Tim Wolf
(former) Senior Director
R.W. Beck – An SAIC Company

Whether it is music (the iPod), books (the Amazon Kindle), imagery (digital cameras), or movies (Redbox), the brief history of the “digital” revolution is replete with winners and losers, innovators and followers, and clear lessons that new, disruptive technologies drive fundamental changes in the business model rather than vice versa.

But what about the energy industry?

While we have not yet – in Steve Jobs’ words – “found the recipe” for the Smart Grid, the shopping list is largely written and many utilities are now in the kitchen. Further, companies such as Google and Microsoft as well as a dozen start-ups searching for the recipe expect the utility business to foot the bill for the underlying technology as they take the customer high ground.

The convergence of Smart Grid technologies with consumer electronics, wireless communication networks, and the Internet will enable what all the attempts at deregulation have failed to: the creation of a platform for true customer choice and a sea change in how customers buy, use, and perceive energy. One of the things that has made the iPod so successful is that Apple has focused so effectively on the wants and needs of the end user to deliver ease of use, freedom, and true value. And there is money to be made in this rapidly emerging market space. That’s why many companies such as Google, Microsoft, Intel, and Cisco are entering the Smart Grid market space with new energy management products, software platforms, and services to get in on what has always been the utilities’ private domain. The deployment of Smart Grid technologies brings with it significant threats and opportunities for the traditional utility franchise—depending on how the utility decides to approach it.

It won’t be easy!

The Smart Grid technology revolution will require utilities of all types and sizes to develop new business and investment models, new business processes, new skill sets, new ratemaking strategies, new programs, and a laser-like focus on the customer. These challenges presented by the “Human Side of Smart Grid” may well prove to overshadow the technology challenges, as utilities struggle to adapt their organizations and implement effective change management programs to a landscape that is rapidly shifting under their feet.

Today, according the Edison Foundation’s Institute for Energy Efficiency, there are less than 10 million truly smart meters (with two-way communication) deployed at utilities in the U.S. The American Recovery and Reinvestment Act’s Smart Grid Investment Grant (SGIG) program will support the deployment of an additional 18 million smart meters over the next three years. And this does not include the ongoing or planned advanced metering infrastructure (AMI) deployments by utilities that did not ask for, or receive SGIG monies. That means by 2015, as the adoption curve steepens, there will be some 30 million smart meters deployed. By 2019, that figure is expected to nearly double to almost 60 million smart meters.

Think about it. Utilities will be adding tens of millions of intelligent, near real-time, two-way communicating “computers” to the side of everyone’s house, so say nothing of the millions of devices – from programmable communicating thermostats to in-home displays to smart appliances – that will be installed behind the meter. If we as an industry, steeped in a nearly century-old, protected business model, think we know exactly how all this will turn out, what sort of innovation will be unleashed, and how customers will respond, we are kidding ourselves.

What is clear is that faced with higher prices and desiring higher levels of service, consumers will react and make choices. Utilities that innovate and work with their regulators or governance boards to adapt – even transform – their business models, will find themselves in a much stronger position to shape their future. Those that do not may well have their future shaped for them. And, all the while, the expenses for building out support systems in areas such as billing and control will be left with the regulated business as newcomers grab customer attention and revenue. There is a significant chance of stranded assets as utilities build infrastructure only to have the fruits of their labor taken by other firms.

To stay ahead of the disruption curve of Smart Grid, utilities must move beyond the mere technical questions and orchestrate a cultural shift that results in a new level of focus on their organizations and their customers. This is not to suggest that utilities do not currently do so, but rather that they must shift their focus to the context of a new business model in which real-time information, communication, control, and customer interaction are the norm.

Inside the Utility

The planning and implementation of a Smart Grid initiative is a complex endeavor that will fundamentally transform the way a utility delivers energy and the way its customers use energy. The effort will cut a wide swath and impact a broad array of stakeholders across the organization. And though the technologies involved are critically important, the success of any utility’s Smart Grid initiative will also depend on nontechnological elements such as change management; solid program design; rate analysis and development; marketing, communication and outreach to customers; and building a project atmosphere and organizational culture of innovation and openness to change within the utility.

