By Gadi Solotorevsky, cVidya
When Bob Dylan wrote “The Times They Are a-Changin” in 1963, it’s certain he did not have in mind what would eventually take place in the electricity utilities market in 2015. Given that he wrote the song in the hopes that it would be an anthem for all types of change afoot, maybe he wouldn’t mind it having a place in what is currently taking place in the utilities market. All this provided, of course, that he’d be paid royalties for its use.
So what is the change taking place, and, just as importantly, what does it mean? Could this new dawn result in substantial risks for both providers and consumers, along with the potential for greater rewards?
The electricity market is becoming more complex and segmented in the areas of production, transportation and distribution of electricity. This, in turn, is opening up the market to greater competition, resulting in a multitude of companies competing against each other for customers who have options when selecting a utility provider.
Concurrently, some utilities are witnessing a shortage of supply, and struggle to provide electricity at all times to all customers, especially during periods of peak energy consumption. This means the cost of providing electricity over certain thresholds can be high, as extra capacity must often be purchased from third parties in order to keep up with customers’ usage.
One answer to short supply and high cost is demand response (DR), a concept by which electricity companies can adjust prices according to demand. This can include raising prices when customers are approaching their limits or charging more in the evening during peak usage, while lowering charges during the off-peak and morning hours or both. The ultimate goal is for utilities to be able to provide clean energy at prices that make sense for everyone. Several challenges to this seemingly straightforward approach exist, however.
Admit the Waters Around You Have Grown
Utilities must be able to offer their customers attractive price plans that also are good for business and allow providers to intelligently control electricity usage. To accomplish this, however, customers must opt-into DR and be willing to sign a contract for dynamic pricing. Analytics are required for utilities to be able to assess their customers’ requirements and habits in relation to their own distribution capabilities, so they can offer them the best possible plan.
Many utilities are currently losing large amounts of revenue through “non-technical” losses, such as fraud and revenue leakage. Causes of non-technical loss vary from operational losses, such as meter manipulation and energy tapping reading errors to financial losses caused by missing or late payments, rating errors and undercharging or overcharging. Any or all of these can lead to losses of up to 20 percent, depending on a country’s maturity. In 2009, this translated into varied monetary losses, in some cases in excess of $5 billion per year, according to Bloomberg. The ultimate goal, therefore, is to reduce electricity usage during peak hours, when a loss of just 10 percent can be significant.
The ability to detect fraud and leakage enables companies to immediately reduce energy losses, requiring a lot of complex analytics around the customer, to track their behavior and identify fraud and leakage. For example, if a customer’s electricity usage inexplicably drops, analytics can determine if this is a legitimate fall because the customer is away on vacation, or due to more nefarious circumstances, such as bypassing the system and syphoning electricity from a neighbor. Utilities can therefore classify customers by harnessing analytics to track their behavior over time, thereby learning to identify fraud and leakage.
Many companies today only detect leakage physically, through sending personnel into the field. This operation is expensive, however. Some European companies perform more than 150,000 physical inspections per year-resulting in enormous costs, and also limiting the amount and type of leakage that can be detected.
You Better Start Swimmin’ or You’ll Sink Like a Stone
The utility market is moving inexorably toward widespread smart meter adoption. Prior to smart meters, analog meters were seldom read more frequently than once per quarter and only small amounts of data were collected, meaning there was less data for utility companies to analyze. Smart meters allow readings to be taken hourly, or even every few minutes. Utilities now have vast amounts of information with which to work, so deeper and more varied analytics are possible
Smart meters are essential equipment for utilities of the future, but they have not been universally welcomed with open arms. Counter-movements aiming to forestall the adoption of smart meters exist. On the customers’ side, arguments against smart meter adoption include accusations of unreasonable bill increases, privacy infringements and possible health ramifications.
As meter readings become more frequently and larger amounts of data are collected, consumers can take greater ownership over their energy consumption and electricity charges no longer must remain fixed. Pricing, therefore, will become more complex causing confusion for both customers and electricity providers.
Utilities will be challenged to transition customers to smart meters and the new price plans. Utilities are concerned about the risk of bad press, as even a small error can result in many users reluctant to sign on to smart meters. This is particularly significant with regards to “bill shock”-customers being hit with surprise bill increases, sometimes exceeding tens of thousands of dollars.
Bill shock can be caused by various issues and a number of bill shock cases have been reported in the media over the last few years. For example, in 2014 an article titled “Why Hydro One’s billing is Under Attack” in Toronto’s The Star newspaper wrote about meter-related issues at the utility. The article highlighted late billing and back-billing, whereby customers did not receive bills for a number of months (sometimes years), only to be hit with backdated and grossly inflated bills based on estimates from outdated meter readings. Problematic transformation projects also contribute to bill shock and have resulted in more than three million UK energy consumers being overcharged in 2014, including 16 percent of Scottish Power’s customers, due to problems caused by the implementation of a new billing system, according to a story in The Guardian. Other contributors to bill shock include incorrect pricing, meter failure, clock accuracy and fraud.
The Line it is Drawn
Bill shock leads to a bad reputation for the utility. This, in turn, makes customers more reluctant to adopt smart meters and can even drive customers away and into the arms of the competition. In addition, regulators can impose penalties on utilities, resulting in additional losses.
The causes and potential ramifications of bill shock are real threats to the adoption of smart meters. The good news for utilities is that the problems that cause bill shock can be detected and, if not prevented, at least corrected effectively, preserving goodwill between customers and their provider.
The correct solution, as illustrated in Figure 1, combines the implementation of smart meters with customer education and suitable demand response plans, tailored to individual customers’ requirements through effective analytics. The result is “smart utilization.” Utilities can then enjoy greater savings, thanks to appropriate demand response plans, fraud mitigation, accurate meter readings and peak usage regulation, resulting in reduced costs for the customer with accurate and timely billing. More and more customers can then opt into smart metering plans, resulting in an increased return-on-investment in smart meter adoption.
There are significant positive ramifications for utility service providers that implement analytics-based smart meters. For those who do not employ analytics, as Dylan’s lyrics warn “…the first one now will later be last, for the times they are a-changin.'”
Gadi Solotorevsky, Ph.D, is the CTO of cVidya, a supplier of revenue analytics solutions for utilities, communications and digital service providers. He has more than 15 years of experience developing and deploying revenue analytics solutions and methodologies. Dr. Solotorevsky is one of the founders and the chair of the revenue assurance modeling team of the TM Forum. He is also one of the authors of the TM Forum documents TR131 and GB941 that are today the de facto standard in revenue assurance best practices.