The following is a Viewpoint by Philip Mihlmester, executive vice president at ICF.
Forward-thinking companies, like Amazon and Apple, are changing what customers expect from their service providers, including utilities. As a direct result, consumers are increasingly interested in alternative energy choices that give them greater control, comfort and convenience.
Increasingly, consumers expect a full menu of options that they can customize to meet their energy preferences, whether those are focused on controlling energy costs, improving the comfort and security of their homes and businesses, promoting environmental stewardship or other interests. For utilities, this provides an opportunity for value creation, which is increasingly driven by anticipating and satisfying these changing customer needs.
Utilities today are well-positioned to provide new products and energy options, which can generate fresh revenue streams and earnings opportunities. The relative revenue potential of these opportunities, however, depends on a number of factors, including market demographics, regulatory treatment and capital availability.
At a high-level, the most promising options in the short-term are programs that increase revenue without requiring major capital outlays and are scalable. Examples include growing sales through beneficial electrification programs and creating new revenue streams through value-added services that expand on current capabilities, such as online marketplaces and connected home programs.
Investing in customer-facing assets and launching new lines of businesses typically come with greater regulatory and operational hurdles, but diversifying a utility’s business model can bring significant benefits when properly executed. Here are a few paths utilities can take to enhance customer engagement and grow their businesses.
Increase sales through beneficial electrification
Utility electrification programs have progressed well beyond the pilot stage, producing a program model proven across a number of long-running utility success stories like Houston-based CenterPoint Energy’s forklift electrification program – launched in 2008.
The CenterPoint program, which is largely driven through forklift dealer engagement and training, results in an average of 3.7 MW in load growth per year. Programs are evaluated based on load growth delivered, incremental operating margin and return on investment (ROI). Load growth and operating margin are highly variable based on the size of the program, but ROI is very favorable due to the long life of the installed equipment.
Electric light duty vehicles (EVs) also represent a significant potential source of new electricity sales in the long-term. Utilities are actively promoting EVs through marketing activities such as ride and drive events, employee engagement through workplace charging initiatives, rebates for charging equipment and, in partnership with automakers, vehicle rebate programs.
A successfully rolled out [electrification] program can quickly result in improved local air quality, reduced greenhouse gas emissions and customer cost savings.
Executive Vice President, ICF
A key factor limiting the growth of EV ownership is the lack of publicly accessible charging infrastructure. Nationally, the government is establishing a network of charging infrastructure along highway systems.
In general, beneficial electrification programs promote the use of electrically-powered equipment over fossil-fueled equipment across a variety of applications.
Several utilities in California, Hawaii and Nevada are also looking at transportation electrification as part of an integrated grid strategy, where EVs and batteries are managed to address a variety of grid needs. For example, Hawaiian Electric wants to electrify the state’s entire transportation system – including the airport, ports, fleet vehicles and cars. One of the reasons they want to do this is to soak up all the excess generation they have from solar in the middle of the day.
Indeed, a successfully rolled out program can quickly result in improved local air quality, reduced greenhouse gas emissions and customer cost savings.
Utilities looking to enlist electrification programs may benefit from efficient use of excess capacity, improved utility load factor and increased customer satisfaction. Program participants may also benefit from reduced energy costs and cleaner work environments. Further, as the larger energy supply shifts to low and no carbon resources, the environmental benefits of electrification increase.
Consider offering value-added services
Value-added services are specialized services provided to customers and/or third parties in exchange for a fee, revenue sharing mechanism or other financial benefit. These same resources can be used to provide value-added services to third parties, who can use this data to inform their business strategy and reduce customer acquisition costs.
In addition to leveraging readily available resident data, utilities can leverage their experience designing and installing electric infrastructure to provide turnkey projects, such as installation of CHP on microgrids at customer sites to improve reliability. Other examples of utility product and service strategies are online marketplaces and connected or smart home offerings.
Online Marketplace: With 8 out of 10 Americans now shopping online, ecommerce marketplaces are gaining in popularity as a vehicle to add to revenue and provide another touchpoint to build engagement, satisfaction and trust along a customer’s energy journey.
Most utility marketplaces have their start in lighting catalogs (think specialty light bulbs) and online fulfillment. They have advanced since those days, but the market has characteristics of still being in the early stages, including a rather fragmented and complex vendor landscape comprised of different providers, different fulfillment vendors, different software platforms, etc.
Existing utility online marketplaces vary in their scale and scope. ComEd’s Marketplace, for instance, sells lighting products, smart thermostats and other connected home devices. As utilities move towards more of a platform model, marketplaces can play an ever greater role in enabling customer choice through the offering of products and services that also provide value to the grid.
Connected Home: The growth of the smart home market provides an opportunity for utilities to generate new revenue streams by offering customers home automation and related services.