Over the course of dozens of Smart Grid and AMI projects over the past two years, R.W. Beck has found the following elements are essential to building a foundation for Smart Grid success within the utility organization.

A Clear Vision and Strategy

Where does the utility want to be in 10 or 20 years? What will it look like; how will it operate; and what goals are to be achieved? Without a common, unifying vision that is broadly understood throughout the organization, it becomes very challenging to transcend the organization’s traditional silos and barriers. Strong support and buy-in from the entire senior management team is equally critical. The visioning exercise for Smart Grid is efficient and straightforward and is readily harmonized with the utility’s enterprise resource planning and strategic planning.

The vision is supported by a strategic messaging map that provides a clear set of “home base” messages that articulate the purpose, goals, and value proposition of Smart Grid in a clear and compelling way to both internal and external stakeholders. If executed correctly, all communications about the project will clearly map back to the core strategic messages to help ensure understanding, organizational alignment, and a broad base of support.

Technology Road-mapping – A View from the Future

Taking place a level down from the vision and strategy development, the technology road-mapping process assesses the current technology landscape at the utility and the business goals and objectives supported. The process challenges the utility to honestly explore 10 or more years into the future with respect to its mission and business drivers. Participants envision a future state consistent with the utility’s mission then work backward from that state, defining the steps, the sequence of technology investments, and the dependencies to get there. The technology roadmap contains both strategic and tactical elements and must remain a living document that can be updated as new conditions arise.

With the roadmap in place, senior management has a valuable tool and well defined technology pathway to prioritize capital investments across the organization, align utility activities with strategic planning, and enable utility employees to better understand and support the strategic direction because they see where they’re heading.

Whether it’s AMI, outage management, distribution automation, integration of renewables, mass-market demand response, distributed generation, or energy storage, the technology roadmap provides the basis for integrated, effective decision making at both the strategic and operational levels.

Business Process Redesign

A key element to ensuring strong return on the Smart Grid investment is to re-engineer, streamline, or even eliminate business processes to take advantage of the capabilities of the technology and the value of the data the systems deliver. R.W. Beck’s experience has shown that a focused business process re-engineering effort to streamline internal processes is one of the most valuable endeavors the utility can undertake in concert with AMI/Smart Grid deployment.

The process starts with the utility management team identifying the business functions that will be impacted by implementing Smart Grid technologies. The process then digs deeper to capture the work processes to support those functions. From there, it’s a matter of prioritization – identifying the business process opportunities that will deliver the greatest value to the utility and its customers. Developing honest, accurate assessments of the current state is critical.

As the process moves forward, team members lay out those processes and deconstruct them, always asking the questions “Why?” and “What if?” From there, the teams work collaboratively to define a future state for each of the processes based on the capabilities of the systems and data they provide.

The future state is then laid over the current state to fully identify the required changes to implement the new process. These inputs include resource requirements (organization, staff, systems), as well as upstream and downstream dependencies. The key consideration during the business process redesign phase is to identify the lowhanging fruit: those processes that can be re-engineered and implemented in the near term to optimize the return on technology investment.

Organizational Refinement

AMI and Smart Grid are transformational technologies that bring with them significant changes and far reaching impacts on how a utility will run its business, how it will interact with customers, how data will be managed and applied, and how energy will be delivered and used. Therefore, the Smart Grid utility will require new and different skill sets as well as organizational structures to optimize performance and return on technology investment.

The organizational refinement process involves tough choices. People’s jobs may disappear or change dramatically. In the typical utility we see management teams and workforces that can be segmented into three groups regarding their receptiveness to change. About one-third of the people in a typical organization are change agents. Another third are “on the fence” about whether change is a good thing. The final third are resistant. Focus change management efforts in the context of the established vision and technology roadmap on the middle third to tip the scales for the organization in the right direction.

Internal Stakeholder Engagement and Communication

Internal utility stakeholders hold the key to Smart Grid success. They will implement and operate the Smart Grid, and their involvement and understanding from the beginning is critical. The senior management team must commit the time and effort to meet with employees across all groups, evangelize the vision and strategy, and maintain that effort until alignment and inertia to move the project forward take firm hold. This internal communication effort must be continued throughout the project based on a comprehensive communication plan and messaging map established early in the process.

