The Retail Electric Provider and the Smart Grid: Reviewing the Past and Anticipating the Future to Understand the Present: Part Two of a Three-Part Blog

Posted On: June 1, 2011

By Stream Energy Director of Market Research Mike Rowley

The Future (and remember, I am just guessing).

Mike Rowley In 20 years our industry will have solved two of the major problems associated with serving our customers:

1) The incoherent nature of consumption of electricity by consumers, and

2) The fact that an energy company needs to also be a “bank” for the customer with short-term loans payable in the next month.

Problem #1, the incoherent nature of energy demand by the consumer

By placing smart devices between the customer and the market, the customer can continue to be basically incoherent about his or her usage patterns, because the devices will make the wanted adjustments based on the programming that the consumer chooses in advance. Our customers will decide on an energy usage pattern based on a preferred or mandated lifestyle. There will be some customers who prefer to stay with a single rate-based product and choose to never be interrupted for any reason. There will also be those consumers who are the polar opposite who will choose the price-point at which they will sell-back their verifiable usage to other market participants. In between those two poles will be customers who tailor their conservation patterns and market participation with a simple trip to their PCs.

A major issue might be the question of “who” compensates the ultimate consumer when he/she uses the DR process and sells back to the market.

THIS IS THE QUESTION THAT MY SECTOR SHOULD BE ASKING!

It is my prognostication that consumers can and will bypass their suppliers when selling back to the market. So, a survival tactic for the electricity supplier would be to “offer” to manage the DR process for the customer … sounds like Enernoc, Comverge and Energyconnect, doesn’t it? But it isn’t, and we will get to that when we discuss the “present” in the third part of this blog series.

Problem #2, the electricity supplier also being the loan company for the consumer

Currently, the predominate method of financially serving electricity customers is a post-pay process that requires the electricity supplier to maintain enough credit to “loan” its customers the money to purchase power, with the payback being in the next month. This practice will be eliminated. Currently, industries like telecom and cable TV have eliminated being the bank for their customers and have instituted prepaid services. Electricity will follow. To take it to an extreme, 20 years from now home banking systems will be so well developed that the electricity customer will be charged, using electronic funds transfer overnight, for the next day’s consumption based on his or her historic usage patterns and the weather with an after-the-fact true-up happening over the next night when the customer makes payment for the next day, with some suppliers willing to float the customer a loan for one day’s purchase.

I also expect that energy will be bundled with other services by companies I call “Lifestyle Vendors.”

Needless to say, it is the smart meter that will allow the retail electric provider to change these two practices. But the smart meter currently does not allow our smaller commercial and residential customers to participate directly in the demand response market.

I have partners and employees whom I address from time to time for the purpose of keeping them in the loop about what my “mind’s eye” perceives as the direction of the industry. When I am asked about my definition of the “smart grid,” my answer is simple:

“When every market participant (i.e. generator, consumer, ISO, control area operator and marketer) has the ability to transact and settle either a purchase or a sale of energy to any other market participant in near real-time, at the kWh level, based on a published market indicator, we will have accomplished the creation of a smart grid.”

Until that time, we have smart components that will eventually be utilized to create the smart grid. Smart meters are currently being used for information and education purposes and for the creation of rudimentary time-of-use and pre-paid products that can now be monitored and trued-up daily, but real-time DR products do not exist for the residential and small commercial customer. Smart meters will be able to allow the supplier to tailor its services, products and pricing options to better meet the needs of the consumer. An example:

Anecdote: The other day I was in an Albertsons grocery store in my little town of Cedar Hill, Texas. I noticed in one corner of the store was a contractor selling furniture, electronics equipment and BBQs. Every sign stated a “per week” price and the fact that there was no Social Security number required or credit check done. In the last month, I have taken meetings with three different vendors attempting to sell me customer information systems for a prepaid payment option that uses Automated Meter Reading technology.

It hit me hard that I was living in a state that had seen a marked change over the last 10 years and the currently existing population mix now had a preferred method of purchasing that I had been ignorant of until that day in Albertson’s. I needed to offer an electricity purchasing option that allowed the customer to pay in shorter intervals, avoid credit checks and not require a Social Security number.

What I had been looking at with those three vendors was not a “new” methodology; it was the industry’s adaptation of an accepted payment methodology that the retail electric provider can now offer with “NO RISK” to the consumer because of the advent of Automated Meter Reading and the concept of pre-payment for any period of time, including daily, with the cost of the payment method being absorbed by the payer, who chooses to make several payments a month, instead of one large payment.

So, what is lacking from the “smart grid” based on my previous description? Near real-time transaction, verification and settlement processes. How does a buyer, and the ISO, know that the electricity (purchased in the DR market) was actually made available?

1) How do settlement differentials get handled by the ISO/Control Area in the imbalance market?

Currently, I have only seen one methodology that addresses these two issues. It is a white paper by Dr. Ed Cazalet entitled Transactional Energy Market Information Exchange: An Information Model for Energy Transactions in the Smart Grid. Simply stated, it addresses both the transactional and settlement issues of near real-time DR energy markets.

Another issue still to be tackled is dealing with the imbalances created when there is a “no verifiable response” or a “partial” response, and even an “over-response” by the DR side of the market. Now, mind you, I am talking about doing this at the most granular level, the residential customers. I do realize that for the industrial, manufacturing and large commercial customers, these issues are being handled, although still being challenged.

Now, I want to go back to the statement I made earlier that “Ownership of the Customer Relationship” will be the most important issue in the future.

I believe that bundling “lifestyle products” will become the norm in the future. A consumer may purchase this array of services individually, or as a package of services that has an inherent discount for purchasing several products together.

An incomplete list of these potential bundled products are:

  • Electricity
  • Natural Gas
  • Propane
  • Water
  • Home Warranties
  • Insurance Policies
  • Trash Collection/Recycling
  • Sewer/Septic Tank Maintenance Services
  • Home Security
  • Internet
  • Telecom
  • Cable TV
  • Maid Service
  • Toll Tags

I suggest that the potential exists that all of these services could be purchased, and paid for, via overnight electronic funds transfers through a single “lifestyle products” vendor, even though the services come from different providers. We are already seeing a bundle of telecom, cable and internet service from AT&T, of which I currently partake. So again I state that in order for the electricity suppliers to become the “lifestyle products” supplier of the future, “ownership of the customer relationship will be the most important issue for the retail provider’s business.”

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