Consulting firms work with utilities to introduce new offerings based on the installation of smart home devices connected to a universal app that provides automation, energy monitoring, preventative maintenance and protection alerts. The app becomes a new channel for utilities to reach customers and leverage insights to provide a richer and more personalized customer experience and potentially increase energy and demand savings captured through the DSM portfolio. These programs are typically easy to scale and can generate revenue for utilities through equipment margin, monthly fees and referral fees.
Further, we’re getting closer to realizing the concept of the utility as a platform, with the distribution grid serving as the interface between the utility, customers, third parties and the wholesale market. In this role, the utility would serve a market enablement and value creation function — facilitating new third party products and services, connecting buyers and sellers, and enabling market transactions, including selling grid services into the wholesale market.
Smart Cities: As utilities upgrade and modernize their infrastructure to support a two-way flow of electricity and new services, they can also support smart city initiatives, which use digital technologies to optimize urban services such as gas, water, electricity, transportation, lighting and heating. Rather than duplicating the investment, cities and communities can leverage electric utility investments in meters and secure communications networks to operate these other services. This can result in significant cost savings for the municipality and a new revenue stream for the utility (infrastructure as a service).
Often, value-added services leverage existing marketing channels and related IT systems and back office support to effectively target customers and streamline the utility’s service offering.
Grow rate base through DER
One of the primary ways utilities create shareholder value is by investing in assets and increasing the rate base on which they earn their authorized return. New customer offerings that allow for utility ownership of program assets, such as owning a community solar array or distributed energy resources (DER) offered as part of a customer program, provide an opportunity to grow a company's rate base and increase earnings.
This is likely a greater opportunity for vertically integrated utilities, as they typically face fewer restrictions on asset ownership compared to utilities in states with retail competition, where there may be rules prohibiting utility ownership of generation assets and/or prohibit utility ownership of assets behind the customer’s meter. Where not prohibited, the potential advantages of diversifying utility asset bases to include distributed generation and other DER must be balanced against the potential for anti-competitive behavior that will limit market growth, slow innovation, and disadvantage other competitors.
Some examples of asset-based technologies that can be considered for utility ownership include rooftop and community solar, smart inverters, energy storage, microgrids and combined heat and power (CHP).
In fact, an in-depth study of the CHP potential for 10,000 SoCalGas sites conducted by ICF helped them develop an innovative business strategy to offer enhanced CHP services to customers, including the option of having SoCalGas build, own and operate CHP equipment on a customer’s site. To support this business approach, SoCalGas requested (and received approval of) a new tariff to offer CHP as a service to an individual customer with the CHP investment added to SoCalGas’ rate base.
By aligning customer value with utility value through the offering of new utility products and services, utilities can establish a sustainable framework that helps them adapt to industry trends and capture new strategic growth opportunities.
Executive Vice President, ICF
While the CHP business case is more straightforward for gas utilities, which will sell more gas, the approach represents an opportunity for electric utilities as well. In many states, electric utilities can treat CHP investments as rate-based supply assets, the same as any other supply-side investment.
With utility ownership of a CHP asset, the utility earns on the invested capital and continues to serve the full customer electric load, without the loss of revenue that occurs when a customer invests in CHP. Ultimately, investing in assets that enable new options for customers can benefit utilities and customers, including currently under-served populations.
Develop new lines of business
Some utilities are exploring and opening new lines of business, such as appliance servicing and repair, home warranty services, vegetation management, real estate services and outdoor/security lighting. These services are typically offered through an unregulated affiliate subject to code of conduct rules to ensure a level playing field. For example, Duke Energy provides home protection plans as market-based, unregulated offerings, which include but are not limited to home wiring repair, surge protection plans and HVAC repair.
Other examples of utilities offering competitive products and services through unregulated affiliates include Exelon (Constellation Energy). Additionally, several utilities are investing in technology companies or forming strategic partnerships with third parties. American Electric Power (AEP) recently invested $5 million in the energy storage software provider Greensmith and is currently partnering with them on an energy storage system in West Virginia. Ameren, National Grid, Southern Company and Xcel Energy, have teamed with Energy Impact Partners — a private equity and venture capital firm — to invest in innovative energy technology companies.
Aside from investment returns, utility-involved energy partnerships can benefit through enhanced visibility to energy-conscious customers and understanding of the emerging technology landscape for pilot opportunities.
Business model diversification pays
The utility industry is continuing its move away from a commodity-based business toward a customer-centric model that seeks to uncover new sources of value for customers. For many utilities, this requires a reassertion and strengthening of their role as a trusted energy provider and enabler of choice.
By aligning customer value with utility value through the offering of new utility products and services, utilities can establish a sustainable framework that helps them adapt to industry trends and capture new strategic growth opportunities. Customers benefit through greater personalization of their energy experience and utilities can benefit by creating new sources of revenue that can hedge against declining sales growth and other competitive pressures as well as improve customer satisfaction.
Philip Mihlmester is an executive vice president at ICF. He has over 30 years of experience in the technical and management direction of engagements in the energy, environmental and quantitative analysis areas.