Customer-oriented Networks: A North American Perspective

Network Transformation Roadmap (NTR) Program

Commonwealth Scientific & Industrial Research Organisation (CSIRO)

Australia

Paul De Martini ICF International

September 3, 2015

About the Author

Paul De Martini is a Senior Fellow at ICF International and a Visiting Scholar at the California Institute of

Technology. His advisory and research work focuses on customer-centric business models, integration of

distributed energy resources and grid modernization. Paul draws on his prior experience as Chief

Technology & Strategy Officer for Cisco’s Energy Networks business, Vice President of Advanced

Technology at Southern California Edison, and market development roles as an executive with leading

North American competitive energy services firms. He currently facilitates California’s More Than Smart

working group and is an advisor to the New York Reforming the Energy Vision, Market Design & Platform

Technology working group.

Contents Introduction .................................................................................................................................................. 1

Customer-centric NSP ................................................................................................................................... 2

Structured vs. unstructured evolution ...................................................................................................... 2

Customers in Regulatory-Financial Context .............................................................................................. 3

Essential Characteristics................................................................................................................................ 5

Customer Expectations ............................................................................................................................. 5

Customer Engagement Evolution ............................................................................................................. 6

Network Services Customers/Users.............................................................................................................. 7

Prosumers ................................................................................................................................................. 7

Merchant Users ......................................................................................................................................... 8

NSP Services: Present & Future .................................................................................................................... 8

NSP Services by Customer Category ......................................................................................................... 8

NSP Services Examples .............................................................................................................................. 9

Conclusion ................................................................................................................................................... 12

1

Introduction Changing customer needs are leading to the growth of distributed energy resources (DER)1, a

development which is transforming the utility industry worldwide. Utilities and policymakers in North

America and globally are focusing their strategies on creating 21st-century customer services and

electric distribution platforms that provide superior customer value. Network modernization and

customer operations investments create a foundation for the future, but are not sufficient.

An ideal strategy will position electric network service providers (NSP) to successfully navigate and

influence the evolving utility business model to transition from the historical load-serving paradigm to a

new customer-centric service-based paradigm, being mindful of three key goals:

1. Maintain the franchise (social license) via providing and enabling superior value options for

customers;

2. Sustain relevance in the 21st century economy; and as a result

3. Secure the utility as an investment vehicle.

The significant uncertainty about the future means that NSP strategy must provide optionality for the

utility to be in the best position to thrive under a wide spectrum of potential future business models.

However, several key aspects of a successful model are clear:

The preferred NSP model must create value for customers

The preferred NSP model must also achieve financial recovery of the use of the network

The preferred NSP model will utilize the utility’s competencies as a network owner and operator

Customer decisions regarding alternatives to manage energy costs and improve reliability, based on

policy incentives - or not, are creating substantial change in the use and related value of the distribution

network. The adoption patterns observed globally to-date, along with the related impacts to distribution

system operation, can help clarify the key interrelationships between customers and NSP business.

Figure 1 below illustrates a three-stage evolutionary framework for a customer-centric distribution

network as is developing in North America.

Figure 1: Customer-centric Network Evolution

1 Distributed resources includes demand response, energy efficiency, renewable and clean distributed generation, distributed

energy storage and electric vehicles. While back-up generation is not usually part of the DER definition, this paper also considers customer adoption of back-up generation for reliability enhancement.

2

This framework is based on the assumption that NSP services and infrastructure will evolve in response

to both bottom-up (customer choice) and top-down (public policy) drivers. The yellow line represents

customer DER adoption in a NSP service area and regulatory jurisdiction. Thus, each stage represents

the effects of both increasing customer adoption of DER and a set of public policies enabled by

technological innovation. Each level includes additional services and functionalities to support the

greater amounts of DER adoption and the level of system integration desired. Each level expands on the

capabilities developed in the earlier stage expanding the role of customer decisions into electric system

operations. The result is an increasingly customer-centric system.

Customer-centric NSP Traditionally, electric network utilities largely viewed customers as predicable load under a monopoly

franchise model in which generation was seen as the profit center – not customers. This has evolved

over the past two decades through various global electric industry restructuring efforts and emergence

of commercially viable alternatives to customers’ use of utility services. Utility focus has shifted to more

clearly understand the interrelationships between their customers’ decisions and a) network planning

and operations, and b) utility financial performance in the context of revenues and regulatory

authorizations.

