Preparing for Automated Metering by Chris Trayhorn, Publisher of mThink Blue Book, May 15, 2006 Over the past year, technology advances and high energy prices have stimulated interest in advanced metering infrastructure (AMI). Discussions are wide-ranging. Some focus globally: Australian and Canadian smart metering; new European Union requirements; the results of time-ofuse pilots that arose in the wake of Californias deregulation debacle. Some discussions emphasize AMI benefits new products, instant outage detection, better load management. Others plunge immediately into interval billings fine points: contracting, hedging and settlements. Focusing utilities attention is the federal mandate that each state examine the possible expansion of advanced metering within its borders. Cost Focus Midsize and smaller industrial and commercial firms are generally eager to explore AMI benefits. Still, what this discussion lacks is a clear focus on their primary concern: total energy cost. And despite relatively low U.S. energy prices, when compared with prices worldwide, there is good reason for businesses cost concerns. U.S. industrial firms spend an annual $53.6 billion on electricity[1] and another $47 billion on natural gas.[2] Energy costs vary widely among specific industries but typically comprise between 2 and 20 percent of the value of goods shipped.[3] In some industries, attempts to reduce energy intensity have been successful. But not in all. The Industrial Energy Consumers of America, for instance, cite energy as a major contributing factor to the loss of 2.8 million U.S. manufacturing jobs since 2000.[4] While costs per commercial company are generally lower, energy costs loom large for the sector as a whole. U.S. companies, for instance, spend in excess of $100 billion on electricity[5] and almost $30 billion on natural gas.[6] Possibly even more significant is price creep. Over the five years from 1999 to 2004, industrial electricity prices per megawatt hour rose 19 percent, while commercial prices rose 12 percent.[7] And thats before exceptional price escalations of 2005-2006 especially for natural gas initiated todays energy-cost outcry. Competition and AMI In the 1990s, continuing concern about energy costs and competitiveness led many commercial and industrial (C&I) energy users to support competitive energy retail markets they believed could reduce prices. And even though competition remains limited in most states, there have been positive effects: A recent report[8] credits competition for reducing the inflation-adjusted energy bills of most New York businesses, where competitive energy suppliers now service more than half of the commercial electricity load and more than 75 percent of the industrial load; A 2005 report from the Associated Industries of Massachusetts (AIM) Foundation, for instance, credited competition, in combination with restructuring-related rate caps, for a seven-year total savings of $2 billion and projected ongoing annual savings of $350 million[9]; and While national averages can be no more than suggestive, given the difference in populations served, the U.S. Department of Energy shows energy-only suppliers as pricing commercial electricity at 6.58 cents per kilowatt hour, as opposed to full-service providers 7.91 cents.[10] Few C&Is are as yet voicing such high hopes for advanced metering. In fact, to some, AMI may look like a solution in search of a problem. Metering does not address the high price of heating with natural gas, oil or propane. Time-shifting of electricity use might work for businesses running multiple but changeable shifts but it means nothing in the context of a retail store whose customers are unlikely to shift their shopping to the pre-dawn hours. And when oligarchic supply markets result in only the smallest of price spreads among suppliers, even large businesses with dedicated energy managers cannot use hourly price changes to significantly reduce costs. In other words, AMI is not an automatic positive for the C&I customers often seen as its primary supporters. To improve the atmosphere for the discussion of possible metering changes, utilities should examine the extent to which existing programs meet C&I customer needs. Do existing utility programs maximize the customer benefits available from whatever deregulation currently exists? Do customers understand their choices among existing utility programs? Have utilities extended business programs to all who might benefit, or are special deals available only to the largest and most sophisticated industrials? Might existing or new services address the unmet needs of a broader C&I audience? Answering those questions requires some careful analysis and communication. Step One: Analyze C&I Program Costs and Profits AMI can, of course, be a win/win proposition for utility and customer alike. But it is more likely to be accepted as such if C&I customers already work with the utility in an atmosphere in which their individual concerns are addressed. Utilities have a long history, of course, in addressing the concerns of the largest commercial and industrial customers. They frequently play a role in regional economic development strategies that attempt to keep large local employers in place and attract new ones. Discounts or special rates for large energy users are common. But the number of customers addressed with these special programs has, per utility, typically been small. And utilities generally handle them as exceptions to routine IT processes. To facilitate this exception handling, more than half of all utilities and more than 60 percent of electric utilities use key account programs that manage highly individualized billing approaches. The key account approach is staff-intensive. That means high costs. Salary and support for an account representative servicing a utilitys 30 largest customers may be cost-effective when spread across revenues