As the smart home market heats up, digitalization, changing customer demand, and innovation in-home energy management technology has opened the door for electric utilities to get in on the game. While tech companies’ access to the home remains siloed to the device level, utilities have the power in the home — literally.
Utilities own the missing piece of the smart home puzzle — real-time, whole-home energy data. This, along with the trust of their customers, a connection to every home, and their large capital resources, gives utilities everything they need to make a winning play in the smart home.
So, what is keeping the majority of utilities from making their move? Misperceptions. Dissenters say that the smart home is a losing market for utilities. They tell utilities to take a back seat and just provide subsidies and incentives. This approach, while easier to implement, leaves the utility with no long-term connection to the customer and essentially abdicates the relationship once the rebate is paid. But there is another option. Now, utilities can leverage this data and keep the customer’s attention, while creating an energy-driven smart home.
The smart home market — a lost cause for utilities or a hidden treasure?
One of the great innovations in the 20th century, almost everything we do today is powered by electrification, which was brought to us by electric utilities. However, once electricity made its way into every nook and cranny of our lives, utilities moved from a driver of innovation to a provider of a basic necessity that needed to be maintained. Because of their shift from innovation driver to basic service providers, many may be under the mistaken belief that utilities don’t have the market or brand power that a technology company has — framing utilities as the “luddite” industry.
What’s worse, some utilities are effectively capitulating to this belief, opening themselves for deep disintermediation from their residential customers. For example, some utilities provide rich rebates for smart thermostats, capturing energy and demand savings required by law and regulation and maybe receiving a small bump in customer satisfaction in return. But in this scenario and others like it, it is tech companies that create those smart thermostats, not utilities, that are forming enhanced customer relationships and capturing the related customer data of these devices.
To further complicate matters, utilities are fragmented with about 3,100 electric and 1,500 gas utilities spread across the country, and each on its own may feel overwhelmed by the prospect of competing for a true seat at the smart home table. They may feel powerless or inadequate to properly frame and solve the problem of how they should help residential customers easily optimize their energy use for their own benefit — balancing cost, comfort, security, as well as utility desired grid management?
The only way to really help residential customers is for the utility to get behind the meter. What is behind the meter that is so interesting? Data. Data upon data in the home that has enormous value to service providers by adding necessary intelligence to their operation and giving customers needed insight into their home and energy.
“The data holds great power; it can be used to manage energy demand by incentivizing consumers to use less electricity during peak hours,” says Bradley Olson in his Wall Street Journal article, Google, Amazon Seek Foothold in Electricity as Home Automation Grows. And with all that ‘great power’ waiting to be harnessed, the question becomes, who will be in the home gathering that data to provide the services customers want when they decide to spend their discretionary dollar? This is the skirmish that is taking place in this space today. Or as Bradley Olson says in the Wall Street Journal, “Home energy management is a battleground in competition between Google and Amazon…”
And now… the utilities are joining that battle.
Utilities will have the chance to take the energy data that only they have access to and unlock invaluable insights, connecting every part of the smart home. While this could be just another player added to Olson’s ‘battleground,’ utilities have a remarkable chance at using this energy data to unify a market that has previously been fragmented in each of their individual territories. So how do they get in a strong position to do this? Understand their strengths and use it to their advantage.
The missing piece of the smart home — energy data
Utilities can pave the way to innovate new energy management solutions. Are we talking about grassroots R&D to develop new tech and new experiences? Probably not. The degree of fragmentation of the industry minimizes the development intensity. Just ask any technology vendor about its experience and joys of “pilotitus” the industry has. Every utility wants to test a tech on its own, develop its own perspective on value-added benefits, and then run its own 3rd party measurement and verification.
So, what do utilities have in their favor to fight the problem of fragmentation? Five strengths give them an advantage over the tech giants.
1. Financial Power: Market cap of the utility industry is significantly higher than technology companies. Some C-level executives at utilities lament over the financial power the tech sector wields, and even a few have stated that the market capitalization of Google exceeds all utilities combined. Time to give that a fact check. Upon looking into that declaration, recent statistics emphasize the falseness of this statement.
Granted, the summation of the tech space market cap is an enormous number, but generally, all of these players are competing with each other for the same customers, unlike the majority of the utility space. When one stacks up the market power of the collection of utilities just in the United States, the financial power exceeds Apple, the current most valued company in April 2019 by 16%.
Next, looking at total revenue as a comparison, the differentiation becomes more clear. Comparing overall revenues to tech players, utilities lead the next biggest player by almost twice as much and the smaller Facebook by nearly 10 times.
Utilities have a market of 329 million people or about 121 million homes. Tech firms have the entire world as a market, amounting to around 7 billion people. Even if you limit their target market to the 2.5 billion smartphone users, the fragmentation tech companies have given the complexity of international markets, language barriers and local regulation expose the difficulties they must manage. Furthermore, if revenue is compared to active customers or users and total addressable market (TAM), utility revenue power on a “per user” basis towers over technology companies.
Because tech companies must spread their revenue over a much larger customer base, the revenue intensity per “user” in the utility industry far exceeds those in the tech world. And given that utilities virtually serve the entire U.S. population and define a fully saturated market, tech players have a long way to go to take an equivalent share of the U.S. consumer wallet. Only Amazon has a revenue number that compares to utilities, and this is driven primarily by its retail model in which a large percentage of revenue is passed through from products sold. Thus, if the share of wallet is a measure for consideration, utilities have an enormous lead and thus could have a massive influence on the outcome of the smart home. The question is, will this lead erode if utilities don’t defend their consumer relationships?
