Chapter 18
The Future of Utility Customers and the Utility Customer of the Future
Robert Smith*
Abstract
Focusing on residential customers, the chapter examines how the electricity utility industry’s model as a monopoly provider of a “universal” essential public good is being challenged by changing customer options, including self-generation, energy efficiency, “enabled” appliances, local energy storage, and electric vehicles. Against a background of falling peak demand and energy usage, the chapter explores the electricity grid’s place in the hierarchy of needs, when faced with the coexistence, competition and coopetition of multiple energy sources and emerging technologies. It considers what electricity customers want, the choices they will face, and how these choices will shape the utility of the future.
Keywords
customer preferences
utility future
Maslow
electricity grid
distributed generation
battery storage
smart appliances
1. Introduction
Electricity utilities have a reputation for being cautious, conservative, and inward looking. This wasn’t always so. Early industry players such as Edison were highly entrepreneurial in delivering customers tailored distributed energy services (mainly lighting, motive power for industry, and traction for rail) (Smith and MacGill, 2014). However, with maturity and continued growth, and as electricity became central to people’s wellbeing, the industry transitioned to a more staid and stable business model: providing an essential public good through natural monopoly infrastructure. The grid’s role was keeping the lights on and our role as appreciative energy consumers was to pay for it. The magic that happened on the utilities side of the meter was their business, what we as customers did on our side of the meter was our business.
This model has proved remarkably resilient over the past century accommodating not only new technologies, in both generation and end-use equipment, but also changes in public policy, in some cases including removing vertical and horizontal integration to create wholesale competition and retail customer choice. However, because distribution networks have continued as regulated monopolies, even many competitive market sectors still operate within the constraints of earlier arrangements, including simple metering and tariffs, constraints designed as much for public equity objectives as economic efficiency.
Now, however, real change appears to be unavoidable. Utilities that have enjoyed unrelenting growth and protection from competition now find usage declining, and load profiles shifting, as customers improve energy efficiency, deploy distributed generation, and start to manage their loads more actively. Distributed generation, most notably photovoltaic (PV) systems, is a major disrupter but other technologies, including distributed storage, “smart” end-user equipment, and electric vehicles, may prove as disquieting (as described in the chapters by Cooper and Grozev et al.). Network monopolies are being challenged and regulators are left to ponder what tariff, market, and regulatory arrangements might be required for this brave new world.
The role to be played by energy consumers, particularly residential customers, is the main focus of the chapter, structured as follows. Section 2 briefly considers competing futures of the grid from technology, business model, market reform, and policy perspectives, highlighting some of the limitations in the framing of these issues. Section 3 focuses on the consumer’s perspective, and the underappreciated importance of considering end-users preferences—what customers want. Section 4 looks at some key energy technologies from the perspective of customer’s effectual demand, then Section 5 covers grid parity, followed by the chapter’s conclusions.
Providing a counterweight to the industry’s focus on new technologies and business models, and policy maker’s focus on competition and tariff reform, Section 6 concludes that customers’ preferences and responses, not technologies alone, are fundamental to the shape of the utility of the future.
2. Where next for the grid—fate and its drivers
Where to now? As evident from this book and elsewhere, there is no one clear path ahead. Nillesen and Pollitt describe five megatrends, Buger and Weinmann describe incumbent strategies, and Nelson and McNeill discuss Australia’s specific strategies. Yet, the grid seems to face one of three possible fates: mostly business-as-usual; a more distributed grid; and grid defection, where a growing number of energy users depart it entirely. Which fate triumphs will depend on the interplay of varied drivers, including technology progress, prices, market and regulatory arrangements, and broader societal objectives, including environmental challenges. However, often overlooked, it also depends on energy consumers themselves. Customers’ needs are what drives the value chain, what underpins the business case of industry structure options, and what determines how surplus value is created and shared.
