Navigant Research Blog

Reading for a Changing Utility Landscape

— January 6, 2016

If you have been on the Internet recently, you will have noticed that the end of 2015 brings with it endless online posts regarding some of the year’s bests, worsts, highlights, and lowlights. I’m following suit by listing a handful of my favorite semi-work-related books. Throughout the last year, many thought leaders introduced creative approaches that apply to current utility business challenges. These approaches include, but are not limited to, organic growth, disruptive technologies, and fraternal twins, and global warming and climate change. Here are my favorites from 2015:

  1. How to Fly a Horse: The Secret History of Creation, Invention, and Discovery, by Kevin Ashton.
    Now that the Internet of Things (IoT) has entered the energy and utilities industry in a big way, it is time for people in this industry to read something by the man who coined that term, even though the book itself is not specifically focused on IoT. Debunking the idea that greatness is the result of single moments of revelation, Ashton argues for the merits in repeated experimentation, failure, and gradual development. Utilities feeling pressured by an all-or-nothing approach to developing an integrated and smart organization can pivot their focus a bit more toward how they can start to get their hands dirty, focusing on small achievements to support the foundation of much larger change.
  2. Losing the Signal: The Untold Story Behind the Extraordinary Rise and Spectacular Fall of Blackberry, by Jacquie McNish and Sean Silcoff.
    While I did not love the heavy historical narrative in this book, it did really hone in on the concept that one should never underestimate their competition (in BlackBerry’s case, the iPhone), and that competition can come from anywhere. Since the power utility industry has traditionally been protected by a regulated monopoly model, lessons in dealing with competition are likely less ingrained than in other deregulated markets. But as the regulatory environment changes, young companies in solar, storage, IoT, energy efficiency, and demand management have encroached on utility consumers like never before, and there are no signs that their momentum will slow. The utility-customer relationship is becoming more important than ever, right when it stands the most threat.
  3. Superforecasting: The Art and Science of Prediction, By Philip E. Tetlock and Dan Gardner
    Based on a 4-year study of random individuals tasked to predict outcomes based on common information, the authors of this book found that the best forecasters followed a common methodology based on data collection and objectivity. This seems like an obvious outcome, but the authors also noted that it is very rarely applied to business, economic, and political forecasting. Something for all of us to ponder.

These are just three books that felt pertinent to me this year given the changes occurring in the United States and globally, where environmental, political, and technological forces are shaping organizational change at an unprecedented rate. In a time of unruly transition, one thing that cannot hurt executives is to start reading up on the topics that have helped leaders in other evolving industries—and look for ways to apply lessons to their new challenges.

 

Aclara to Buy GE Meters Unit Amid Shifting Strategies for Smart Grid Vendors

— December 7, 2015

Aclara Technologies pending acquisition of General Electric’s (GE’s) electric metering business underscores the shifting strategies among smart grid vendors. For Aclara, the move strengthens its goal to beef up its smart grid infrastructure. For GE, shedding its metering business fits in with its aim of becoming a more digital company. If the deal goes through by the end of 2015 as planned, Aclara would take over GE Meters’ global headquarters in Somersworth, New Hampshire. This includes 300 employees, as well as a satellite manufacturing plant in Chicago and a center of excellence in Bilbao, Spain. Terms of the deal were not disclosed.

St. Louis, Missouri-based Aclara intends to leverage GE Meters’ expertise in support of its concentration on important technology trends such as advanced metering infrastructure integration, cyber security, and cost-effective field upgradability, according to a management statement. Most of Aclara’s current smart metering business is among small and midsize municipal and rural electric utilities in the United States.

The Aclara-GE Meters deal follows a similar pending transaction by Honeywell, which announced in July its agreement to buy smart meter manufacturer Elster from Melrose Industries, a United Kingdom-based investment firm that specializes in buying and spinning off manufacturing firms. The Honeywell-Elster transaction is valued at $5.1 billion and is expected to close in the first quarter of 2016. In terms of scale, the Honeywell purchase of Elster is much larger than the Aclara-GE Meters transaction, given that Honeywell is expected to take over management of about 6,800 employees and the business includes gas and water meters, and not just electric versions.

For major smart meter competitors like Landis+Gyr, Itron, and Sensus, these pending deals have to give them some pause as they ponder what type of landscape they will compete in when 2016 rolls around. Do they double down on their own strengths, or do they seek new pathways, deals, or partners to stay relevant in the market? Along with other stakeholders, they need to also consider the fact that the smart metering business is undergoing some important changes, and that the pathway ahead is unclear in a somewhat down market. Major deployments of smart meters in Europe are stuck in slow gear, Chinese manufacturers are sniping from below on price and capabilities, and the U.S. market remains sluggish, though bigger deals are expected in the next year or two.

On a personal note, it is also somewhat sad to see a venerable brand like GE leave the meter market after some 130 years, but then again, business will be business.

 

Detroit Versus Silicon Valley

— November 24, 2015

October 29, Keith Naughton of Bloomberg Businessweek described how the established auto industry of Detroit is competing against the fast emerging auto industry of Silicon Valley (SV). Naughton’s article focuses on autonomous vehicle (AV) systems and examines the different R&D strategies of General Motors and Google, which essentially amounts to a comparison between gradual adoption and rapid innovation strategies to automotive technology. Naughton’s AV focus provides interesting insights, but it’s impossible to ignore the relevance of his comparisons beyond just AVs. For instance, Detroit and SV (the latter including Tesla and perhaps Apple) are each pursuing a different approach to that other disruptive force in the auto industry: electricity.