2. Focus & Knowledge: Utilities generally have a relatively narrow focus on energy, energy management, and effective grid operation. On the contrary, technology firms have a wide array of focus, solving many problems and moving fast to outpace competitors. Most utilities have developed strong energy efficiency groups that hold the keys to true customer relationships when it comes to energy management (2017 spending $8B). They have studied the customer for years, understand how customers respond to offers, and this is why the tech companies have realized that a key channel is through energy efficiency. They rely on utility marketing to get access to this highly valuable channel, and in fact, are being paid through the rebate process at the same time. It’s a genius move… for the tech companies, that is!
But what if a utility didn’t bow to the technology companies when it comes to sharing the value of these transactions? What if instead, they demanded certain data privileges and data security for the customers they are promoting these technologies to? Well then, they would finally be taking control of these technology relationships, truly owning the most valuable point of the relationship — energy data.
3. Data: One of the great strengths of distributed utilities is that they are the only ones who have the ability to unlock whole-home data — unfettered access to real-time energy. Maybe even without realizing it, utilities have positioned themselves as the best ones to manage this data for customers. The data guards on the utility industry are unmatched in today’s data mining world.
Utilities can play a natural role of “energy data protector” and set the standards of energy data use, holding 3rd parties accountable and responsible for creating outstanding, yet privacy safe experiences and services. But their advantage goes beyond data privacy. As states have tried to foster the growth of the smart home through a “build it and the market will develop” concept, we have seen it fall short time and time again. From this, we’ve learned the importance of the channel these technologies proliferate from.
Opening up the market to all the tech players who aspire to know the customer through energy usage has created micro fragmentation in the local market, diluting messages to customers and increasing confusion in an already confusing market. Stakeholders misinterpreted the results from those efforts as a lack of customer value proposition. This view is misguided because it was the market constructs that failed from the beginning.
A market will only ignite when the cost of a customer entering is low from a dollar and effort point of view. Right now, smart home technology isn’t set up to hit either of those points — but the utility channel is. Utilities are already in almost every home. They have ways to decrease the price and they have an established channel to demystify the technology. And even better, they already have access to the whole home data, not just a piece of the pie. No one benefits by using fragments of the data — not the customer or the provider. Utilities have the chance to capture and grow the data as a whole, something no other smart home provider can say.
4. Customer Journey: Utilities can develop powerful services in and around energy if they so choose. There are natural extensions of energy data that can help keep customers engaged and seeing the utilities positive value proposition. Beyond billing, outage, and energy efficiency rebates, utilities can develop services based on their unique customer perspective that no other industry can easily replicate.
Can they do this alone? With the industry fragmentation, probably not. What they can do is find technology partners that are willing to look at and support contiguous and consistent customer experiences across an energy education and services journey. These partners will truly want to strengthen utilities’ relationship with customers rather than echo the tech companies desire to disintermediate the utility from their customer.
5. Local Brand: Everyone knows their utility, as it serves all customers, all segments. Looking at those local utility customers in terms of the technology, nearly every household either selects Android or iOS operating systems for their smartphones. They choose Amazon or Google for voice activation in their homes. But the local utility is in EVERY home, not just some homes.
While brand awareness for these technology companies is high, one has to look at the impact of the tech players highly fragmented marketing spend. Even though utilities are fragmented by location which limits product development power, the tech players are fragmented because they must fund every channel and every market they want to play in. The Smart Energy Consumer Collaborative recently surveyed utility customers and 78 percent of consumers trust their utility and are more likely to participate in a program or purchase the product if their utility endorses it. Customers just trust their utilities, and that is a very valuable brand attribute.
Utilities could make a power play — but will they?
A hundred years ago, electric power generation and distribution resided exclusively with the utilities. But in today’s world of distributed generation, business models are becoming more distributed as well, as utilities see the need to make their way into new frontiers. If one looks at just this financial data, it is undeniable that utilities have the market power and the financial power to compete. The real question at hand is will they? How can they defend their revenue advantage?
The monopoly franchise for the distribution companies will prevail through time given the indispensable product utilities bring to the US economy. However, to say that utilities cannot compete is a bit of a misnomer. The truth is utilities can compete without even developing sophisticated new products or marketing capabilities. Strategically, there are really two options:
- Rapid industry consolidation to capture future revenue in spaces that technology will take us (difficult due to the current federal and state regulatory complex).
- Leverage existing pro-utility technology platforms in the market today that are helping utilities develop marketplaces, storefronts, new services, and especially smart home energy management products.
At some point, the utility industry will begin to separate. On one side will be those who capitulate and let the other players fully take the space. Those that fixate on past practices and the safety net of traditional return on asset models, achieving short term goals, will eventually find that the old model has expired. This will leave them exposed to eventual acquisition as the market for new energy-related products and services bring new life into the industry.
But on the other side will be those utilities that learn how to leverage technology and claim behind-the-meter services. It will be this utility that I will be betting on. It will take this issue head-on and truly fight for relevancy with its end-customer. It will ignite its customers’ imaginations, build new, profitable business models through the proliferation of smart technology and unite the smart home through new energy services driven by whole-home data. This is the utility of the future. And it is all starting now.
Originally published on Electric Light & Power.