Cheryl Linder Smart Grid Lecture 3-7-2011

Cheryl Linder, Global Offering Leader, IBM Energy and Utilties Industry
March 2011

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

© 2010 IBM Corporation

IBM Institute for Business Value

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

2010 2009 2008

Embody creative Reinvent customer Reinvent customer
leadership relationships relationships

Build business model Embody creative
dexterity leadership

2 © 2011 IBM Corporation

Agenda

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


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



… because in many parts of the world, residential customers have
become much more of a force over the past 20-40 years
Changes in residential and industrial electricity consumption in the US, 1949-2009

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

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



… 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
Low (Traditional
Consumer)

-  passive receipt of content -  passive receipt of power
Increasing Decision-Making Initiative

-  limited sources of content generation -  limited sources of power generation
-  major media companies exclusively control content -  incumbent utilities exclusively control power generators
-  provider-customer relationship one-to-many, driven by demographics -  provider-customer relationship one-to-many, driven by demographics
and geography and geography

-  consumer interest drives new and more targeted choices in content -  consumer interest drives new and more targeted choices in power
-  more interest in and leverage of information on quality indicators for supply
content (e.g., TV program rating systems) -  more interest in and leverage of information on quality indicators for
-  broader choice of providers drives more active role in provider selection content (e.g., green energy standards)
-  consumer does not control content, but has stronger influence via -  broader choice of providers drives more active role in provider selection
choices -  consumer does not control generation, but has stronger influence via
-  introduction of time-shifting technologies enables more active selection choices
and management of content at individual level -  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 -  interactivity and involvement with generation and service providers
High (Active

increases increases
Consumer)

-  consumers active in producing content and influencing content -  consumers active in generating power and influencing generation
distribution planning decisions
-  rapid creation of new content types as techology change causes -  rapid creation of new power supply options as techology change causes
explosion in capabilities explosion in capabilities
-  dynamic, value-based pricing of content -  dynamic, value-based pricing of power (e.g., time-of-use)
-  provider-customer relationship dynamic is increasingly customized to -  provider-customer relationship dynamic is increasingly customized to
specific entertainment and information interests, with consumer specific energy management goals, with consumer analytics a key
analytics a key driver 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;



… because in a time of great technological innovation for the industry,
business model innovations have not kept pace
Percent of CEOs reporting a strong focus on specific BMI areas

Unlike most other industries, energy and utility business models
have changed little from those in the mid-twentieth century
Source: IBM Global CEO Study 2008


… because those who build major infrastructure aren’t certain to
profit most from its presence
Who invested in broadband Who benefited most from it?
infrastructure?

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



We envisioned in the 2007 report a future for energy providers
driven by technology evolution and increasing consumer control
Utility Industry Models
Participatory Network
Distributed and

Operations Transformation
Dynamic

A wide variety of grid and network
Some combination of grid and network technology evolve to enable shared
technology evolves to enable shared responsibility, and consumers’ strong
responsibility, but consumers either interest in specific goals creates new
Technology Evolution

cannot exert much control (or elect not markets (virtual and physical) and new
to) and the balance of benefits favors the product demands, which balances
utility benefits more equally between the
consumers and utilities

Passive Persistence Constrained Choice
Centralized and

Consumers take firm steps to move
One-Way

Traditional utility market structures
toward more control, but are limited to
dominate, and consumers either accept
certain “levers” (technologies, behaviors,
or prefer the traditional supplier-user
or choices in providers) by regulatory and/
relationship
or technological constraints

Low High
Degree of 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

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
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.



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
(2010 respondent totals are shown for each country)

2010 8000 responses

2008 5000 responses

2007 1900 responses

Source: IBM Global Utility Consumer
Surveys, 2007-2010


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

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

22% 20%
(22% in 2008) (21% in 2008)

Passive Ratepayer (PR) Energy Epicure (EE)

33% 24%
(31% in 2008) (26% in 2008)

Sample Size = 5084 Source: IBM 2010 Global Utility Consumer Survey
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. Source: IBM 2010 Global Utility Consumer Survey
20 Sample Size = 5984 © 2011 IBM Corporation


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)

Will consumers
open their
wallets for new
offerings?

Sample Size = 4539 (2010), 3497 (2008), 1893 (2007) Source: IBM 2010 Global Utility Consumer Survey


Residential consumers remain tough customers – their expectations
in many areas far exceed their perceived service
Percent of respondents who believe that their current provider does/should
focus on specified activities or attributes

29 point gap 46%

45%
32 point gap

24 point gap 40%

Do these gaps
22 point gap 38% invite new
entrants and
new business
20 point gap 28% models?



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)



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

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



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



… 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



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

 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

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

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


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

creates value (access creates value
to products and (products and
services) services)

End Users Distributor/ Manufacturer/
Intermediary Seller

Marketing Value Intelligence Cash Applications

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
1 5
creates value creates value

using service &
delivered back application derived
to Google via intelligence
the services and 4 6
applications
Services & Applications Commercial
Services & Applications
which i consume

in return for passive

which merchants
2
intelligence

consume
3 8
7

9
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
10
Source: IBM.
marketing value intelligence cash


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

Two single-sided Two multi-sided Two single-sided Two multi-sided
platform model types platform model types platform model types platform model types

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.



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




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

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

Source: IBM 2008 Global Utility Consumer Survey Sample Size = 5084

Conclusion



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

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

40 Source: IBM Institute for Business Value (IBV) analysis. © 2011 IBM Corporation


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

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?

41 Source: IBM Institute for Business Value (IBV) analysis. © 2011 IBM Corporation


Telecom companies have been through a similar transition – what
can we learn from it?
Who invested in broadband Who benefited most from it?
infrastructure?



Thank You!

cheryl.d.linder@us.ibm.com

www.ibm.com/energy


Cheryl Linder Smart Grid Lecture 3-7-2011

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