Five Consumer Mega-Trends Threatening Electric Utility Revenues

Bill Roth | Jul 22, 2013

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Spanning all industries, consumers are fundamentally changing how they make decisions on what to buy and who they buy from. The implications for the electric utility industry are larger than those described in the EEI white paper entitled Disruptive Changes. The electric utility industry's preservation of revenues and investor capital will be determined by its success in aligning with the following five consumer mega-trends reshaping the U.S. economy:

1. Financial headwinds are the new norm. Consumers are in active pursuit of lower bills. This is not just an electric utility industry challenge. A recent Nielsen survey concludes that consumers now view financial headwinds as their new norm. They no longer expect an improved economy to improve their household finances. Consumers, most especially the millennial generation, now look to themselves to find answers that reduce their bills, including electricity bills. This consumer pursuit of lower monthly bills places every business including the electric utility industry at a crossroad. Either a business supplies lower monthly bills solutions or their customers will figure out a way to do it themselves.

2. The millennial generation. The millennial generation will exceed the boomer generation in annual buying power by 2017. Yet the electric utility industry has been slow to align with how the millennial generation communicates and makes decisions. The proven five keys to engaging the millennial generation are:

- Embrace their beliefs

- Be cool with a purpose

- Offer affordable and authentic products

- Demonstrate enterprise-scale authenticity

- Be transparent because there are no secrets

The electric utility industry's revenues are very much at risk with a millennial generation that views the industry as missing in action.

3. Moms are fighting mad. Moms increasingly view fast food, chemicals and pollution as threats to the wellness of their loved ones. These Concerned Caregivers are taking action through Internet websites like Care2 and Moms Air Force. Care2 is the largest online community for healthy and green living with over 22 million members and a membership climb rate of approximately 100,000 new members per month. Moms Air Force claims they are "139 million moms strong." Activist moms hold their electric utility to two expectations. The first is to put the wellness of their loved ones above all other considerations. But these moms also manage the household budget. They expect the companies they do business with, including their utility, to provide products and services that align value with values.

4. CEOs commit to renewable energy. CEOs are adopting sustainability to reduce their operating costs, increase customer alignment and mitigate risks. Walmart's CEO Mike Duke has made sustainability a core platform for achieving everyday low price leadership. Using 100% renewable energy is a key element in Walmart's sustainability plan. Apple CEO John Cook is driving the company to green their supply chain in response to customer CSR issues. Also included in Apple's sustainability initiatives is the use of 100% renewable energy. These are not isolated cases of CEO leadership. CEOs from Alan Mulally at Ford to Clif Bar's CEO Kevin Cleary are incorporating sustainability as a core corporate attribute. Electric utility revenue preservation will require a c-suite alignment with the growing number of CEOs that are incorporating sustainability into their strategies and operations.

5. Consumer acceptance of cost reducing disruptive technologies. Corporate America preserved their earnings during the Great Recession by aggressively adopting cost-reducing disruptive technologies. Increasingly electric utility customers are adopting this trend to control their costs. This trend is being enabled by global economies of scale for renewable energy, batteries and smart building systems. One example is IEA's projection that renewable energy will supply more energy to the global grid than natural gas by 2016. The EEI Disruptive Changes suggestion on redesigning rates may only create short-term revenue preservation results as DSR and DSM technologies gain global economies of scale cost advantages. The reality is that the electric utility industry will need to align its value-proposition to fulfill customer expectations for behind the meter DSR and DSM technologies that lower costs and environmental impacts.

Preserving electric utility revenues

For over a hundred years the U.S. electric utility industry has been a global leader in supplying reliable and price competitive electricity. The industry is staffed with highly qualified engineers and proven business leaders. But the following changes outside the industry are reshaping consumer expectations:

- Today's customer engagement path is as different as an electric bill insert, a tweet and crowd-sourcing

- Disruptive technologies in renewable energy, energy storage and building operations are benefiting from a global declining cost curve at the same time utilities continue to raise prices

- Consumers are searching for technologies, products and businesses that offer the winning combination of "cost less, mean more." Market research confirms they "want it all" where they pay lower bills for smarter, healthier and greener solutions.

The electric utility industry's revenue preservation challenge is to:

1. Engage the millennial generation
2. Align with Corporate America's CEOs in their adoption of sustainable best practices including the greening of their supply chain to reduce risks and costs
3. Satisfy the consumer search for Walmart-like "everyday low electric bills."
 

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Comments

It is interesting to read this article while always keeping in mind the phrase assumed by the author "the utility is a monopoly". This sentence from point 1) is particularly relevant. "Either a business supplies lower monthly bills solutions or their customers will figure out a way to do it themselves."

In a competitive market, companies must gradually adjust their strategies to suit changes in customer needs and tastes, but in a monopoly market even with strategies presumably closely aligned to a majority of customer needs and tastes, companies are vulnerable to finding themselves suddenly out of synch with a majority of their customers with only slight shifts in customer tastes. Add to that problem, the natural aversion to change of the management of a monopoly, and one is likely to find a monopoly company dramatically out of synch with a majority of their customers / voters / ratepayers. The result is liable to be dramatic shifts back and forth in customer demands as a very few percent at the middle switch opinions for or against a few relevant issues of which they may be aware. Add to that the recent reduction of investor attention spans, requiring no actions which don;t have immediate results, and monopoly utilities may find themselves in future badly out of touch with both customers and investors.