2.1. Mostly Business-as-Usual
There is no doubt about the transformative power of electrification, or the value people place on what it does. “We are creatures of the grid.”1 Although there are still more people without access to electricity than when Edison introduced his light bulb in 1888, most of the world can take reliable grid electricity for granted.2
Centralized grids owned and operated by vertically integrated monopoly utilities have proven remarkably successful. Grids represent the largest machines on the planet, and electrification has been judged the greatest engineering achievement of the twentieth century, ahead of the automobile, the telephone, and the computer (Constable and Somerville, 2003). The success reflects the benefits of combining the centralized geography of traditional energy resources (eg, hydro systems and coal basins) and major economies of scale in conventional distribution and generation (eg, hydro, thermal, and nuclear), with historical load growth, and the load diversity. The most straightforward, and still the predominant, business model to deliver electricity has been to make power utilities, whether private or public, regulated monopolies. Indeed, only a relatively small proportion of energy consumers are served by utilities in restructured, market-oriented energy industries, and for these network monopoly charges still remain a major part of bills.
Until recently centralized monopoly grid electricity has been able to provide cheap and reliable power that outcompeted other energy options for the major share, but not all, stationary energy uses. This positioned electricity as an essential public good and supported subsidized access for less fortunate or especially favored customers. Hence, cost recovery for utilities could be managed with “postage stamp” pricing across customer classes, largely determined by equity concerns, rather than cost reflective tariffs.3
How might new technologies, business models, market arrangements and policy drivers change this? Scale and diversity advantages have allowed the vertically integrated grid model to assimilate successfully both new policies and new energy technologies—generation technologies (including efficient gas-fired plants, as well as highly variable and unpredictable wind and PV), and new loads like peaky reverse cycle air-conditioners. But while life has become more complex and riskier for many generators and retailers, only recently is the network’s traditional business model being confronted by changing drivers of customers’ usage.
The drivers of customers’ energy usage can be grouped as growth increasers (population and prosperity), growth slowers (prices and policy), and growth muddiers (productivity and preferences).4 Population and prosperity, the two traditional long-term growth drivers, will continue to play a role. If the past is any guide, there will be more of us, we will be richer, and we will spend more. Yet, while energy usage remains linked to economic growth, this relationship is weaker now than in the past and is being swamped by other counterbalancing factors, chiefly prices and policy.
Prices, volume-based electricity tariff increases, are clearly driving a slowdown in usage across many jurisdictions. But are continuing grid price rises as inexorable as some assume? The key role of relative prices and “grid parity” are discussed further in Section 4 but highly visible price developments may be being given more prominence than they merit.5 Less visibly, policies underpinned by environmental concerns have been driving reductions in electricity usage through energy efficiency schemes and education, appliances and building standards, and the impacts of Feed-in-Tariffs and carbon prices. And if voters’ preferences support cleaner energy futures, policy drivers will continue to reduce energy usage.
The two final drivers of energy usage, productivity and preferences have muddier, mixed, and less certain impacts. Productivity is the efficiency benefit technology delivers, getting more with less, and is most often reflected for generation technologies in falling product and output prices. Productivity is also seen in the growing availability and competitiveness of efficient end-use technologies, such as LED lighting and heat pumps in refrigeration and reverse cycle air-conditioning.
Most forecasts of the utility of the future hinge on increased productivity making new technologies cost effective.6 Yet this risks missing something important—preferences drive customers’ choices. This also applies in the policy space where voters’ environmental views will be critical to support for lower energy use and renewable generation. Ultimately, policy consists of peoples’ preferences as filtered through the political process.
Energy customers’ responses to shifting drivers is leading to flat or falling demand, and increasing distributed generation. This is making utilities’ traditional business models, tariff, and market arrangements appear outdated. As what utility business’s do on their side of the meter is now being threatened by what customers’ do on the other side, business-as-usual seems likely to become a nostalgic scenario.
2.2. The Distributed Grid
Users of the grid have always been distributed, in terms of numbers and location. Only the most energy hungry industry would chose to locate near power supplies or to develop onsite generation for more than backup supply. But now that the scale economies and the geographical distribution of traditional energy sources (thermal, hydro, and nuclear) that kept generation big and centralized are less compelling, it seems natural to assume that energy supply will become distributed to match energy demand.
This may or may not follow. Distributed technologies such as PV and battery energy storage may not require major economies of scale, but neither do they have major diseconomies. Household sized PV systems can have similar costs to utility size plants, so there may no longer be a single best size. For such technologies, bigger is no longer necessarily better, but neither is smaller. A fully scalable generation technology can be effectively deployed in multiple locations and multiple sizes, both beyond and within a network. For example, Marnay’s chapter makes the case for an integrated grid comprising multiple connected but semiautonomous microgrids.
