Look to other industries for lessons on marketing services.
Rich Huntley is practice leader—energy efficiency and demand response at Vertex Business Services.
North America has begun its seemingly relentless march toward the smart grid. Business cases already are approved in states such as California. Encouraged by regulators, utilities have filed for, and in some cases were awarded, stimulus grants. The National Institute of Standards and Technology (NIST) has issued its framework and roadmap for smart-grid interoperability. Among regulators, utilities and associated consultants and advisors, millions of dollars and countless hours of brain power have been invested in smart-grid technologies.
But will there be a return on this investment? Part of the rationale for most of the smart-grid and smart-metering activities is the premise that customers would participate in programs or modify behavior to lower consumption. Through various methods, customers also would shift or lower peak usage. With the exception of Ontario, Canada, almost all customer programs and time-based rates currently are optional. According to Chartwell research, 1 percent of the federal stimulus money was awarded for customer systems, while the rest was granted for other parts of the smart-grid landscape including crosscutting, AMI, and distribution. So the question remains: How does a utility get a meaningful number of customers to participate in the rates and programs facilitated by smart meters and smart communications? If utilities don’t succeed with this now, how much of the investment will be wasted? This is a question not just for utilities, but for the regulators who approve their plans. Have regulators imposed the same level of hard questioning and scrutiny around this key element of the plan as they have on other areas?
The good news is that with a smarter, more dynamic infrastructure, utilities can offer a plethora of programs, from innovative pricing through direct load control all the way to cogeneration. The development of these programs is vital if utilities are to harness the technology in a way that will improve their businesses and operations.
It’s not as simple as creating small piecemeal programs. For the utility company, each program absorbs time and money and only will be worth pursuing if there’s critical mass achieved. To make these business-critical programs worthwhile, utilities must develop strategies to drive increased program participation. Put simply, after investing significant sums on infrastructure, single-digit program penetration numbers can’t be considered a success and won’t create the results that utilities require.
Take a simplified example: a smart-meter budget of $300 per endpoint. If $100 of that amount is expected to create a demand-side benefit and only 5 percent of customers participate in programs, then it costs $2,000 per participant. Although this oversimplifies the complexities of a roll-out program, it serves to illustrate the challenges of gaining sufficient adoption for programs in order to justify the technology investment.
A competitive company such as a credit card company lives or dies by getting its customers to evaluate, enroll and participate in programs, products and services. To do this, the company deploys time-proven activities such as customer segmentation, collection of data, targeted offers, proactive reach and incentives for program enrollment. Would utility regulators have sanctioned utilities’ use of only their historical customer marketing strategies if they had appreciated their significance? The presumed answer is no, which begs the question: Is the extent to which this can make or break the smart-grid investment fully appreciated by all stakeholders?
It’s probably fair to say that U.S. utility industry managers know less about individual customers than do their retail or financial services counterparts. This lack of understanding exists because until now, it wasn’t necessary to know any more about the customer; universal obligations to serve each equally have ensured that customer-specific data has been, at least in some part, irrelevant. In the eyes of the energy company, one residential meter is essentially the same as another in terms of delivery of the energy commodity and engagement of the customer.
Also, if targets for existing programs generally have been determined on a small scale, why be aggressive trying to target the right customers? Only when targets and goals increase does the focus turn to those who not only have the propensity to participate, but the profile to deliver desired results. As noted, these targets are set to rise.
Some may argue that open markets will provide the solutions—that markets will create the competitive environments needed to deliver innovative approaches to energy efficiency and other products and services. This remains to be seen, as retailers in Texas have only recently begun introducing time-of-use pricing to their customers.
Historically, the distribution companies have driven the development of innovative smart-meter and smart-grid infrastructure, while for the most part the retailers sat on the sidelines. Why is this? Perhaps Texas retailers have been more interested in remote disconnect functionality as an enabler of collections, rather than developing innovative time-based rates to appeal to their customers. This focus might see pre-pay meter deployment leapfrog innovative demand-response strategies in terms of priority among retailers.
These observations aren’t meant as criticisms. The logic of the retailer is understandable given the market, but if these observations hold—in competitive and non-competitive markets alike—the same situation will play out across North America as technology gains more of a foothold. Utilities deploying smart-meter technologies must think about what they’re now selling. It’s not just kilowatt hours or even the ability to cool homes, but programs that benefit customers and the system at large. Obtaining customer consent and participation will require new marketing and customer-management techniques that are prevalent in other industries. In the very near future, there will be a shift to a relentless focus on having compelling offers and getting customers to buy into them.
