Energy is a major component of the United States’ economy. According to the University of Michigan Center for Sustainable Studies, “the U.S. spent $1.2 trillion on energy, or 5.7% of Gross Domestic Product (GDP)” in 2019. While that’s no small amount of what the U.S. produces, the somewhat surprising news is that energy consumption is projected to decline in the coming decades. By 2050, energy per capita is expected to decline below 300 million BTUs per capita, a dip beneath current usage statistics. The U.S. Energy Information Administration attributes this demand to increasing energy efficiency, stating, “U.S. energy consumption grows at a slower rate than gross domestic product through 2050 as U.S. energy efficiency continues to increase.”
This poses a challenge for public utilities. While energy efficiency is a stated policy goal, the achievement of it seems to shrink utilities’ revenue prospects. How can utilities continue to grow even as consumers and companies alike consume less energy? In this article, we will seek to answer that question.
Satisfying today’s energy consumer
It’s easy to see declining energy consumption as an inevitability, but a fatalistic attitude toward the changing competitive landscape obscures a key insight: Efficiency cuts both ways. It can cut a utility’s revenue if not carefully managed — and it can also grow it. How? Consider the following.
A standard unit of power measurement is a quad, which is defined as a quadrillion BTUs. Utilities can imagine what exactly a quad is by using a number of different practical measures, such as the fact that it equals 293,071,000,000 kilowatt-hours or 970,434,000,000 cubic feet of natural gas or 8,007,000,000 gallons of gasoline. Visual Capitalist notes, “A quad is a massive unit that only is useful in measuring something like national energy consumption.” What’s also noticeable is that “a whopping 68% of all energy is actually rejected energy, or energy that gets wasted through various inefficiencies.” And that statistic appears even more stark when broken down by sector. The residential sector only enjoys a 65 percent end-use efficiency with 3.75 quads of wasted energy, while the commercial sector also has a 65 percent end-use efficiency with 3.15 quads wasted.
Utilities often focus on the revenue lost due to greater energy efficiency, but increased efficiency represents an opportunity to please customers. Utilities don’t want to deliver power that isn’t used, and customers don’t want to pay for wasted energy. Utilities can help satisfy today’s energy customer by helping to educate them as to how they can save money by using energy more efficiently. They can also employ efficiency tools such as time-of-use billing, which allows utilities to leverage smart metering in order to set usage-adjusted rates. Added benefits such as discounted days and “free” off-peak periods help keep customers happy and leverage efficiencies to benefit utilities, decreasing expenses and increasing income.
Another way to please customers while helping utilities involves implementing prepaid billing. This option reduces expenses such as collections and many standard billing costs. Passing some of that savings on to customers benefits both parties.
Diversifying utility asset bases
Energy efficiency — meaning the maximally productive use of energy — isn’t the only way for utilities to reduce expenses. They can maximize income (and sometimes every realize strategic growth) by diversifying their utility asset bases.
Everyone is familiar with the four largest generators of American energy: petroleum, natural gas, coal, and nuclear. Much has been made about the death of coal, and natural gas has suffered more modest declines, while petroleum and nuclear energy have enjoyed only marginal increases. However, almost all of the smaller alternative energy sources have enjoyed healthy to dramatic growth. These include:
Only geothermal, which is the least used of all energy sources, saw a decline.
Distributing energy generation across multiple asset bases offers several growth opportunities for utilities. Naturally, these opportunities will vary from state to state since some states restrict utility asset ownership. However, in contexts where it is allowed, asset investment can lead to the development of a vertically integrated utility, which greatly reduces operating costs. States that have renewable energy targets may offer various kinds of incentives to encourage their development, including utility ownership of assets. These assets can include technologies that consumers would typically own, such as rooftop solar arrays, which can lead to rate recovery without a substantial capital investment.
Other benefits include:
- Diversifying the utility’s asset portfolio
- Decentralizing energy production, which protects against economic shocks
- Developing expertise in a new energy technology field
- Shoring up strategic vulnerabilities in an existing grid by introducing new technologies at key points
Value-added services are generally defined as optional utility services that a customer may elect for additional benefits, services whose costs are only borne by those specific individuals and not the entire customer base. Value-added services have a number of benefits over traditional utility services. They can use extant marketing channels, greatly reducing communication costs. The same holds true for IT resources and back-channel systems, which can engage with value-added services at minimal cost. Finally, utilities have a unique position to offer specialized value-added services such as electric vehicle charging stations, backup microgrids that can continue to function for specific customers during catastrophes or unexpected grid failure, and solar panels for rural areas.
These value-added services can expand in multiple ways, and two of the most promising are through online marketplaces and smart homes.
Web-based marketplaces such as Amazon, Yelp, and eBay achieve revenue growth not primarily through creating and selling their own products, but by connecting interested consumers with third-parties who have applicable goods. While not every online marketplace has proved successful in its mission, they have still led a retail revolution that has transformed what it means to buy and sell — and there’s no reason why utilities can’t join them.
Power-related products applicable to both residential and commercial clients abound. Everyone could benefit if utilities could connect customers with reputable third parties who offer goods that might benefit them. The challenge lies primarily in quality control and avoiding the impression of a conflict of interest on utilities’ parts.
Speaking of energy-related goods, utilities can also implement value-added services that related to the internet of things (IOT) offerings that increasingly appear in modern smart homes, benefits such as surge protection for expensive appliances. Smart homes, though, can benefit utilities in less immediately obvious ways. The use of smart metering on a utility’s side and the wealth of data generated by smart homes means that energy providers will one day be able to determine who is in a property, when peak energy usage occurs, and how to best manage the grid to avoid blackouts or brownouts. Utility efficiency increases even as customer satisfaction also grows.
An engineering-focused company that understands how to best benefit all kinds of utilities, Milsoft offers multiple services, such as outage management, enterprise accounting, GIS modeling and analytics, hosted interactive voice response, and automated customer services. Contact us today to learn how we can help your utility grow!