Navigant Research Blog

Utility Reform Takes Hold in the Rockies

— April 6, 2015

A new bill introduced in the Colorado General Assembly is intended to jump-start the state’s efforts to revise its traditional utility ratemaking models. In effect, the bill would contribute to substantial changes in how Colorado utilities plan, upgrade, and operate their grids. The end goal is to align the utility business model with state objectives to promote an environmentally friendly industry through increased adoption of clean/renewable generation and energy efficiency strategies.

Specifically, the bill would require the Colorado Public Utilities Commission to investigate and report its findings on potential measures to encourage customer energy efficiency and engagement, grid efficiency and reliability, technology innovation, and clean energy development and integration. This would guide the restructuring of the Centennial State’s practices around ratemaking, incentivizing, standards development, and approval processes in order to appropriately balance the good of the public, environmental benefits, and the utility business. It’s a tall order, but other states such as Hawaii, New York, and Massachusetts have already laid the groundwork for revising their energy regulation frameworks around similar goals.

For the Long Term

To date, utilities and other stakeholders both within Colorado and nationally have expressed concerns over the loss of revenue, increased grid instability, and cross-subsidizing that can occur in areas with high penetration rates of distributed generation. Notwithstanding the need to lower the greenhouse gas emissions associated with traditional forms of power generation, prices for distributed solar systems are declining, fueling adoption and raising awareness around policies that support growth. So, it’s imperative that regulators enable mechanisms that enable utilities to maintain profitability and provide good service.

One such mechanism that has commonly been discussed is performance-based ratemaking. A somewhat nebulous concept, a performance rate structure essentially rewards utilities based on the level of service they provide to their customers. In theory, utilities are more invested in pursuing long-term improvement strategies instead of squeezing revenue out of their current asset base to meet service requirements.

Past Due

Many observers believe that the traditional regulatory framework is overdue for reform, and I happen to agree. But others see the reform process as potentially over-hasty. This month in Public Utilities Fortnightly, Kenneth W. Costello, principal researcher at the National Regulatory Research Institute, warned readers of the uncertainty around the spread of new technologies and resources in North America. “Decisions that bank on the sureness of the future invite regrettable outcomes,” remarked Costello.

Keeping that in mind, perhaps the slow pace of regulatory reform might actually be a blessing in disguise for Coloradans. Realistically, the state is unlikely to implement any sort of large reform in the near future. HB 1250, the bill under question, was approved by the Energy and Transportation Committee in late March on a party line vote. It still has to pass through financial and appropriations committees before it gets to the GOP-dominated Colorado Senate, which will most likely kill the bill.

Max Tyler, the primary sponsor of the bill, told me that he holds no illusions that this legislation will sail through the Colorado Senate. Nevertheless, he maintains a sense of optimism in regard to state energy reform: “Ideas with big barriers and big changes will take a while.”

 

Going Small, Americans Seek More Efficient Housing

— March 25, 2015

If you have spent any time on social media lately, you’ve likely encountered at least one post or online album that features so-called tiny homes. Literally tiny, averaging less than a couple hundred square feet, tiny homes have inspired numerous periodical references, coffee table books, and at least one documentary. Given that Americans on average tend to inhabit more square footage than people from almost any other nation, it’s remarkable to see this change in attitude as a growing number of people not only accept, but also intentionally pursue smaller living spaces.

Though it’s a far cry from the idyllic rural landscapes that many tiny houses are photographed in, large cities like New York, where high demand for space has inflated rental and housing markets and regulators are pursuing more sustainable forms of urban development, are benefiting from this minimalist attitude. Recently, a collaborative micro-apartment project called My Micro NY received the city’s adAPT NYC award to design, build, and operate a 55-unit space in Manhattan, with each apartment to be less than 400 square feet.

Hold Please

From an energy-efficiency perspective, small-unit multi-tenant living spaces have many benefits. Individual small units require much less energy to heat and cool, and efficient multi-tenant spaces can benefit from shared climate control. If the resident struggles with personal energy management (e.g., they constantly push the hold button on their thermostat and forget to turn it off), much less energy is wasted in a shared climate. Most importantly, as with multi-tenant spaces in general, heating and cooling can be shared, so the per-capita energy requirements are much lower. And if the space is designed to be energy efficient—or even better, zero energy—then these effects are multiplied.

Of course, there are downsides, including the potential negative effects on one’s health that can be caused by spending too much time in a small, studio-like space. Experts generally agree that while this type of housing can be suitable for young professionals in their 20s, it can have detrimental health effects on individuals in their 30s and 40s who have different lifestyle preferences and forms of stress. Families and couples should be aware of possible issues surrounding privacy and the ability to concentrate in small, shared spaces.

Small Is Beautiful

Still, energy-efficient housing solutions are becoming widely available for people of all ages, incomes, and lifestyle preferences. The explosion of the energy-efficient pre-fab market, which is characterized by smaller overall spaces, is an indication that Americans are compromising space for efficiency—and not necessarily with cost as a major driver (aside from the fact that smaller square footage = less overhead cost).

Although tiny homes on wheels and pod apartments will likely remain niche markets, the growing buzz and number of options offer design and lifestyle benefits that are catching the interest of many Americans. As a culture, Americans are still far from being characterized as energy-conscious, but this growth in the small housing market signals a step in the right direction.

