home display devices.
• Device ownership and cost recoup: Customer meter and equipment surcharges have caused programs to fail in the past. General rate-base recoup, where the cost of the devices is applied to all customers equally through rates, is optimal. Utilities must develop procedures to facilitate the integration of customer-provided equipment into demand response, MDM, asset-management, and load-control systems.
• Device functionality: Technologically-advanced devices with automation can better respond to demand-response events. Manual interaction of any form usually decreases the participation rate, and thus the benefit of the program.
• Customer control: Tools such as business intelligence portals, historical consumption analysis, and predictive cost modeling can help customers determine what price levels are acceptable—and decide when to shift loads to other times when pricing is more palatable. Customers will have greater control over the services they receive, when they receive them, and what prices they shall pay for those services.
Finally, utilities should consider implementing comparative-analysis tools that allow customers to see how their participation in various rate programs and rate structures compare to others, thereby facilitating their decisions to enroll in one program versus another.
AMI and smart-meter technology and implementation programs involve a complex, broad array of challenges. Additionally, a large majority of the potential benefits provided by AMI are in fact related to customer acceptance and participation in new programs designed to lower system operating expenses and energy-consumption charges. Effective communications and change-management programs supplemented with novel, easy-to-use and understand tools and technologies will increase the likelihood of the utility and the customer reaping and sharing the rewards associated with AMI implementations.
There is a follow-up to this article: Bringing Customers On Board, Part II.