Structured vs. unstructured evolution2 Customer decisions regarding energy use, DER adoption and selection of adjacent services are a material

disruptive force on the operation of electric networks. To better understand the implications of the

three developmental stages just described, it is useful to distinguish between “structured” and

“unstructured” industry evolution. These are two very different models for how change can occur in a

large-scale complex system: a) gradual change guided by policy and regulation and adaptation on the

part of the existing system construct (“structured”), and b) dramatic change driven by customers and

external forces such as technology and business innovation that disrupts the existing structural elements

and their relationships and requires more systemic reorganization of the system (“unstructured”). In the

electricity industry context, these two models have different implications for customer engagement and

services; network operations, planning and markets; and for regulatory reforms needed.

Structured evolution occurs without significantly disrupting the existing industry structure, through

measured policy and regulatory changes that affect the pace of DER adoption to a considerable degree.

The growth of DER adoption in Stage 1 is largely structured evolution driven by policy. As a result, it is

more a process of adaptation to changing conditions, or accommodation or integration of new entrants

and technologies, rather than a dramatic change in paradigm. In contrast, a shift toward unstructured

customer-driven evolution, as technologies reach commercial viability and cost-effectiveness, emerges

in Stage 2 and is predominant in the more revolutionary step to Stage 3 — a high-DER, more

decentralized power system with peer-to-peer energy trading across the distribution.

Each state and locality will experience customer adoption at a different pace based on when the cost-

effectiveness of a DER solution equals or is less than the customer’s cost of electric service.

Technological advancements will diminish the ability for policy makers and regulators to shape the pace

and dispersion of customer DER adoption. Utilities are recognizing that old deterministic models of

2 Adapted from P. De Martini and L. Kristov, Distribution Systems in a High Distributed Energy Resources Future Technical

Report No. 2, Future Electric Utility Regulation Series, Lawrence Berkeley National Laboratory, 2015, pre-publication

3

customer load are increasingly irrelevant and that a combination of customer behavior economic

modeling, marketing propensity analysis and probabilistic network planning is necessary.

This means that electric network service providers need to understand customer behavioral economics

(in addition to electric system economics) and new ways to engage customers to adopt and utilize DER

within a more holistic manner that is beneficial for all customers and the network owner. This includes

recognizing and valuing the net benefits can be achieved from leveraging customer DER across a modern

electric network platform.

Customers in Regulatory-Financial Context3 Utilities are also increasingly recognizing enabling alternatives (as opposing) may better position them

with customers in terms of financial and regulatory outcomes based on enhanced social license. Studies

over the past decade have shown material positive correlation between a utility’s customer satisfaction

ratings and profitability through favorable regulatory authorizations and credit ratings.

A 2005 report by Standard & Poor’s (S&P) 4, indicated there is a “fairly strong correlation” between

customer satisfaction and a supportive utility regulatory environment which can indicate better credit

quality. S&P’s analysis compared its opinion of a utility’s regulatory environment and the J.D. Power and

Associates Customer Satisfaction Index (CSI).

More recently, a 2012 J.D. Power study5 of regulated electric utility customer satisfaction results in the

U.S. showed that higher levels of customer satisfaction is linked with higher profitability as shown in

Figure 1. Specifically, that regulated utilities in the top quartile of customer satisfaction one year prior to

a rate case had 0.5% higher ROE than the bottom quartile. Also, the study found utilities in the top

quartile received rate increases closer to their requests than did utilities in the bottom quartile.

Figure 2: J.D. Power, 2011 Industry Quartiles Based On Overall Customer Satisfaction

While these linkages have been increasingly established, utilities have been slow to internalize the

“value of customers” in their business strategies. This has changed more recently as customers have

chosen alternatives. Utilities in North America and globally have begun to explore the interdependencies

between providing electric network services essential to modern life and the more clearly understood

relationship to social license created by satisfied customers necessary for a regulated business.

3 Adapted from P. De Martini, Customer Driven Utility Business Models, Edison Electric Institute, 2014 4 T. Shipman, Customer Satisfaction Levels Can Affect U.S. Utility Credit Quality, Standard & Poor’s Ratings Direct Service.