Utilities might not have to persuade the customer to buy the commodity, but they will have to offer innovative products targeted at particular segments of their customers. Regulators will need to give the same attention to a utility’s plan for proactive outbound campaigns and one-to-one marketing as they gave to their decisions to select a fixed or mesh radio frequency network.
Programs and Products
The process of energetic and proactive customer engagement is no longer simply nice to have. Engagement is rapidly becoming a necessary skill that all utilities must acquire. As we start to collect data at a more granular level, this capability will allow companies to access and overlay other data sources to better match the right programs with the right people.
Smart-meter technology has the potential to create new billing paradigms that aren’t encumbered by constraints such as meter-read cycles. Programs can be developed that allow customers to select bill dates and bill frequency. Naysayers will present objections regarding such constraints as batch billing windows, data privacy and concerns about the complexity of deploying these campaigns. But if other sectors are deploying technologies to overcome the exact same issues, utilities have to ask, “why can’t we?”
In a utility industry with smart meters and accompanying infrastructure, there will be no need to wait until the end of the month to receive a bill. Customers could gain access to their usage information when they want, and enjoy services that in many ways are closer to those they currently have with cell-phone companies. Beyond this, they could set alerts to tell them when certain spending thresholds are met or even perform “what if” analyses on thermostat changes and appliance usage to decrease energy expenses. In time, utilities even could let customers decide for themselves the frequency and timing of their bills, allowing them to synchronize the delivery of bills with their ability to pay. This ultimately will reduce time-consuming arrears collections and will improve positive customer experiences as a result of better-managed consumption. Creating services around the needs of customers results in many more examples than just support for an in-home display.
A recognized part of the smart-meter business case involves better understanding outages and restoration of services. Many questions remain such as: Is the customer significantly represented in this discussion? Will outage notifications grow more sophisticated and indicate the nature of the issue and estimated restoration times? Will customers be able to nominate third parties to receive this information so, for example, neighbors can turn off the water to prevent pipes from freezing or remove food to stop it from spoiling when the customer is away during an outage?
As with any vision, achieving it requires work, but it’s best to start with an appreciation of what’s possible. Few transformational accomplishments have ever been achieved by setting conservative goals and safe targets.
Right People, Right Products
As this richer tapestry of rates and programs becomes available, how will utility customers know which are right for them? How will they select the rates and demand-response programs that are appropriate for their lifestyles, budgets and behaviors? Customers will look to their utilities for the tools to make data-driven, informed decisions. In turn, utilities can look for lessons from those industries where survival depends on understanding everything about the customers and exceeding their needs and expectations—both realized and unrealized.
Utilities will need to make sure they identify the customers that have the propensity to participate, and the usage to deliver the kinds of load shifting and consumption reductions that are in the smart business case.
Think for a minute about buying a book on Amazon. The Web site offers suggestions as to additional items the customer might like based on previous purchasers’ baskets of goods. Tools such as this weren’t commonplace until relatively recently, but as the data began to be captured and analyzed, it became a very profitable tool for the retailer and a well-liked advisory feature for customers. Could utilities do something similar—alerting customers that others with the same consumption patterns have opted for pricing programs A and B and reduced bills by X percent?
In competitive markets, the data might be used to identify customers who are primed for up-selling or cross-selling innovative service bundles. For example, a customer with data that shows consumption usage in line with a reliance on air conditioning might be a strong candidate to target for an appliance service contract. The good news is that even for regulated utilities, tremendous opportunities exist.
Marrying consumption patterns with external data such as green propensity scores can increase the effectiveness of these campaigns. Potentially, the targets for an A/C cycling program could be the pool of customers who have central air conditioning. However, if the program concerned rebates for more efficient air conditioners, it would make sense to remove from this target list those customers that have bought a unit in the last two years. This isn’t data the typical utility has or tracks today, but such data is available.
Utilities need to separate their obligations to make all programs available for all qualified customers from their proactive focus on the best prospects—i.e., those customers that have the propensity to participate and the ability to deliver the desired results.
The data also can assist in identifying customers who would be ideal candidates for control technology for central management of appliances such as air conditioning. According to Stephen George, a principal consultant at Freeman, Sullivan & Co., “combining price signals with control technology can increase demand response by as much as 50 percent in some markets.” If utilities execute programs effectively, they will see an increase in participation and much greater returns on their investments in the smart grid.
Other industries have gone down this road and so must the utility industry. The alternative would doom utilities to operate blindly, as some local phone companies do, sending customers bill inserts for services that can’t even be provisioned at that particular house. A smarter approach is the way of the future, not only for grid technologies but also customer-engagement strategies.