Customer Interface Systems–Energy Tools for a Competitive Era
By Patrick Hodges, Frost & Sullivan
Although meters have drastically improved since Thomas Edison`s time, many of the meters installed at today`s customer premises are technologically inadequate. Conceptually, it`s logical to assume that utilities would already be the benefactors of current technology, however, since they have not been operating in a competitive environment during much of the technology evolution, they have been slow to utilize some of the available technology, such as customer interface systems.
According to strategic research conducted by Frost & Sullivan, an international marketing consulting company that monitors the energy industry for market trends and analysis, the wholesale value of all integrated residential customer interface system products sold to North American utilities in 1997 was roughly $4 million. That figure is forecast to grow to $161.1 million by 2004. Utilities have been and are expected to continue to be the primary purchasers.
At the current rate of customer interface system deployment one could expect the market to be mature and saturated with value-added utility services. That`s why it`s imperative for the supply side of the utility industry–power marketers, utilities, co-ops, etc.–to begin installing customer interface links to all their customers. Although the barriers to entry are low in this developing market, barriers to success are high. Early market entrants will have the advantage of brand awareness, and then brand loyalty, and they may form partnerships with other early market leaders who provide complimentary products and services. Frost & Sullivan believes that energy service providers and customer communication product providers who form practical strategic relationships with complementary companies will become the most successful.
Will residential customers buy interface systems? Based on Frost & Sullivan research, the answer, so far, is no. This is a critical stumbling block for residential market progress. Many in the utility industry believe that a direct launch on residential customers would be a waste of time and money. They also believe that it would be less effective than grafting customer interface systems onto the backs of proven business models such as security, entertainment, telephony services and home automation. Home automation, which is the distant cousin of utility customer interface systems and includes products by IBM and X-10, is the closest customers will come to buying hardware. Lacking a discernable utility interface, home automation systems none-the-less utilize in-home local area network (LAN) technology which bears a striking familiarity to the technology utilities are utilizing for load control and messaging.
Smart User Interfaces
Commercial and industrial (C&I) customers will likely use their desktop computer with Internet capabilities as the primary user interface. For residential customers, the user interface is much more interesting. Residential user interfaces can include thermostats, screen phones, televisions, computers or telephones. Honeywell is on the cutting edge of thermostat user interfaces. Honeywell`s EMS 1000 thermostat incorporates energy management features that display pricing tiers with temperature offsets for changing set points depending on information sent by the utility. In addition, the thermostat combines wired and wireless wide area network (WAN) and LAN capabilities with a control feature. Developed with Scientific Atlanta`s Maingate, the CEBus compliant EMS 1000 features two-way communication on an in-home powerline carrier LAN. Being WAN independent, the Maingate can send and receive data via public or private networks including telephone or cellular. Today`s customer interface system technology combined with interconnectivity and open-architecture make scalability the order of the day.
Quantifying the C&I customer interface system market is precarious because its current interfacing needs focus on discrete applications. Since AMR is the primary interface need, it has been factored into Frost & Sullivan`s AMR market total revenue estimate. The total revenue was roughly $250 million in 1996 and is expected to be three to four times that figure in 2005.
Market growth will not occur without a system-level appreciation of costs versus benefits as opposed to an analysis of discrete technology application, such as AMR. Load research, automated connect/disconnect, remote meter reading, fault detection and increased bill accuracy are benefits of having a customer interface system in place. Moreover, placing a dollar value on these benefits requires a fully-burdened analysis.
In 1995, operations and maintenance (O&M) expenses for major U.S. utilities totaled $104 billion. Administrative, general, customer and sales expenses accounted for 20 percent of that total. Between 1986 and 1995, real O&M costs (fuel plus non-fuel O&M expenses) decreased 22 percent to $0.035/kWh in 1995. However, non-fuel O&M costs remained relatively flat at $0.026/kWh. At the same time, major utilities decreased employment by 20 percent and salaries and wages decreased by 28 percent to $0.05/kWh.
Shortly thereafter, some of the larger utilities began to realize that their customers were their biggest assets. Balancing customer satisfaction and cost-cutting is possible, but shadowed by the mission-critical task of finding solutions to the new and perplexing problems created by deregulation. Any solution that has a payback of more than three years is difficult for utilities to commit to in today`s uncertain market.