August 2005 5 A. Heath and D. Seldin, How Customer Satisfaction Drives Return On Equity for Regulated Electric Utilities, JD Power &

Associates, May 2012

4

This examination has expanded beyond customer satisfaction to explore dimensions of customer loyalty

as it becomes more relevant for network providers in a disruptive competitive environment. Customer

satisfaction is not a measure of loyalty – meaning that high customer satisfaction doesn’t mean a

customer won’t choose another alternative when given a choice. As such, loyalty may be a better

measure to assess the future relationship with customers in the context of new business options. A key

loyalty issue today is whether customers believe that “my utility does what’s right for me even if it’s not

best for them.”

This is a critical issue for regulators and utilities to consider in shaping electric network provider roles

and services and customer expectations. Misalignment between standard network service and related

regulation, and customers’ expectations for differentiated services can create unintended customer

misperception. In 2013, Accenture highlighted that “just 24 percent of consumers trust their utility to

inform them of actions they can take to optimize energy consumption”, based on their annual utility

customer survey.6 Bain & Company’s global loyalty survey7 of industries found similar results as

highlighted in the Figure 3 below. Any discussion of new utility business models and regulation should

consider alignment with customer’s interests.

Figure 3: Bain & Co. Industries' Net Promoter Scores

However, all is not lost for NSPs as a Swiss Re survey8 showed more customers would rather buy

renewable energy from utilities than generate their own. The issue for utilities and regulators to

consider is what network business options and related services are needed to enhance customer

satisfaction and ensure long-term loyalty in order to maximize value for all customers. This requires

deeper customer engagement and collaboration with all customer segments. As an executive with a

large U.S. retailer shared at the 2014 Edison Electric Institute National Key Accounts Workshop, “We

need to discuss potential business that we have together. We need to look at each other as valued

business partners.”

6 Accenture, 2013 New Energy Consumer research study, Accenture press release, June 2013 7 J. Moerkerken, K. Petrick, A. Dullweber and B. Hamilton, Turning On Utility Customer Loyalty, Bain & Company, 2012 8 Cited in J. St. John, Consumers Want Green Energy From the Utility if the Price Is Right, Greentech Media, Nov. 19, 2013

5

Essential Characteristics Defining the essential characteristics of customer-orientation for long-term NSP success starts with

understanding customer expectations (“voice of the customer”), in addition to policy objectives as

regulated network providers continue to be viewed as facilitators of public policy.9 These expectations

and objectives provide the basis for identifying the direction and shape of customer engagement,

services and enabling technology platforms.

Customer Expectations Business and organizations across all industry sectors are facing the challenge of responding to well-

informed customers with high expectations. As J.D. Power noted in 2014, “Consumers are becoming

more familiar with a higher level of service in their daily activities with other service providers and, as a

result, their expectations are rising.” An expectation economy, has emerged enabled by unfettered

access to information regarding the best and most relevant products and services anytime and

anywhere via ubiquitous Internet connectivity. For the electric industry these include increased

expectations regarding options for lowering cost, eco-friendly energy supply and enhancing service

reliability that include the ultimate control of doing-it-yourself.

Active Energy Management

Commercial customer decisions on energy cost management “have become an integral aspect of

managing key financial, energy security, brand, regulatory and competitive risks,” according to a recent

Ernst & Young (E&Y) survey of 100 global corporations.10 Similarly, a 2014 Smart Grid Consumer

Collaborative survey found, “most consumers voice a desire to reduce their energy bills, not be wasteful,

and express a belief that they are energy conscious.” Customers are taking advantage of greater access

to information and automation to manage their energy spending.

Alternative Energy Supply

Customers are seeking alternative distributed generation supply options based on retail costs, reliability,

and environmental objectives. The over 50% decline in rooftop solar prices since 2010 and expectation

for continued reductions may allow rooftop solar to reach retail parity11 in the most populous states in

America within 10 years. Also, by 2020 rooftop solar PV systems in North America will be bundled with

energy storage as the standard customer offering from leading firms, such as SolarCity12 and SunPower.

Sustained low natural gas prices in North America have spurred a renewed interest in combined heat

and power as another option, particularly in microgrids and sustainable city developments. The

economics of alternatives do vary greatly by utility service area based on local service factors, including

applicable tariffs, regulation, federal and state subsidies, and individual customers’ perception of value,

but the overall trend is clear.

Reliability Enhancement

Recent major weather events in the U.S. have highlighted the value of reliable electric service to

customers, communities, and local economies. As a result, residential and commercial customers are

9 The policy role is often ignored in the current U.S. discussions regarding network provider models in a more competitive

and potentially disruptive environment. 10 Cleantech Matters, Global competitiveness Global cleantech insights and trends report, Ernst & Young, 2012 11 Retail parity is the price in which the customer’s cost of buying/leasing solar PV equals their applicable tariff rate. Retail

parity includes the cost reduction from federal and/or state incentives. 12 Public comments by SolarCity COO Peter Rive at the October, 2014 More Than Smart workshop in California as reported by

GreenTech Media.