 

Utilities Enter a Brave New World of Customer Engagement

— March 9, 2015

Utility Dive’s State of the Electric Utility 2015, released last month, aptly states that “The greatest challenge for the utility industry may be its greatest opportunity.” The report is referring to distributed energy resources (DERs).  The survey of utility executives across the United States revealed that no less than 70% of interviewees see strong opportunities in exploiting the growing DERs market, despite regulatory structures and traditional utility business models that present obstacles. For now, the major legwork is focused on reforming those two critical inhibitors, but once that’s done, will utilities be prepared to navigate the competitive environment through effective marketing strategies for their products and services?

While many utilities still have to maneuver through operational, regulatory, and business plan challenges before they can wrap their heads around marketing strategy, the fact of the matter is that the private market for DER products and services is already very mature across the United States—and strong competition requires equally strong marketing.

Information Flood

To be clear, I do not consider utilities to be marketing laggards; pretty much every investor-owned utility (IOU) that I know of (and many municipal and cooperative utilities as well) has a marketing team that can shape, execute, and evaluate successful customer-facing programs.  The problem is that all of their future competitors also have skilled, innovative, and highly resourced teams that are experienced in conducting business in markets undergoing disruption.

One challenge is that marketing and branding have gone through enormous changes with the rise of the internet.  Consumers have an increasing number of outlets to research and review products. Unfortunately, the Internet is also unruly by nature, and it’s easy to be misinformed and end up misdirected. Marketers are held responsible for creating pathways for online users to obtain accurate information and get to the best purchasing point—no simple task, given that this requires a highly developed understanding of consumers and the obstacles they face online. For an example of how this might pertain to a utility that wants to, say, participate in the solar leasing market, just google “solar lease”; the results will speak for themselves.

Getting to Know You

Something that I’ve heard about a lot when I read about the so-called utility “death spiral,” is that utilities do not know enough about their consumers or how to interact with them, because they’ve never really had to. I actually disagree with this, but even if it were the case, utilities are still better prepared to get to know their customer than many think—just see Navigant Research’s report, Smart Grid Data Analytics for Customer Engagement.

Unlike the vast majority of the private sector, utilities already have access to many different types of information for their entire target consumer base. Customer information and billing systems are a starting point, but with advanced metering infrastructure and other forms of intelligent grid monitoring becoming commonplace, there is additional relevant data being collected across the grid.  Navigating data privacy correctly, utilities will be able to consolidate information on many different levels to track customers’ energy usage and pinpoint their needs–the first step to effective marketing.  This is something that competitors with limited data may perpetually be stuck guessing about, and might be the edge that utilities will be looking for.

 

Thermostat Studies Show Benefits of Being Smart

— February 16, 2015

This month Nest announced several studies that have been conducted on its learning thermostat.  One was conducted by MyEnergy, a Nest subsidiary that analyzes residential energy information. The others were conducted by the Energy Trust of Oregon and by Vectren Corporation, an Indiana-based holding company. The results boost Nest’s claims that the thermostat can pay for itself in only a year or 2.

Across the studies, evaluators found average annual reductions in electricity use between 13.9% and 15% for cooling and 10% and 12% for heating loads.  For natural gas, the Vectren study confirmed an average annual reduction of 12.5%.  In terms of cost savings, Nest states that adopters showed an average of 9.6% savings on their gas bill and 17.5% on their electric bill.

Last year, competitors EnergyHub and EcoFactor released third-party studies that indicated reductions in electricity use of 6% to 17% after thermostats controlled by their back-end platform were installed in users’ homes.

The Limits of Studies

Smart thermostats have become increasingly numerous in recent years. According to Navigant Research’s report, Smart Thermostats, North American household penetration of these devices is expected to exceed 20% by 2023. Until recently the market was concentrated in warm weather states, but adoption across colder climates is becoming more common, and utilities are becoming interested in smart thermostats for year-round energy efficiency and demand response (DR) programs.

Regardless, the high prices—$150 to $300 for the device alone—are still a barrier. Hence, smart thermostat vendors have trumpeted third-party studies that indicate positive return on investment (ROI) through energy bill savings. Analyses of products from EcoFactor, EnergyHub, and now Nest indicates annual energy savings in the 8% to 15% range.

But such studies can be interpreted in several ways. The most obvious conclusion is that the chances of incurring similar savings are good given the variety in the studies’ methodology and sample populations. On the other hand, factors like the locations of households, weather varying, and simultaneous energy efficient behaviors all affect study results.

Your Results May Vary

For states where heating and cooling are a small part of the utility bill, the savings from a smart thermostat will look different than those in an area where the costs are high. In such cases the results could be misleading.

The MyEnergy study included households from all over the country in its sample, and Nest claims that it is fairly representative of their adoption base—but is that representative of U.S. consumers as a group? The average reported savings might not fall in the middle of the spectrum of all consumers, so someone using this information as a basis for purchase of the $250 device could be anywhere from greatly or slightly disappointed to slightly or very pleased depending on how similar they are to the majority observed that indicated decent savings.

And if the consumer doesn’t really care enough to break down this information in the first place, much less nitpick findings from a variety of disparate studies? These types of adopters might be drawn to purchase the device simply for its user delight qualities. Nest has created an iconic device that by most accounts works really well and that has a lot of informational features designed to trigger more energy efficient behavior. That would be a great outcome.

 

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