BY JOHN PETERS, ENGAGE CONSULTING
Where there’s change there is opportunity, and in the utilities industry, the introduction of smart meters is one of the most far-reaching changes of recent times. The opportunities for new revenue for energy suppliers-and some of the risks-begin with the rollout programs and range from new tariffs to more accurate settlement and smarter homes.
Underpinning the creation of new products and services is the communications infrastructure that advanced meters and smart grids provide. The availability of high-resolution, timely data about customers’ energy usage offers suppliers the opportunity to realize new revenue streams and better protect themselves from competitors. Further, advanced meters can be configured remotely, thus eliminating the burden of changing meters when tariffs and services change.
It is unlikely, however, that advanced metering will lead to increased revenue for energy suppliers through traditional means. In territories where in-home displays (IHDs) will be common, advanced metering will lead to reduced domestic energy consumption and revenue. Despite the expected reduction, opportunity exists for suppliers to engage with customers. If a customer looks upon a supplier favorably for services or advice that might reduce consumption, that customer might stay with the supplier longer, increasing customer lifetime value, according to writings on loyalty by economists Frederick F. Reichheld and W. Earl Sasser. For new revenue opportunities, one must consider what advanced metering enables in product and service diversification.
An engagement touch point with every customer
Installation offers an early engagement touch point with domestic customers. Access to data is key to enabling new smart-enabled services, and for this to happen in the U.K., at least, customers can opt in to sharing fine-grained meter-reading data with their suppliers or third parties for energy efficiency or marketing uses. It is in the suppliers’ best interests to ensure customers see the new meters positively and understand the features and benefits of meters and IHDs. This data is so valuable that suppliers might find it advantageous to offer customers an incentive for sharing the data with them. This incentive could take the form of a loyalty scheme, a small discount or a commensurate charitable donation.
Recognizing that the success of smart metering relies largely on consumer perception of the meters, the U.K. Government Prospectus Response of March 2011 concluded that energy suppliers should develop and follow a licence-backed code of practice governing the installation of smart meters. This was submitted to Ofgem in December. The main objectives of the code are to ensure customers receive a high standard of service throughout the installation process and know how to use and benefit from smart metering equipment to improve their homes’ energy efficiency.
Smarter marketing, retention
As customers opt into sharing their data and gain improved visibility of usage patterns, suppliers will be able to segment the customer base accurately, enabling more targeted marketing. A program of offering customers tariffs that will save them money based on their consumption patterns likely will be well-received and will improve retention. A similar strategy is employed by service providers in the fiercely competitive U.K. mobile phone market and serves to protect revenue from competitors while assuring new customers they always will be on the best tariff for their usage. The availability of more data also unlocks the opportunity for tailored energy efficiency advice that could lead to improved customer retention. Further, that same data could be used to encourage behavior change, for example, by showing a customer how his or her energy consumption compares to that of similar homes in the neighborhood.
Customer opt in is also the key to smart home services. Advanced meters are a direct line into homes. This remains some way from realizing a fully integrated and automated smart home for the mass market. Opportunities exist, however, for suppliers that can combine home monitoring with home control. British Gas paints a compelling picture of a future home where metering, demand management and remote control has been fully integrated to provide remote control of heating, appliances, home security and electric vehicle charging. By developing a model of typical consumption in a home, suppliers also will be able to identify anomalies in energy consumption and use this to offer alert services. For example, is an appliance regularly using more energy, suggesting an imminent breakdown, or has a vulnerable person not turned on the heating on a cold day?
Linking advanced metering with demand management will support the introduction of new and innovative charging models. For example, suppliers could offer new lifestyle energy pricing wherein a customer could say, “Maintain my home at 17 degrees C in the evenings.” The supplier then would manage heating within the home to achieve the target temperature and bill the customer accordingly.
There are, however, policy issues that could restrict the use of advanced metering infrastructure to provide value-added services. There is a risk that regulators in the U.K., at least, will not look favorably upon moves by suppliers to provide extra services to consumers across what is a monopoly-owned infrastructure despite provisions for third-party access to the infrastructure. Despite the challenges in the U.K. market, vertically integrated suppliers in the U.S. and elsewhere are experiencing some success in using smart grid infrastructure to deliver value-added services such as home security or telemedicine. It is unclear, however, how well the metering infrastructure will compete in the longer term against alternative communications infrastructure, not least of which is consumers’ own home broadband service.
Smart metering data also could enable changes that make the settlement process more accurate, giving suppliers more of an incentive to encourage off-peak energy use by customers.
In the U.K., settlement is based on half-hourly time units. Actual meter readings might be taken only monthly or quarterly. Settlement calculations, therefore, are based upon profile classes, which represent average customers and allocate monthly consumption against half-hourly time slots in a standard profile.
If a supplier’s customers begin to move demand away from peak periods, for example, through time-of-use tariffs, the supplier will not fully realize the benefits of that behavior change because customers are being settled according to the standardized profile classes. As more fine-grained metering data becomes available, the settlement process could reduce or eliminate the need for profile classes and accurately reflect customers’ actual usage. Thus, suppliers that can discourage the use of peak-price energy likely would pay less for their energy on the wholesale market and would be able to pass on savings to customers.
Threats to supplier revenue
If suppliers fail to capitalize on data from advanced metering, other more agile competitors will use that data to take customers and revenue from them. With access to metering data, switching providers and energy managers will find it easier to move their customers to alternative tariffs, and any move to streamline the switching process-because advanced meters improve data quality-only would strengthen switching providers’ offers.
Further, as demand-side management becomes more common, aggregators could take supplier-provided granular metering data to better balance demand against wholesale purchasing, allowing them to offer customers new and cheaper tariffs than alternative suppliers.
The technologies for remotely managing and monitoring energy use and appliances in homes have been available many years, but with advanced metering, the critical difference is scale. The mass rollout of smart meters will give suppliers access to usage data in millions of homes and businesses.
Data within homes will be available on a smart metering home-area network and available to devices and services provided by third parties such as their tablets and smart phones. The prospect of linking accurate metering data within and outside homes to new services and load management offers some of the most exciting opportunities in this space.
Smart grid and advanced metering-enabled services represent a huge opportunity for suppliers, and they must be ready to capitalize on the new streams of data and access to customer homes. If they fail to grasp the opportunity, more innovative competitors and new market entrants will make use of that data and take customers and revenue from incumbents.
John Peters is the managing director of Engage Consulting. He has 30 years’ experience in the energy industry and an in-depth knowledge and understanding of regulatory structures, commercial frameworks, government policy and global smart developments. Peters was a significant contributor in setting up and operating the U.K.’s metering, settlements and trading arrangements.
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