6

adopting onsite back-up generation at an average annual growth rate of 10% since 2005 according to

Generac, the U.S. market leader. Generac also recently estimated current U.S. residential market

adoption at over 3% for stationary and 13% for portable generators. Reliability is also a significant

concern for critical city emergency services, military and business. This is leading a growing number of

customers to consider microgrids13 that can integrate energy management systems with onsite clean

and backup generation to create improved resiliency.

Customer Engagement Evolution Many utilities recognize they have a way to go in achieving true engagement across their customer base

and operations. This requires addressing the evolution of customer engagement as is developing in

many industries in terms of enabling greater customer control through information and choices,

providing operational/market context for customers, collaboratively interacting with customers, and

seeking opportunities to co-create value through customer partnerships. These elements are not

sequential and should be pursued within a holistic customer engagement strategy and implementation

plan. These plans have been implemented as part of a customer journey14 initiated with smart meter

deployments or other pervasive customer touch programs.

Figure 4: Customer Engagement Evolution

Customer in Control

The first step in in a 21st Century customer engagement strategy is providing the information and

decision support tools to empower customers to make informed decisions regarding the various means

and alternatives to manage their energy budgets. This is being expanded to include information on

alternatives for energy supply and enhancing reliability. Automated access is simple and available to 3rd

parties via customer authorization.

13 Microgrid is a group of interconnected customer loads and distributed energy resources that acts as a single controllable

entity that can operate in integrated or independent modes to increase reliability for the customer/s. 14 Southern California Edison and BC Hydro implemented such a customer journey as part of their smart meter/smart grid

deployments leveraging experts from IDEO, the global human-centered innovation and design firm.

7

Customer in Context

Customer information (utility, public and 3rd party proprietary) combined with operational information

developed through greater use of analytics and geospatial data enables contextual insights for both

customer decisions as well as planners and operators. This mutually beneficial information spans

distribution network hosting capacity for DER development to targeted demand side management

program design to real-time outage and restoration information.

Customer Collaboration

Customer interaction is increasingly being explored for not only self-service operational savings, but also

market participation opportunities and information about outages and damage assessment after

storms. This information exchange not only uses structured data, but also unstructured information

from social media sites such as Twitter, YouTube and Instagram regarding, for example, outages and

storm damage.

Customer Co-creation

Customer DER is increasingly viewed as a viable alternative to traditional generation, transmission and

distribution investment. In this context, customers and their merchant providers become co-creators of

the future integrated grid. The opportunities to expand value creation extend to the electrification of

transportation to achieve greenhouse gas reduction objectives as well as local municipal partnerships to

achieve sustainable urban development globally.

Network Services Customers/Users Network services customers are evolving and expanding with the adoption of DER and opening of

market opportunities for these resources to provide services to market and network operators. Many

customers will continue to receive more traditional network services, with perhaps options for greater

information access and enhanced reliability. However, there is a growing segment of business and

residential customers, prosumers, that are adopting DER that are using the network in new ways (e.g.,

bi-directional use) and related services (e.g., virtual energy storage). Additionally, an emerging set of

merchant customers that are using the network as a means of enabling transactions with both

consumers and prosumers. The following discusses the emergence of prosumers and merchant users.

Prosumers The evolution of certain customers (regardless of business or residential segment) becoming prosumers

– that is, producing excess energy and related services as well as consuming delivered energy from the

power system, is well established. The network and related services largely involve delivery and market

access services to participate in wholesale markets. Additionally, services may include DER portfolio

management and optimization for customers’ assets. For government customers, the needs may

involve a larger scope of services related to urban sustainable development through zero net energy and

enhanced reliability solutions. These solutions more often propose to integrate various renewable and

clean resources to serve multiple end-users leveraging NSP infrastructure, and DER asset management

and monetization.

8

Merchant Users A set of merchant users are emerging for distribution network services, similar in nature to those in

wholesale markets, including:

Energy Service Providers

Competitive, unregulated Energy Services Providers (ESP), such as Constellation, Direct Energy and NRG

in North America, and new non-profit Community Choice Aggregators will continue to bundle energy

with other value added services including onsite generation, storage and demand response technology

for customers. These ESPs will be customers of the NSP in terms of transporting energy and related

services across the distribution network between the customer and the wholesale market. Also, as DER

grows, ESPs will likely seek to avoid transmission system charges by transacting over local distribution

networks where possible.

