by Tanya Bodell, Charles River Associates

Utilities are working diligently through their smart grid strategies. Yet public forums indicate a disheartening reality.

Smart grid is not being driven by consumer demand, net benefits remain unclear and utilities are being forced into a new business model yet to be developed. What is the right business plan for smart grid? Focusing on retail customers, this column walks through the standard sections of a business plan to see where the industry stands.

1. Target Market

A key assumption underlying smart grid is that customers differ by load curves, appetite for conservation and demand elasticity.

Tapping into these differences allows for a cost-effective means of voluntary load control. Yet discussions concerning smart grid often lump consumers together, as if they were a homogenous mass of individuals.

Smart grid initiatives need to segment the market and target those customers who will receive the most benefit.

2. Competitors

Customers already have options to conserve energy and reduce consumption—shutting lights off and investing in energy efficiency, to name a few.

Under most rate structures, however, they do not benefit from shifting their load to off-peak hours. What does new technology provide that customers do not already have?

Smart grid needs to develop a unique value proposition to be accepted and embraced by consumers.

3. Product or Service Offering

Is smart grid a product offering or a service offering? Smart grid is discussed as both and neither. The smart grid might be simply an enabler, just as the Internet is an enabler.

On top of these platforms, buyers and sellers can connect in new ways to transact both products and services. Are you best positioned to provide a smart grid platform, new products or services?

Smart grid requires a new way of thinking, along with new business models, to capitalize on the business opportunities it creates.

4. Marketing Strategy

Marketing educates customers about products and why their lives will be better if they buy.

To this end, advertisers either identify an unmet need or create new ones.

Right now, consumers are being told smart grid will let them know how much electricity is consumed each hour and enable more control of consumption.

Once the professional ad agencies are involved, consumers will discover that smart grid is required to fulfill the unmet needs of being accepted, being in charge and being able to retire on your own personal island.

5. Sales Strategy

When is the best time to start selling directly to customers? As soon as possible.

To date, smart grid sales strategies have ignored end users. Advanced metering information providers have sold smart meters to utilities.

Utilities have sold state regulators rate recovery. Government has sold taxpayers a 21st-century electricity grid.

It is time for the sales pitch to focus on customers and define the value proposition or risk being derailed by irate consumer push back.

6. Financials

The economics of a profitable investment generally have an upfront outflow of investment dollars in exchange for positive future cash flow with adequate expected return given the risk of that investment.

Yet a utility’s investment in smart grid can create negative returns—an upfront smart grid investment in exchange for reduced revenues because of falling or shifted demand for electricity.

To be financially viable for utilities, smart grid revenues must extend beyond the expected return on rolling advanced metering systems into ratebase.

Expected program penetration, demand response, load shifting, system cost impacts and alternative rate structures need to be analyzed, assessed and run through multiple scenarios to understand the impact of smart grid on a utility’s financials.

Smart grid is not a separate initiative from corporate strategy; it needs to be incorporated into the entire strategy of a utility or run the risk of inadequate returns.

Smart grid requires a new business model.

Target customers most likely to benefit from new products and service offerings enabled by smart grid technology.

Create a value proposition that fulfills an unmet need and market that value directly to customers.

Focus sales efforts on the customers who ultimately will have to pay for the new technology. An investment in smart meters without smart products and smart business structures that realize the extent of smart grid value quickly becomes a not-so-smart investment. It’s time to develop your business plan for smart grid.

Author

Tanya Bodell is vice president of Charles River Associates. E-mail her at  Tanya.bodell@fticonsulting.com

“How is managing in the new economy different from managing in the old economy? Actually, it’s a lot the same. It’s about the financial discipline of the bottom line, understanding your customers, segmenting your customers by their needs, and building a world-class management team.”

Meg Whitman, former eBay CEO