Utilities must emphatically view demand-side customer projects as long-term capital investments. Discrete as well as integrated applications, such as AMR and load research, however, can provide immediate savings. However, it is difficult to assess the value of applications such as utility messaging. Will consumer messaging, in and of itself, be a valuable enough interface application to give a utility a critical edge? The timeline for success in the customer interface systems market will be measured in decades and half-decades, not in months.
With utility credit ratings slowly slipping, only those utility-vendors (unregulated subs) totally committed to providing interface systems will be long-term survivors.
In the past few years, slashed utility research budgets have killed several key pilot programs and the vendors serving those projects. This, plus other factors have restrained growth in the residential market and turned it into a war of attrition. For example, Pacific Bell suspended the hybrid-fiber coax network it began deploying in San Jose and San Diego, the network around which San Diego Gas & Electric was beginning to build its customer interface system.
Widescale Deployment Prospects
Commercial and industrial customer interface systems will be limited to discrete meter reading, initially, depending in part on state-specific metering equipment requirements. The C&I customer interface system solution of the early 21st century will include an hourly meter (purchased by the customer or its supplier, or outsourced to a specialist company) and a telecommunications link (public or private wireless WAN, telephone system, or mobile/walk-by for devices that can time-stamp and store data). For the C&I market, energy management, load control based on price signals and AMR are the three definitive applications served by discrete interface systems.
The actual C&I customer interface is less fascinating than the residential customer interface system. Whereas residential systems focus mainly on the connection, what happens on each side of the C&I connection captivates industry onlookers. The growth in software tools and ancillary product/services tailored to C&I energy measurement and analysis represents the clearest revenue opportunities.
C&I customers have indicated through Frost & Sullivan surveys that they`re not remotely interested in any of the services which are the foundation for residential gateway interfaces. C&I customers, for example, aren`t interested in utility telephony or Internet services.
At the residential level, discrete customer interfacing will be limited to AMR and network meter reading technologies, which primarily provide only utility applications. Integrated-gateway customer interface systems will only pay for themselves if utility applications are piggybacked onto valuable services, such as entertainment.
The prospect for wide-scale deployment depends on current customer interface systems that provide a cost to benefit ratio greater than competing projects. This is difficult if not impossible to measure. Will customer messaging, for example, generate brand loyalty? A customer interface network stretching across Pacific Gas & Electric Co.`s California service territory does not guarantee protection against Enron`s campaigns in that state.
Opponents of customer interface systems point to the high cost of hardware per site, and point out that utilities could use that money more effectively to brace against takeovers, to execute mergers or to use for projects with more predictable and immediate paybacks.
And while utilities wait for significant price drops, vendors know that won`t happen until production economies kick in. Who`s going to make the first move?
Patrick Hodges is an Energy Industry Analyst for Frost & Sullivan`s Energy Services research group. He specializes in business development strategies for revenue-cycle and demand-side product/service markets. Frost & Sullivan is an international marketing consulting company that monitors energy industry market trends, market measurements and strategies.
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Are Utilities Ready?
Getting utilities to understand the potential impact of customer interfacing is a challenge of paramount importance. A utility research manager at a California utility known for its cutting-edge utility research failed the test. When asked, “Will your budget include funds for a customer interface system?” The person replied, “Customer interface system? You`re asking if our customers communicate with each other?” The question was rephrased, “Not between customers, between you [the utility] and your customers?” His final response, “Sure, we have a customer interface system. It happens when we send customers their bills.”
A large eastern utility was also contacted. A high-level engineer was given the following explanation: A customer interface system can combine discrete utility functions, such as AMR with utility messaging for example into an integrated customer interface gateway so customers can better understand their consumption patterns and the utility can meet its goals. “Heck, that`s nothing new. Customers have been able to do that for years. The meters sitting right outside their house if they want to read it,” he replied.
This command system allows residential customers to program high-energy usage appliances to turn on to match the times when energy prices are lowest, and turn off when prices are high.
Interface systems often use some sort of module, such as this one, to monitor energy usage and control appliances.