DER Aggregators

The role of aggregating non-commodity energy services by for profit firms and government sponsored

non-profit organizations will evolve to include aggregation of DER resources that supply network

management services as alternatives to generation and network investment. In the U.S. demand

response aggregators like EnerNoc and Comverge, are being joined by DER developers like SolarCity and

SunPower and non-profit state demand side management organizations15 in distribution and

transmission level markets.

Technology Platform Service Providers

As a distribution market place evolves, opportunities to access and mine customer transactional data

may develop. Companies like Google, Apple, ADT (home security), Comcast (cable service provider) and

others are looking to adapt and expand their hardware and software technology platforms to offer

energy-related services to customers. They are also looking to monetize the latent value from the

intelligent building or home energy devices and consumer energy conservation. This value monetization

will involve use of electric network services in many cases to monetize the system energy and capacity

value.

NSP Services: Present & Future Network service providers may expand the range of services for existing business, government and

residential consumers without DER, prosumers with DER and emergent merchant users of the

distribution network. Today, utilities across North America have begun the process of redefining existing

services and identifying new services to meet the changing needs of customers. The following is a

summary of this ongoing exploration.

NSP Services by Customer Category Figure 5 below highlights existing and potential future NSP service offerings by customer category. This

list is based on current customer service offerings and announced service demonstrations by North

America utilities. The future services listed have been discussed in several research papers and in the

New York Reforming the Energy Vision (REV) regulatory proceeding and subsequent Market Design and

Platform Technology working group.

15 Examples include Hawaii Energy and Efficiency Vermont

9

Figure 5: NSP Services by Customer Category

NSP Services Examples The following figures 5 and 6 highlight representative NSP service offerings based on the list above for

Consumers, Prosumers and Merchant customers as proposed, in demonstration or currently available in

North America.

10

Consumer Service Examples

Figure 6: NSP Services Examples for Consumers

11

Prosumer & Merchant Services Examples

Figure 7: NSP Services Examples for Prosumer & Merchant Customers

12

Conclusion The electricity industry is experiencing a sea change across the world: distributed energy resources are

being deployed by customers who are increasingly seeking options to augment existing NSP service that

are more economic, environmentally friendly and offer improved reliability. This trend is expected to

continue its rapid growth through the next decade through accelerating technological and business

innovation. It is important to note that while there has been strong growth rates, customer adoption of

distributed resources is currently at a relatively early stage of market adoption. There remains

significant potential for NSPs to benefit from further growth through a more customer-centric and

distributed power system.

However, new NSP strategies will be required involving new business models and regulation based on a

fundamental shift to customer-centric thinking. The convergence of new energy and information

technologies, expansion of electric markets, pervasive connectivity and related rise of social businesses

allow business strategies and customer engagement that were not possible a decade ago.

As such, the time is now for NSPs to consider the following and begin a journey with their customers –

all of their customers – including those that may be disrupting aspects of the traditional service model.

Customers’ perceived value of NSP service drives enterprise value through revenues and social

license. Customer satisfaction is an excellent starting point, but delving deeper into customer

loyalty is needed to more fully understand the changing nature of customer perceptions in a

wider competitive landscape.

NSPs need to engage customers on all four dimensions; control, context, collaboration and co-

creation to plan and operate a 21st Century electric network. Close engagement will also yield

insights into customer decision making that has the potential for material changes (positive and

negative) in the operation of a network as well as opportunities for new mutually beneficial

value creation with customers.

NSPs should explore opportunities to facilitate customer choice as the value of doing the right

thing for customers now may be a primary factor for future success in a more customer-centric

electric system.

NSP customers are expanding to include prosumers and merchants that have generally viewed

as competitors – these customers have new service needs with associated revenue potential

that may more than offset the loss of traditional revenue.16

Business model pilots are an effective approach to validate new NSP services - allowing

validation of customer acceptance, revenue models, and processes and technologies toward

production service launch. Global experience with new NSP business models and revenue

opportunities is growing and opportunities for best practice sharing is expanding.

16 New York’s NYSERDA research organization is conducting an analysis of the revenue potential from these types of services

that is expected to be completed by the end of 2015.