The utility of the future? Think shopping mall

By Elisa Wood

April 1, 2010

The energy world is about to turn upside down. With the coming of smart grid, the electricity consumer becomes the electricity seller; the passive home appliance becomes the active energy manager; the grid repairman becomes the grid itself.

Such an upheaval means that the energy world needs to start thinking about a new business model, says a recent report by IBM Global Business Services Energy and Utilities.

The fact that IBM is advising the energy industry is itself a point of interest, yet another signal of the new market opportunity emerging within the energy arena for information technology. This opportunity has drawn the attention of not only IBM, but also CISCO, Google and many others.

So how does IBM see the energy business model changing? First consider what it has been for the last century: a grow-and-build model. This model brought universal electrification to the United States. Utilities encouraged more and more consumption, and they built power plants and transmission to the far corners of the nation to serve the growing demand.

“The success of this strategy was remarkable. In the United States for example, from 1920 to the mid 1960s (excepting the period of the Great Depression), usage increased at seven percent annually – about five times the rate of usage of all forms of energy combined and three times the rate of economic expansion in general,” says the IBM report, “Switching perspectives: Creating new business models for a changing world of energy.”

But today we no longer need such expansion. The grow-and-build model is obsolete, yet continues to be used by utilities. As a result, utility stocks, which in the 1940s-1960s significantly outperformed the Dow Jones Industrial Average, now lag well behind.

Instead of expanding their territory, utilities are being called upon to change their product — to offer energy that is more efficient and clean and service that is more consumer-friendly.

Smart grid technology can help utilities meet today’s imperative. But it brings with it a new and complex relationship between customer and utility. This is because smart grid allows consumers to control energy usage via a home computer. Heck, their appliances can control energy usage without the consumer doing anything. And with increased use of solar energy and other distributed technologies, the home also becomes power plant and storage facility for the electric utility.

“Companies willing to tackle industry model innovation and sit at the nexus of new complex relationships among business partners and customers will be well positioned to create and capture new demand for emerging products and services. Strong growth in revenues and profits – albeit accompanied by some risks – is achievable in multisided business models because of the embedded network economies of scale (i.e., margins increase with network size),” says the report.

IBM calls this new business model “a multisided platform.” What does it look like? Think shopping mall.

“Manufacturers, retailers and shoppers all benefit from having a single location where they can meet and transact business. A wider variety of stores and services brings more shoppers; more shoppers bring higher sales volumes for manufacturers and lower costs for retailers (and, in theory, also lower prices for shoppers). Thus, some element of network economy is bundled into the shopping mall value proposition. The platform owner (the mall operator) extracts some of this value in the form of rent to store owners and, in some cases, service fees to shoppers,” says the report.

If indeed this is the future, it won’t be embraced quickly or easily by utilities, which are notorious for their caution. For those who do move forward, here is some of what IBM advises.

Be sure your current customer base is sizable enough to ensure that you get a meaningful head start.

But don’t hurry. History has shown that later movers may actually benefit from standing back from the first wave.

Time the announcement of your new business model carefully to avoid shocking long-time constituencies or alerting rivals too soon.

Consider corporate culture changes that will ensue.

What might this new model mean to the utility business? A new kind of grow-and-build. Except this time the industry will not conquer the frontier with power plants and transmission, but information technology. See the full report here: http://www-935.ibm.com/services/us/gbs/bus/html/ibv-electric-utility-innovation.html?ca=rss_bcs

Visit Elisa Wood at http://www.realenergywriters.com/ and pick up her free Energy Efficiency Markets podcast and newsletter.

Next: The wattcom boom

By Elisa Wood

June 11, 2009

I was at a meeting about three years ago where state energy commissioners and power plant developers were debating new market rules, some to take effect almost immediately, others five years out. A wise commissioner looked around the room and said something like: “All that matters are the immediate rules because everything will be different in five years. In fact, most of you won’t be working for the same company you are today.”