Detroit’s philosophy regarding electricity is similar to its approach to AV systems. The city has been gradually electrifying existing vehicle platforms, and this is evidenced by the fact that most of the plug-in vehicles Detroit has put on the market have been plug-in hybrids, and the fully electrified vehicles are mostly limited to markets where states have zero emissions vehicle mandates. Alternatively, the SV mantra has been the aggressive pursuit of a fully electrified alternative requiring no customer sacrifices in terms of range or convenience.

Regional Rivalry

The differing approaches have bred a regional rivalry that is demonstrated by occasional quips from industry leaders. Elon Musk often makes headlines with statements that imply Tesla may one day be bigger than GM and that Detroit needs to have a more aggressive electrification strategy. In response, Detroit calls out SV for naivete—when rumors first started to leak that Apple may be developing an electric vehicle, former GM executives Bob Lutz and Dan Akerson both publicly cautioned Apple on the struggles of entering the car business. Additionally, Lutz has continually critiqued Tesla’s business and sales model, assessing a high probability of Tesla’s ultimate downfall despite high praise of the product.

To be fair, these critiques have a strong foundation in reality. Detroit has been historically slow to adopt and produce fuel efficient or alternative fuel vehicles, creating opportunities for other global players like Toyota and Honda to grab significant chunks of the market through hybrids. Arguably, Detroit is likely to lose market share on fully electrified vehicles to other more aggressive global automakers (Nissan, BMW, BYD, and now Tesla).

Meanwhile, SV’s aggressive approach has led to challenges regarding market regulations. Tesla’s struggles with state dealership laws are well known, but Tesla has also run into trouble on software upgrades and referral programs. Additionally, though Tesla’s stock quote is impressive, its record with profits and deadlines is not. The end Lutz has assessed for Tesla has also been well played out by other California automaker startups.

Regardless of the different approaches these two regions characterize, the future U.S. auto industry is not going to exist without Detroit or SV. Detroit needs SV’s tech innovations and probably a little more SV chutzpah when it comes to investing in a new vehicle technology, and SV needs Detroit’s extensive supply chain, manufacturing expertise, and 100 plus years of market knowledge. Notably, however, SV does not need Detroit’s internal combustion engine.

 

Despite Volkswagen Scandal, GM Remains Committed to Diesel

— November 17, 2015

In the wake of the ongoing revelations about Volkswagen (VW) deliberately manipulating powertrain control software in order to pass emissions tests in Europe and the United States, it would have been unsurprising if General Motors (GM) and other automakers immediately cancelled all future diesel engine plans. Instead, GM remains fully committed to a broad portfolio of fuel efficiency technologies that include diesel engines in a variety of vehicles.

In June 2015, Dan Nicholson, GM vice president of global powertrain development, announced that “GM wants to be considered the leader in North American passenger car diesels.” The same month, Nicholson also spoke to the media and to analysts at a Chevrolet technology forum where the second-generation Cruze was revealed. In North America, the new Cruze will be offered with two four-cylinder powertrain options, a 1.4-liter turbocharged gasoline engine, and a 1.6-liter diesel.

Diesel on Schedule

Barely 2 months later, the automobile leader that Nicholson wanted to dethrone began imploding from self-inflicted wounds and proceeded to take an entire class of fuel-savings technology down with it. Despite the acknowledged illegal actions of VW and unconfirmed reports that other manufacturers may have cheated in a similar fashion, Mark Reuss, GM executive vice president for global product development, is staying the course.

Reuss told a group of North American Car and Truck of the Year jurors in early November that the next-generation Cruze diesel remains on schedule for production in 2016. That announcement came as GM revealed that the diesel-powered 2016 Chevrolet Colorado and GMC Canyon had officially been certified by the U.S. Environmental Protection Agency (EPA) as the most fuel efficient pickups in the United States with an estimated 22 mpg city, 25 mpg combined, and 31 mpg on the highway.

The certification of the new trucks was due right around the time that the VW scandal went public and was held up for several weeks as the EPA decided that these should be among the first vehicles to undergo additional road testing in order to validate the results of the usual lab tests.

Unlike VW’s four-cylinder diesel engines, the GM trucks and the Cruze utilize a urea-injection system to control emissions of nitrogen oxides (NOx). During development prior to the launch of the Cruze diesel in 2013, Chevrolet did test the same lean NOx trap technology used by VW, but found it inadequate to meet EPA and California Air Resources Board standards.

During a weeklong evaluation earlier this year, a 2015 Cruze diesel returned 39 mpg in combined driving with the older 2.0-liter engine that was then in use. The 2017 Cruze diesel will be powered by a new 1.6-liter engine that debuted earlier this year in several Opel models in Europe. In the Cruze, the new engine is expected to easily beat the 33 mpg combined rating of the old model.

Navigant Research’s Automotive Fuel Efficiency Technologies report projects that diesels will only account for about 3% of North American light duty vehicles sales in 2025, but GM wants a big piece of that market as the company takes advantage of every technology in its portfolio. GM is already aggressively slimming the mass of its new vehicles and adding automatic stop-start as a standard feature on many models. In the next year, the company is set to launch new conventional and plug-in hybrid electric systems, the 200-mile Bolt electric vehicle, and by 2020 plans to launch fuel cell electric vehicles. No stone—including diesel—will be left unturned by GM.

 

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