generated by those customers. It becomes less and less so, however, when smaller C&Is are handled in the same way. How small do customers have to be before it becomes cost-ineffective to handle them as key accounts? To answer that question, utilities need extensive analysis of the profitability of individual C&I customers, profitability by type of service and profitability by group. They need to identify usage patterns and chart consumption. Step Two: View Customers Business Drivers The data analysis in step one is far more useful in the context of customers business drivers and trends in their markets. Also important is to understand changes in customer needs through time. As C&Is energy sophistication increases, the utility/customer conversation is likely to become deeper and more complex. Among the parameters likely to change are: Cost determinations. C&Is may initially be driven by cost per kilowatt hour. As they become more sophisticated, however, they will likely want to evaluate energy and related services as a single unit. They will also want to evaluate costs in terms of their own output energy cost per car or per billable hour. Risk assessments. Many C&Is are risk-averse. They are willing to accept the costs of risk reduction. That is particularly evident in the interest in switching where possible to competitive suppliers. Switching initially appeared risky to many C&Is. Many new suppliers offered contracts that might or might not prove less costly than their utilities supply. And the penalties some utilities placed on switching back, plus the uncertainties of dealing with the new competitive entities, added to that perception of risk. Over time, acceptance of retail, energy-only suppliers is growing, albeit slowly. Of the 16.6 million commercial customers in 2004, only about 445,500 (2.7 percent, representing 11 percent of total commercial load) were being served by competitive suppliers. Similarly, only 13,800 industrials (1.8 percent of the 747,600 U.S. industrials in 2004, for about 9 percent of total industrial load) used competitive suppliers. Increasingly, C&Is will want to explore competitive supply. But that does not have to mean the loss of a customer. In fact, it can be a spur to the utilitys ability to sell new services. Utilities may offer market-rate contracts, for instance, in conjunction with hedging strategies tailored to the individual customers needs. Interest in demand reduction. C&Is avoid participation in demandside management programs when alternatives are too complex for facilities managers to readily evaluate. Utilities that need to expand demand response or load-shifting strategies with C&I customers may want to ease the burden by, for instance, providing basic demand-andload analysis without charge or by offering free consultations aimed at demand reduction. Investment in tools to manage the energy profile. Companies attuned to the energy marketplace are more likely to seek facilitymanager training, decision-support software, on-site or backup generation and outsourcing strategies. Ultimately, large users may find they need to analyze their own consumption data and develop what if scenarios that help them manage their businesses. Step Three: Lessons From Europe Predicting C&I enthusiasm for various program options is never easy. To improve success, it is helpful to look at a market where utilities have already been forced to respond more fully to C&I demands: the European Union (EU). Currently, all EU industrial customers and some commercial customers may choose among suppliers. Its part of the overall market liberalization taking place as the EU matures. Many C&Is have already exercised their right to switch. Many more have renegotiated their utility contracts. Typically, C&Is have represented the greater share of European utilities revenues 70 percent is not uncommon. In addition, service to C&Is has generally been a higher-margin business for them than has mass-market retail. As a consequence, European utilities have approached renegotiation carefully. Their aim has been to: Optimize portfolios by balancing customers with sourcing. To do so, they have been forced to evaluate not only the profitability of individual customers to the utility but also the market drivers affecting that profitability. Structure contracts that best suit their purchasing capability. European utilities commonly offer incentives for long-term contracts, which offer their traders greater leverage in wholesale markets. And they have increased their monitoring of trends in their customers businesses so as to more accurately predict their demand. Segment customers. This helps differentiate the needs of groups and suggests the parameters of tailored contracts. Not every group wants quoting or risk management services. But some do. Identify commonalities among customers. It is important, for instance, to identify factors that result in losses. While European utilities generally retain an obligation to serve, they are not forced to do so at a loss. And they have every right to develop strategies that turn problem customers into assets. Understand customers views toward costs and services. Research by Datamonitor in the German market,[11] for instance, shows C&I customers have responded more favorably to complete solutions than to a price-focused, commodity-only view of the utility-client relationship. Step Four: Address Billing A number of utilities have as yet failed to provide C&I customers with relatively simple billing options that can help them analyze their own consumption and reduce their own costs. Among these options are: Consolidated billing. Companies with multiple sites may want one energy bill sent to a central financial office. They may also want copies sent to the sites. Or they may want sites to receive only their own consumption statistics. And thats just the start. Some companies want each site to compare its