cheryl linder smart grid lecture 3-7-2011

© 2010 IBM Corporation

What’s Next for the Smart Grid Consumer Behavior and New Business Models in the Utility Industry

Cheryl Linder, Global Offering Leader, IBM Energy and Utilties Industry

March 2011

© 2011 IBM Corporation 2

We have provided IBM’s perspective on consumer and business model themes in our last three IBM Energy and Utilities papers

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IBM Institute for Business Value

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2010 2009 2008


Consumer expectations and business model innovation: Why are these important questions to be asking now?

Our views on how the future will evolve

Changing consumer perceptions on energy

Moving into the future: Industry model innovation

Conclusions

Agenda


Consumer expectations and business model innovation: Why are these important questions to be asking now?


Changes in residential and industrial electricity consumption in the US, 1949-2009


… because in many parts of the world, residential customers have become much more of a force over the past 20-40 years

Source: US Energy Information Administration, IBM Institute for Business Value analysis.

As their influence increases, consumers are demanding more from their relationships with their energy providers as they seek options for conserving energy, saving money, and reducing their impact on the environment


… because consumers worldwide are reconsidering their interactions with energy providers – and the energy ecosystem itself

 Significant segments of consumers are willing to assume new roles and take on new responsibilities

 Their motivating factors differ, but most strike at common outcomes – Climate change concerns

– Desires to conserve energy and natural resources

– National economic health and energy independence

– Volatile (and often high) energy prices

– Growing awareness of technological advancement

– Global financial crises of 2007-present

 Their influences are primarily from outside the energy sphere – Entertainment (TV and internet)

– Telecommunications

– Media



… because the rapid increase in consumer choice in other industries will shape expectations for the future nature of energy service

TV Viewers Energy Consumers -  passive receipt of content -  limited sources of content generation -  major media companies exclusively control content -  provider-customer relationship one-to-many, driven by demographics

and geography

-  passive receipt of power -  limited sources of power generation -  incumbent utilities exclusively control power generators -  provider-customer relationship one-to-many, driven by demographics

and geography

-  consumer interest drives new and more targeted choices in content -  more interest in and leverage of information on quality indicators for

content (e.g., TV program rating systems) -  broader choice of providers drives more active role in provider selection -  consumer does not control content, but has stronger influence via

choices -  introduction of time-shifting technologies enables more active selection

and management of content at individual level

-  consumer interest drives new and more targeted choices in power supply

-  more interest in and leverage of information on quality indicators for content (e.g., green energy standards)

-  broader choice of providers drives more active role in provider selection -  consumer does not control generation, but has stronger influence via

choices -  introduction of residential time-of-use programs and green power

options enables more active selection and management of generation deployment at individual level

-  interactivity and involvement with content and service providers increases

-  consumers active in producing content and influencing content distribution

-  rapid creation of new content types as techology change causes explosion in capabilities

-  dynamic, value-based pricing of content -  provider-customer relationship dynamic is increasingly customized to

specific entertainment and information interests, with consumer analytics a key driver

-  interactivity and involvement with generation and service providers increases

-  consumers active in generating power and influencing generation planning decisions

-  rapid creation of new power supply options as techology change causes explosion in capabilities

-  dynamic, value-based pricing of power (e.g., time-of-use) -  provider-customer relationship dynamic is increasingly customized to

specific energy management goals, with consumer analytics a key driver

Sources: Berman, Duffy, and Shipnuck, “The End of Television as We Know It,” IBM Institute for Business Value, 2006; “Television Content Rating Systems”, Wikipedia, last viewed September 11, 2007 (http://en.wikipedia.org/wiki/Television_rating_system) IBM Institute for Business Value (IBV) analysis;

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Percent of CEOs reporting a strong focus on specific BMI areas


… because in a time of great technological innovation for the industry, business model innovations have not kept pace

Source: IBM Global CEO Study 2008

Unlike most other industries, energy and utility business models have changed little from those in the mid-twentieth century


Who invested in broadband infrastructure?

Who benefited most from it?

… because those who build major infrastructure aren’t certain to profit most from its presence


Source: IBM Institute for Business Value (IBV)


… because large global corporations with marketing savvy and name recognition are bringing fresh business models to the industry…


2011 International Consumer Electronics Show, Las Vegas, Nevada. Photo credits: Allan Schurr


… and a host of new entrants are already making headway in various business that touch the traditional industry


Source: IBM Institute for Business Value (IBV) analysis


Our views on how the future will evolve


Operations Transformation Some combination of grid and network technology evolves to enable shared responsibility, but consumers either

cannot exert much control (or elect not to) and the balance of benefits favors the

utility

Participatory Network A wide variety of grid and network

technology evolve to enable shared responsibility, and consumers’ strong interest in specific goals creates new

markets (virtual and physical) and new product demands, which balances benefits more equally between the

consumers and utilities

Constrained Choice Consumers take firm steps to move

toward more control, but are limited to certain “levers” (technologies, behaviors, or choices in providers) by regulatory and/

or technological constraints

Passive Persistence Traditional utility market structures

dominate, and consumers either accept or prefer the traditional supplier-user

relationship

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Degree of Consumer Control


We envisioned in the 2007 report a future for energy providers driven by technology evolution and increasing consumer control

Source: Valocchi, M, A. Schurr, J. Juliano, and E. Nelson, Plugging in the consumer: Innovating utility business models for the future, IBM Institute for Business Value, 2007; Valocchi, M, J. Juliano, and A. Schurr, Lighting the way: Understanding the smart energy consumer, IBM Institute for Business Value, 2009.


