How Do You Compete When GE/Tesla Have Set Their Sights On Your Business?

Considering that digitization is one of the main trends impacting the utility industry (along with distributed energy, aging workforce and infrastructure and more demanding consumers) yesterday’s news that Exelon metaphorically closed shop and handed over the keys to General Electric came as a shock to me. Exelon Corp, the 4th largest US utility by market cap, a company that is really in the asset management business, just handed over the management of its assets (in an ever more digital world) to GE, a company that has made it’s digital power plant focused future clear for all who care to listen. In other industries it would be folly to hand over your core competence to a competitor (that happens to have been supplying you those assets all along).

So how does an industry compete when the competition is not playing by the same rules? How do the utilities of the world who are losing $2tr in value over the next few years compete with the GEs/Teslas of the world who are projected to increase their value (through retail energy) by $4tr in the same time frame?

Is it by tacking on a new business model that is at odds with its (the utility’s) monopolistic DNA? NRG (once a high flier in the industry), under David Crane showed us that’s not the case. Crane tried to change the nature of the business his company was in by making declarations of going all in on the ‘Home’ with blog posts and speaking sessions. What he failed to realize was that his shareholders, all in on coal, couldn’t bear to lose money during the transition. Image below is of NRGs share price during his tenure. Good intentions, badly executed.

Is it by tacking on a marketplace like a few utilities are doing? No. Especially not when the link to the marketplace site is buried deep in a labyrinth of a website.

The Flaw Is In The Design.

Why is the utility industry currently so flawed and unable to adapt to the changing landscape? Because the design of the utility in its current state itself is flawed. Without boring you with the technical details I’ll briefly explain a core part of why the utility is unable to quickly adapt to the changing landscape, which is the Cost of Service Regulation (COSR). COSR essentially means that for utilities to make money they have to build things. Big things. The bigger the thing the utility has to build the more money it can make. That is the fundamental structure of the current utility design preventing the utility from making money off the power it sells you (that’s sold at cost). But that design falls apart in a world where (in the extreme case) the biggest thing you have to build is a solar panel on a home (and if Elon Musk has anything to say about it you’re building it right into your roof). Or a battery pack that hangs in your garage. That design totally crumbles in a world where your biggest asset is probably software in the form of lines of code on a server somewhere. That business model hampers the ability of the utility to truly move into the future. Let’s call this the business model flaw.

Something else that has plagued the utility industry is that the critical product it provides?—?electricity?—?is, by itself, abstract and has no (for lack of a better word) personality. No one, not even the employees of the power plants I’ve worked in, actually truly know what a kilowatt feels like. Due to this lack of personality we end up with a product that is an abstraction represented only by how we feel about the company or entity that provides it. Let’s call this the product flaw.

Utilities will have to apply a foreign concept called design thinking to solve this problem because the true limit to the future growth of the utility is still the customer. The customers ‘heart’ to be precise. The concept of what a utility is has to be redesigned. From the scratch. By solving the two flaws using design thinking. The flaws have to be fixed by being

1. People/consumer centric: what does the future utility consumer want?
2. Creative: what are the possibilities, without our current model constraints?
3. Start testing: how can we simulate future experiences to learn from failing -
4. Iteration is key: going back to the start and redoing this with our learnings from our failures to improve things for the consumer? And also importantly, but counter to the traditional approach of the utility, the utility has to move through #1–4 above rapidly.

Sidenote: The design thinking loop looks pretty similar to the Six Sigma Deming Cycle of 'Plan, Do, Check, Act'.

Business Design flaw: As highlighted above, the value is shifting to the retail sector of the energy industry and this is because the consumers now want something more than just a utility bill at the end of the month. The transition might take a while but all indications are that it is accelerating. In emerging markets (where the transition is happening quicker) consumers never got the opportunity to enjoy the benefits of a fully functional grid and they have transitioned (similar to the mobile phone leap) to the Youtility future business model. It’s a future that looks more like one of Personal Power where we have little to no reliance on the current iteration of the utility for generation, transmission or supply of the energy.

For the utility this transition will will require a move from capturing value by ‘giving people a product that they have to pay for’ to ‘making things people want’. It will start with getting to the root of what people want and it’s definitely not ‘electricity’. People want what electricity provides them and it is a warm home, a cup of tea and visibility at night.

Product Flaw: The feeling of electricity. It’s something that has never been considered as a selling point. Even recently when utilities started to speak to consumers the conclusion was that a way to get to their hearts was through engagement. Even Nest came in and thought the idea was to engage consumers to actively manage their electricity usage. These attempts have failed because of the intangibility of the product and the fact that electricity, unlike gas for our cars, is not salient.