Outside the Utility

In March of this year (2010), a Harris Poll of 2,576 adults in the U.S. gauged public attitudes toward electricity consumption and the Smart Grid. While the poll provided interesting and timely insight into consumer thinking, it also underscored the great need for education and outreach to consumers about the purpose and need for Smart Grid. Among the findings:

• When asked if they’ve ever heard the term “Smart Grid,” 68 percent said “no” and 32 percent said “yes.” When asked if they had ever heard the term “Smart Meter,” only 26 percent said “yes,” while 69 percent said “no” and 9 percent were “unsure.”
   
• When asked if they would be willing to pay 10 percent more right now for electricity each month to get the benefits of Smart Grid in the future, nearly half responded negatively.
   
• Two in five (42 percent) Americans were unable to agree or disagree with the statement, “The electricity system is fine the way it is, and Smart Grid is not necessary.”
   
• When asked about the impact of Smart Grid on the security, reliability, and increased renewable sources of energy on the electric system, at least one-half of Americans expressed uncertainty.
   
• The general population is also uncertain about what will happen to the cost of electricity once these investments are made, and as such are very unwilling to pay for it. Those familiar with Smart Grid are more likely to believe that the cost of electricity will increase once it is deployed (51 percent) than those who have not heard of Smart Grid (39 percent).

“While the need for and benefits of Smart Grid and smart meter may seem obvious to industry insiders, this is not the case with consumers. In light of the huge investments about to be made that ratepayers will ultimately be responsible for, utility companies need to formulate, test, and launch a sustained communication strategy,” said Tish Pasqual, senior research director, Harris Interactive Business and Industrial, Harris Interactive.

This dearth of knowledge and familiarity with Smart Grid and AMI is likely a strong contributing factor to consumer unrest associated with Pacific Gas & Electric’s deployment of smart meters in Bakersfield, California. There a state legislator is seeking a suspension of all smart meter installations in the state until the meter accuracy controversy is resolved through an independent assessment. This issue is now spilling over into the Texas market as well.

While those of us who have worked in the metering industry for a while know that today’s solid-state meters are highly accurate measurement devices – more accurate than their electromechanical forbearers across the entire load curve – the public is skeptical (particularly when the utility is asking them to pay for hundreds of millions of dollars for the meters).

Yet despite PG&E’s best efforts to explain that the higher bills associated with the smart meters is attributable to weather and rate increases, many consumers, consumer advocates, and politicians aren’t buying that. Instead they see that customers received smart meters and bills went up, so they assume that smart meters must be the cause.

Customer Perceptions Rule

The results of the Harris Poll and the trouble in Bakersfield underscore the point that technology is only part of the Smart Grid recipe. Significant education and sustained customer outreach will be required to ensure that AMI technology is accepted, but that’s just the first step. Changing customer perceptions about energy usage and costs will be critical to driving meaningful adoption of programs – time of use (TOU) pricing/ critical peak pricing (CPP), demand response, load control etc. – that actually deliver the value and outcomes that Smart Grid promises.

Voluntary TOU programs have been in place for 25 years or more, and to this date, adoption remains woefully low. An entirely new and challenging period of rate analysis and design will be required to create the economic incentive to make customer participation worthwhile. In the next couple of years, we will likely see programmable communicating thermostats, in-home displays, and perhaps even smart appliances available at retail outlets such as Home Depot and Lowe’s.

What happens when a consumer buys one, comes home and installs it, and it doesn’t configure properly with the meter and home area network? Do they call the utility? Do they call the device manufacturer? Who fills that need in the marketplace if the utility decides it doesn’t want to deal with anything beyond the meter?

These are just some of the challenging questions the industry will have to wrestle with and communicate clearly to consumers as Smart Grid becomes a reality in people’s homes. As with every other product or service, consumers will be seeking value and ease of use. Apple’s mantra in developing the iPod was “if you make it easy, the customers will come.” Utilities who take a page from the Apple playbook, and focus on the user, will find themselves in a much better position as Smart Grid rolls out.

About the Author

Tim Wolf is a consultant focusing on AMI and Smart Grid; formerly with R.W. Beck, an SAIC company.