Lo and behold, he was right. When I think of the people at the meeting, most are already elsewhere – and only three years have gone by. Some of the companies they represented, major players in the fossil fuel arena, are struggling for survival. And where is the commissioner who made the statement? He now works for a wind energy developer.

Who will be the new, big market entrants in the next five years? Here is a clue: More and more energy announcements that come across my desk are not from energy companies. They are from IT companies: Google, Hewlett Packard, IBM.

This makes sense given that a necessary marriage between IT and energy must occur for the development of the smart grid and user-friendly energy efficiency devices. Clearly, the IT world sees opportunity in energy.

Farah Saeed, a senior consultant for Frost & Sullivan, put it this way: “In the coming years, competition expects to intensify as non-energy related IT focused companies expand their presence in the utility sector. Companies such as IBM, Cisco, Oracle, and HP acknowledge the fact that Internet-enabled grid applications present opportunities to serve the utility market. Networks developed to support AMI [advanced metering initiatives] technologies such as home area networking (HAN) and backhaul networks, as well as enterprise software to support asset management, invites the expertise of IT technology pioneers.”

I’m predicting a “wattcom” boom. Okay, maybe the name is corny. But catch up with me in five years – probably less. Let’s see who’s in the room.

Visit Elisa Wood at www.realenergywriters.com and pick up her free Energy Efficiency Markets podcast and newsletter.

Profile of a White Tag Project

By Lisa Cohn

September 18, 2008

Few topics we write about here draw as much attention as energy efficiency certificates. After we mention the certificates, we inevitably receive inquiries from data centers or other large energy users, who want more information.

The certificates also are called “white tags,” a term trademarked by marketer Sterling Planet. Interest in the certificates likely stems from the increasing use nationwide of a more established sister product, renewable energy certificates or green tags. Green tags come from renewable energy projects, while the newer white tags are generated by efficiency measures, like lighting retrofits, combined heat and power, and demand response.

Both white and green tags can be bought and sold. Utilities and other electricity retailers need them to meet mandates in certain states that they provide a set amount of their supply from clean or efficiency energy sources. Voluntary markets also exist for the tags throughout the country. In this case, companies or institutions buy the tags not to meet a law, but as an environmental gesture.

Connecticut has led the way in creating a white tag market. The state requires that utilities and electric retailers make efficiency 2% of their power portfolios this year. The requirement grows to 4% by 2010.

Here we provide a profile of a recent white tag project we unearthed in the files of the Connecticut Department of Public Utility Control. An IBM data center in the town of Southbury created the white tags and won approval September 12 of their validity under Connecticut rules.

IBM created the tags by installing 1,200 efficient lighting fixtures in October 2007 in its 846,000 square foot, three story building. The facility operates 8,760 hours per year. Specifically, IBM retrofitted 3-lamp, T-12 lamps and magnetic ballasts with more efficient T-8 lamps (two per fixture) and electronic ballasts. The fixtures will save the facility 829 megawatthours. IBM determined the savings by subtracting the energy it consumed after installing the new lighting from the energy it consumed before the installation.

The certificates are viable through March 31, 2018. The ending date is based on a state determination that the life of such efficiency projects is typically up to ten years. The facility must measure and verify savings each quarter and submit the results to the state.

Each MWh equals one certificate. The state does not set the price for the certificates – what IBM receives will depend on the market.

The company that helped IBM convert the efficiency savings into certificates was Neuwing Energy Ventures, 6 Evergreen Lane, East Haddam, Connecticut 06423.

For detailed information on the state’s conversion rules we suggest reviewing the Connecticut DPUC’s order setting up the program, DOCKET NO. 05-07-19. This can be found at the ‘in-active dockets database’ http://www.ct.gov/dpuc/cwp/view.asp?a=3364&q=413272.

Visit energy writer Lisa Cohn at www.realenergywriters.com and subscribe to his free EE Markets newsletter and podcast.