So market competition should be employed wherever possible rather than regulated monopoly. Distribution is clearly a job for monopolies bared from any other business activity and operating only in a single small region, but generation and transmission should all be done by competitive entities in a fair and open market, selling directly to the final consumers.

If lower costs are a postulated major driver, then logically renewable energy would not be pursued. However, in some regions (e.g. California) the price of power is being driven to record highs.

Where I am actually going on this is that "feel-good" emotions may be the main driver for most consumers and that is where utilities should concentrate. Seems to work in California, but they may be smoking too much pot and their judgement may therefore be diminished.

As I have previously opined, I do not believe distribution should be left to the free-market, but should be regulated until such time as the consumer actually does have choices. Government contrived "choices" cannot emulate an actual free-market, which I believe is inherently not possible with utilities like water, and power.

I also believe the current "regulated" market needs to be overhauled so it does not so heavily favor the utility while also being burdened with needless costs inflicted upon the consumer by politicians and bureaucrats.

Micheal, how do you hope to implement regulated utilities without having it "burdened with needless costs inflicted upon the consumer by politicians and bureaucrats"? All the members of the regulating bodies supposed to be your agents in rate cases are usually political appointees, often with little knowledge of the product they are regulating or of the business criteria which govern the decision making process of the businesses which they are regulating, assuming those are not themselves government owned and managed by political appointees.

As I said, the system needs to be overhauled to get rid of the oxygen wasters.

Thanks Len and Michael for your posts. I am not sure how your focus got onto the question of monopoly and structuring issues. The focus should be upon customers. Key consumer groups are radically transforming their decision making on what to buy and who to buy from. EEI's "Disruptive Changes" white paper is the tip of the iceberg. The strategic issue confronting the electric utility industry (and all other industries) is the consumer search for products and services that align value with values. That is the industry's ultimate revenue threat or opportunity.

Kind of a late reply, but I do not believe utilities really consider the ratepayers as customers, which would normally be fatal to a business. In my view, consumers are more like shackled piggy-banks with no real choices. Until such time as consumers really do have choices, I think utilities should be regulated even though that has its own set of issues.

There is great subtlety to the use of the word "choice" when it comes to the consumption of electricity.

While I would entirely agree that (at the moment) a house cannot function without electricity and therefore there is little choice but to be connected to the grid some of the major electrical loads in a house do indeed have stiff competition.

I have a choice to heat my house with electricity, natural gas, propane, oil or wood. All are available to me. I choose to heat my house with a high efficiency gas furnace. It used to be heated with electricity which became far too expensive so I now use gas. Loss to the utility of 15 kW of load. The same decision has been made by every building company in my area. There is not one that installs electric furnaces or baseboard heaters in new homes.

I have a similar choice for my hot water heater. I chose gas again because it is far far cheaper. Loss to the utility of another 5 kW of load. Similarly every single builder in my area installs natural gas hot water heaters. No one installs electric water heaters.

For lighting my house electricity is the best alternative by far - however investment in low energy light fixtures has dramatically reduced my electricity consumption in that area and I am trying out the new LED fixtures which are dropping that consumption still further.

In short almost all of the heavy power consumers in my house are either no longer there or use very little power compared to what they used to.

And this leads me to my last point. When I did have an electric furnace and hot water heater powered by electricity the fuel was relatively cheap. It is not now. This has caused a permanent change in my consumption profile from a heavy user to a very light user. I could very easily power my house using a few kilowatts of solar panels and a storage battery.

Len has mentioned this in past posts and while it has limitations for most city dwellers most people with a roof could use this technology to disconnect from the grid entirely and I see this day coming soon - not for all but for an important and sizeable part of the utility consumer base. A large component of my electricity bill is delivery charges. With solar panels on my roof delivery is free.

Utilities have, for far too long, treated their customers with contempt thinking they are a captive audience with no choices. That landscape is changing rapidly especially in North America where long term abundance of natural gas at very low prices is taking the wind out of the sails of many of them.

My view is that the final nail will be the advent of SOFC or similar fuel cell technology. Expensive at the moment but the same was said of flat screen televisions until mass production dropped the price by a factor of 15.

The choice then will be connect to the gas grid or connect to the electricity grid.

Then the utilities will be in a free fall of their own creation. They need to wake up very fast. In Ontario there are now very frequent days of so-called "surplus base-load generation" where the demand is so low that base-load generators must be taken off the grid.

I believe this is a direct result of the trend that Bill Roth has outlined here but it is not just the "millenials" that are causing it. It is everyone that has the feeling they are being ripped off by the utility.....or by Government interference or both....and that is just about everybody.

I believe that utility revenues are going to drop sharply in the coming years which will itself cause price increases and a possibly irreversible spiral.

Malcolm