However, a number of impediments were blocking moves that are necessary to make these transitions

  Insufficient business cases for technology deployment

 Lack of regulatory structures to enable consumer control

 Technologies slower to deploy than forecast

 Consumers unable to/unwilling to exert much control


Source: Valocchi, M, A. Schurr, J. Juliano, and E. Nelson, Plugging in the consumer: Innovating utility business models for the future, IBM Institute for Business Value, 2007.

Some of these blockers are now being pulled down, strengthening our conviction that we are moving toward a Participatory Network that will create an environment favoring business model changes


As these transitions take hold, two factors will be important determinants of how utilities and consumers interact

1.  The degree to which consumers take initiative in decision-making in their energy supply and usage toward meeting specific goals

2.  The consumers’ disposable income available for energy choices in supply and conservation

Source: Valocchi, M, A. Schurr, J. Juliano, and E. Nelson, Plugging in the consumer: Innovating utility business models for the future, IBM Institute for Business Value, 2007.



The new value chain not stop at the meter; it will integrate devices beyond the meter and the actions of customers themselves




Changing consumer perceptions on energy


As part of our research we have conducted three major global utility consumer surveys, the most recent wrapping up at the end of 2010

Source: IBM Global Utility Consumer Surveys, 2007-2010

(2010 respondent totals are shown for each country)

2007 1900 responses

2008 5000 responses

2010 8000 responses



The distribution of four consumer profile quadrants is essentially the same as that in 2008

Source: IBM 2010 Global Utility Consumer Survey Sample Size = 5084


22% (22% in 2008)

20% (21% in 2008)

33% (31% in 2008)

24% (26% in 2008)

Frugal Goal-Seeker (FG) Energy Stalwart (ES)

Passive Ratepayer (PR) Energy Epicure (EE)

All results presented are preliminary pending completion of analysis of full global survey response set


Much of the consumer landscape has remained consistent over the past 2-3 years

• Question was asked for two different levels of savings in 2008.

Sample Size = 5984

Source: IBM 2010 Global Utility Consumer Survey




After the sharp drop after the global economic crisis began in late 2007, spending on non-energy “green products” has also stabilized

Percent of respondents that pay more for non-energy related environmentally friendly products (2007 group of six countries)

Sample Size = 4539 (2010), 3497 (2008), 1893 (2007) Source: IBM 2010 Global Utility Consumer Survey All results presented are preliminary pending completion of analysis of full global survey response set


Will consumers open their wallets for new offerings?


Residential consumers remain tough customers – their expectations in many areas far exceed their perceived service


29 point gap

32 point gap

24 point gap

22 point gap

20 point gap

46%

45%

40%

38%

28%

Percent of respondents who believe that their current provider does/should focus on specified activities or attributes



Do these gaps invite new entrants and new business models?


Sample Size = 5984 Source: IBM 2010 Global Utility Consumer Survey

The more consumers know about topics related to their energy provider and service, the more receptive they are to change

Percent of respondents approving of deployment of smart meters and smart grid locally (underway, proposed, or hypothesized)




Sample Size = 5984 Source: IBM 2010 Global Utility Consumer Survey

Knowledge also impacts some of the critical behaviors which consumers must embrace if societal goals are to be met

Percent of respondents likely to make specified changes in return for one or more listed benefits




Consumers with little or no knowledge of energy topics get their information from very different places than more informed ones

Source: IBM 2010 Global Utility Consumer Survey Sample Size = 5984 All results presented are preliminary pending completion of analysis of full global survey response set


Sources of energy information for low-awareness and high-awareness consumers


The dominating influences for the each of the four groups differ…

Source: IBM 2010 Global Utility Consumer Survey Sample Size = 5984 All results presented are preliminary pending completion of analysis of full global survey response set



… but the extent to which each influences the consumer differs even more dramatically

Percent of respondents that would be likely to change their energy usage patterns based on specific influences


ES FG EE PR




Several important findings are emerging from this year’s survey that relate to motivations and perceptions of consumers

 Knowledge and awareness appear to be key drivers of customer acceptance and demand for new initiatives

 A multi-front strategy for messaging is critical in gaining acceptance for new initiatives

– Priorities and preferred information sources differ across customer groups

– Knowledge (or lack of it) has deep implications for what consumers want and will accept

– The control of some messages is being seized by other parties (media, activists); this front will also require strategic approaches

 Cost control remains the most powerful motivator for change and control overall, but the level to which it motivates consumers depends on their overall profile

 Concerns about privacy around energy usage data are escalating, and these concerns are impacting acceptance of some new programs

  The strong negative impact of the global financial crisis on consumers’ spending for green products and cleaner power persists; if this persists, it could affect demand for other new products and services as well




But the key consumer insight that causes the most headaches for business model innovators is…

PEOPLE ARE VERY INTERESTED IN NEW ENERGY SERVICES.