consumption against company averages. Or a benchmark of similar businesses in a state. Some companies want tables. Some want graphs. The list goes on. Convergent billing, or billing for multiple services on a single bill. Here again, requests for different formats abound. Electronic bill presentment and payment. This lets businesses review and pay bills online. Large businesses may want raw data on CD so they can run their own comparisons. Step Five: Outreach As energy prices rise, an increasing number of companies find value in investing in energy savings and energy insurance tools like price stabilization. Utilities are likely to find increasing interest in such services as: Web-based energy audits tailored to types of installations offices, factories, distribution centers. The Web and email are also valuable tools for ongoing help from the tip of the week to fairly technical comparisons of office-cooling strategies. Special telephone numbers that connect to business-savvy service representatives. Staff in these specialized call centers generally require ready access to online help, including scripts and business process assistants that help with tough questions. Service and price guarantees tailored to the type of business. A retailer may need a guarantee during the holiday shopping season; a farmer may need one for the summer irrigation season. On-site energy audits. Possibly for a fee or for some percent of the savings generated. Cost management programs. A utility may, for instance, offer to share the savings from changes it would undertake to lighting or cooling. Energy-quality guarantees. These can be vital to computer-based businesses. And paying for power quality guarantees from the utility can be a welcome alternative when it reduces the need for backup power sources. Incentives for backup power supplies. Many utilities have demandresponse programs that offer incentives to businesses that agree to reduce or cut power use during times of tight supply or a distribution emergency. But not all. And not all businesses believe the incentives are adequate. Exploring ways to expand existing programs may generate new ideas. They may also convince skeptical businesses that current programs are justified and deserve support. Net metering. Do all businesses with backup power supplies have the opportunity to generate energy for the grid when utility supply runs short? Net metering is now a mandatory option in some states, and interest is growing.Special telephone numbers that connect to business-savvy service representatives. Staff in these specialized call centers generally require ready access to online help, including scripts and business process assistants that help with tough questions. Preparing the Foundation for Tomorrows Discussions Over the next decade, many utilities will want to implement at least some elements of AMI. Support from C&I customers is likely to be essential in winning regulatory consent. Utilities will be best able to win that support by linking AMI to C&I concerns about rising energy costs. But while those links exist, they may not carry the day if C&Is are skeptical of utilities general commitments to meeting their needs. C&Is are far more likely to support the AMI proposals of utilities that have previously demonstrated that commitment by putting in place a variety of cost-cutting services. For utilities, then, one of the best ways to ensure support for AMI in the future is to maximize the number and effectiveness of programs to help C&Is cut costs today. Endnotes Electric Power Annual 2004, Energy Information Administration, U.S. Department of Energy, http://www.eia.doe.gov/cneaf/electricity/epa/ epa_sum.html. http://tonto.eia.doe.gov/dnav/ng/hist/n3020us2A.htm and http://tonto.eia.doe.gov/dnav/ng/hist/n3035us3A.htm. Bernard A. Gelb, Industrial Energy Intensiveness and Energy Costs in the Context of Climate Change Policy, a CRS Report for Congress, November 21, 1997, http://www.ncseonline.org/nle/crsreports/climate/clim- 11.cfm?&CFID=9567575&CFTOKEN=6848150. See also figures from the Energy Information Administration, U.S. Department of Energy, at http://www.eia.doe.gov/emeu/mecs/mecs98/datatables/d98e7_2.htm. http://www.ieca-us.com/downloads/natgas/$111bilion.doc. Electric Power Annual 2004, Energy Information Administration, U.S. Department of Energy, http://www.eia.doe.gov/cneaf/electricity/epa/ epa_sum.html. http://tonto.eia.doe.gov/dnav/ng/hist/n3020us2A.htm and http://tonto.eia.doe.gov/dnav/ng/hist/n3035us3A.htm. Electric Power Annual 2004, Energy Information Administration, U.S. Department of Energy, http://www.eia.doe.gov/cneaf/electricity/epa/ epa_sum.html. New York Public Service Commission Staff Report on the State of Competitive Energy Markets: Progress to Date and Future Opportunities. http://www.dps.state.ny.us/StaffReportCompetition.pdf. Electric Industry Restructuring in Massachusetts: Progress in Achieving the Goals of the Restructuring Act, Associated Industries of Massachusetts Foundation, Inc., http://www.aimnet.org/AM/Template.cfm?Section= Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=7783 The difference between energy-only and full-service providers for industrial electricity is less dramatic 5.06 cents per kilowatt-hour for energyonly, against the full-service providers 5.10 cents. Competitor Tracking, Customer Acquisition in the German Major Power Users Sector, Datamonitor, Issue 1. Filed under: White Papers Tagged under: Utilities About the Author Chris Trayhorn, Publisher of mThink Blue Book Chris Trayhorn is the Chairman of the Performance Marketing Industry Blue Ribbon Panel and the CEO of mThink.com, a leading online and content marketing agency. He has founded four successful marketing companies in London and San Francisco in the last 15 years, and is currently the founder and publisher of Revenue+Performance magazine, the magazine of the performance marketing industry since 2002.