I experienced this firsthand throughout the time I ran Power2Switch where our focus was on helping consumers to save money on their energy. We managed to get the cost conscious consumers fairly easily (30% of your electricity costs!), those whom price signals impacted, but failed to get mainstream until we started to make the electricity more tangible. It was through the clever device of guides called Ohms and Wattson. We did two things at the same time;

1. We abstracted the already abstract concept of electricity even further by highlighting that we all did not know what it was and it was necessary to get concierges/superheroes who could help the customer navigate this.
2. We made things more tangible by masking it under Ohms and Wattson. You could now say ‘I want to be the one who uses green energy’ (even if you did not truly know what or how green your energy was) and walk the journey to obtaining that green energy with the help of Ohms.

This approach came from a personal, and shared approach, to empathizing with the customer. The core element in the design of the new utility could be one word: empathy. Only when you truly walk in their shoes, which we had, will you be able to create products for these consumers that serve their needs.

Data from all my work in this space proves that only between 1–3% of your consumers will actively manage their energy and the rest might care about the cost but only when it’s shockingly different from a range they expect. So what to do? Where Nest got it right was the use of artificial intelligence to help you make decisions about consumption and take action based on their understanding of your behavior. It’s exactly what Google has gone about doing by reducing energy usage in their data centers through the application of DeepMind/artificial intelligence. The idea is to run millions of simulations on the usage profile and decide on the optimal one. It is the work we did on interactive bill in 2012 (image below) and we got coverage in Fast Company for the design and data collection element of this. The plan was to use disaggregated data to help develop your profile and then optimize that usage by recommending different actions based on simulations we would then run.

What we saw was that our service at P2S was percolating into the experience that the customers desired from the utility. We actually considered taking on the customer service task for the utility due to the number of calls we fielded (and eventually forwarded to the utility). This was due to our inability to fully impact the experience even though we had far exceeded expectations for customer service in the industry. Interestingly, all this was a perception. We had not changed the end product, we had just reframed the customer's perspective on electricity.

So for a utility or a technology company that is looking to own the consumer’s heart what should they do? Where does this leave us? It’s a future of customized energy options. Customized for both the customer as well as it is for the utility itself. A full package of the right sized solar panel, batteries and the home appliances that are the right configuration for your energy usage profile. To do this the utility has no choice but to get into product design and development and this might be as a result of designing the inputs themselves. An example can be found in the redesign of rooftop solar offerings.

ReDesigning Rooftop Solar

The beauty of a new business model, based on redesigning the industry, for the incumbent utility is that they already have a good sense for our energy usage from the smart meters that have been deployed across the US. Because no incumbent utility has design thinking in its DNA, to make this transition the utility will have to work with design firms that can dig into and better understand customer needs to develop software enabled hardware. (Full disclosure: I am working with a firm called Axis Design along these lines and we are open to partnerships. Email me!).

(Image courtesy Axis design showing modular packaging that can be applied to, for example, rooftop solar?)

The current rooftop solar design is (for the most part) a fully customized system for the residential or commercial building, every installation. This is cost prohibitive. As solar started to boom a lot of companies got into the space, not because they had expertise in building rooftop solar systems but because of (for example) rooftop building expertise. If the industry is to be rejigged the design of rooftop solar systems should be put in the hands of industrial designers with the goal being to modularize the rooftop solar system to a point where only a little customization is required on the particular rooftop. As I mentioned above, the utility already has information on our usage profiles from our smart meters and can be a critical player in this design by providing data/selling insights to companies that are looking to create businesses to serve rooftop solar design.

This is doable. It’s an approach that enables the utility to solve the product and business flaws of the current business model by finding new ways to interact and capture value from the myriad of new players that can enter this space if the utility decides to just open itself up to where digitization, design thinking and actually selling retail products (at the intersection of the home/energy) might take it. 3M is a company that has stayed alive for 114 years because it continues to open itself up to the possibilities of what sort of business it is and what it sells. This willingness to open up will be the determinant of who, amongst the ~3200 utilities, will still be around in 10 years. Especially if the utilities keep conceding ground to partners who are actually competitors...

Please share, like and do all the things you do to articles. This article is a condensed version of analysis you can find at at Asha Labs or reach out for ghostwriting (that doesn’t suck) at HarperJacobs. Seyi Fabode provides portfolio support at VestedWorld (investing in emerging market companies).