THEY JUST DON’T WANT TO PAY FOR

THEM.


Moving into the future: Industry model innovation


 A platform is a common structure and set of rules that provide a standard foundation for transactions among two or more parties

 Platforms provide a means for providers and buyers of products and services to interact and create value that could not be created otherwise

 The platform lowers the costs of providing services by offering some level of standardization for transactions and reducing duplication

 Platforms can take different shapes

 A platform can be single-sided or multi-sided


We expect that industry model innovation will result in enormous change to the platforms on which electric providers operate

Source: Evans, D., A. Hagiu, and R. Schmalensee, Invisible Engines, MIT Press, 2006; IBM Institute for Business Value analysis.

The electricity network was one of the earliest technology platforms, providing a means for power generators to move their output to buyers, a means for buyers to accept delivery of the output, and a standardized technological specification


Many platforms are single-sided, with manufacturers and sellers at one end and buyers at the other


Marketing Value Intelligence Cash

Distributor/ Intermediary

Manufacturer/ Seller

End Users

Applications

creates value (products and

services)

creates value (access to products and

services)


Electric utilities have operated as single-sided platforms serving electricity users for over 100 years, but the emergence of the smart grid and distributed energy resources – plus the increased engagement of end consumers - will provide the means for a multi-sided applications platforms to develop


These multi-sided platforms (like Google’s model) can provide the “free stuff” people love… but generate profits for participants


Services & Applications

creates value

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the services and applications

creates value

Commercial Services & Applications

whi

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using the value created by Google, the merchant communicates the message to a receptive customer, who has a need coupled with minimal negativity due to minimal intrusion (and real associated value)

and ultimately the customers will pay the merchant for his good or service (tangible commodity value) as a result of him communicating to them when they were in need and it was relevant to them

9

10

marketing value intelligence cash Source: IBM.


There are numerous examples of multi-sided platforms outside the energy industry


Sources: Eisenmann, T., G. Parker, and M. Van Alstyne, “Strategies for Two-Sided Markets,” Harvard Business Review, 2006; Evans, D., A. Hagiu, and R. Schmalensee, Invisible Engines, MIT Press, 2006; IBM Institute for Business Value analysis


This concept is important because we expect a wide variety of multi-sided platforms to develop in the energy industry in the near future…




… and because these models can result in significantly higher operating income and market capitalization

Change in Operating Income per $1M in Revenue for a Platform Provider

Change in Market Capitalization per $1M in Revenue for a Platform Provider


Source: Weill, P., et al., “Do Some Business Models Perform Better than Others? A Study of the 1000 Largest US Firms”, Massachusetts Institute of Technology, 2005.

Two single-sided platform model types

Two multi-sided platform model types

Two single-sided platform model types

Two multi-sided platform model types


Commercial enterprises and new initiatives from major companies are already emerging in many of these spaces




Would you be willing to have your energy usage made available to energy providers if used to provide better service and lower cost to you?

Sample Size = 5084

Many of the models are heavily dependent on leveraging consumer usage data – which is why privacy is emerging as a huge issue


Source: IBM 2008 Global Utility Consumer Survey

Even with two-thirds receptive to an exchange of value for data, the needs and concerns of the one-third that have reservations or are strictly opposed must be addressed


Conclusion


Multi-sided business models are coming – the question is not if, but how fast


Source: IBM Institute for Business Value (IBV) analysis.

Assess whether you have assets, alliances, or capabilities that position you to be a platform owner. If you do…

Evaluate your customer base – is it large enough and engaged enough that is likely to be receptive to your platform-centered offerings?

Determine if your business model is readily scalable and transferable across geographies

If you expect your model to be dominated by a single platform, ensure that you have the marketing resources to support a strong campaign

Look for, and plan ways to overcome, any regulatory barriers to proceeding


Well-prepared companies will reap the benefits; companies slow to react risk losing control of customer relationships


Source: IBM Institute for Business Value (IBV) analysis.

If not… Segment your customer base to determine if any key customer groups are likely targets for platform offerings, and align yourself with an emerging platform to provide competitive offerings

Evaluate the profitability of various offerings – it may not hurt (or may be beneficial) to cede some to platform participants

Assess your key strengths – are you strong enough in certain areas to position yourself as a critical element of a developing platform?


Who invested in broadband infrastructure?

Who benefited most from it?

Telecom companies have been through a similar transition – what can we learn from it?




Thank You!

[email protected]

www.ibm.com/energy

cheryl linder smart grid lecture 3-7-2011

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