The rapid uptake of household PV systems in a number of jurisdictions seems to point towards a fully distributed “small is beautiful” future. Australia’s 1.4 million household PV systems, discussed in the chapter by Nelson and McNeill, are notable examples and cover the roofs of 15% of all houses, and 40% of owner occupied houses in some states. Most were installed in the past 5 years during a time of generous government subsidies and gross metered feed-in-tariffs and when PV system costs fell markedly. Now household’s future financial benefits from PV’s will come predominantly from offsetting their use at the equivalent of retail KWh tariffs, as policy support has been reduced, PV systems are net metered and exports are paid a much lower rate—perhaps a quarter of the retail tariff.
At some tariff level, PV systems make good financial sense although, as we discuss later, this point of “grid parity” for PV is both crucial and problematic. In particular, PV exposes the lack of cost reflectivity in volumetric network tariffs, as households’ daytime PV generation does not necessarily reduce network costs driven by residential evening demand peaks; see chapter by Grozev et al.7
Without cost reflectivity, under the flat volumetric tariffs almost all households and small businesses currently pay, efficient behaviors and choices are not incentivized. Suggested industry responses vary from specific “solar tariffs” to structural tariff changes toward fixed and demand charges. But, as most of the authors in this volume conclude, it seems fair to say that policy makers and regulators are struggling to develop coherent market and regulatory frameworks for incorporating these new developments within the grid.
A more distributed grid seems the most likely electricity industry fate, leaving utilities somewhere betwixt the old business-as-usual world and a brave new world, where their old role is substantially diminished. For some however, progress in distributed battery storage technologies is seen as foreshadowing a radical shift to grid or load defection.
2.3. Grid Defection
A growing number of industry observers see solar + storage8 “grid parity” priced household PV combined with low cost battery storage, making grid defection both technologically possible and potentially economically advantageous.
The Rocky Mountain Institute (RMI) present a strong case for solar + storage to undermine the economics of the existing grid through “load defection,”9 and reflects a growing consensus that the grid will be significantly stressed and downsized, if not made redundant. This view is mirrored in financial analysts’ reactions, such as the following:
In the 100+ year history of the electricity utility industry, there has never been a truly cost-competitive substitute available for grid power. We believe the solar + storage could reconfigure the organization and regulation of the electricity power business over the coming decade.10
Over time, many U.S. customers could partially or completely eliminate their usage of the power grid.11
Our view is that the “we have done it like this for a century” value chain in developed electricity markets will be turned upside down within the next 10–20 years, driven by solar and batteries.12
The RMI paper concludes that “it remains unlikely that large numbers of customers would leap directly from grid connection to grid defection,” but the “economically optional generation mix” shifts toward solar + storage in 10–15 years until by 2050 the “grid takes a backup-only role.”
The RMI’s conclusions naturally depend on many assumptions, including zero demand and capacity charges, falling solar and storage costs, and rising grid electricity costs. In particular, assuming a 3% per annum rise in grid electricity cost effectively assures long-run success for solar + storage as by 2030 grid electricity prices are 60% higher and by 2050 close to three times the current levels.13 And, expected cost reductions in stand-alone household scale solar + storage will surely also apply to small and large scale grid applications as well. Nevertheless, the message is clear, the grid is under threat from load defection if not grid defection and a very different electricity industry future now seems possible.
Yet, while Tesla’s Powerwall home battery launch has ignited imaginations, and grid parity seems nigh, talk of distributed storage currently outstrips both its application and the industry’s understanding of how customers will respond. The seemingly underappreciated role consumers and their preferences have in creating defection, a more distributed, or a mostly business-as-usual grid future is discussed next.
3. Preferences—Maslow’s basement, coopetition, and energy ecosystems
At the end of the 20th century, just as Y2K was about to disable the planet and before the Dot-com bubble burst, Hal Varian—now the chief economist at Google—cautioned: “Technology changes. Economic laws do not” (Shapiro and Varian, 1999). Economic laws, however, have limits. Economics’ strength is in its abstraction of reality to simplify and model a complex world but this is also a weakness. First year economics student are taught to “assume preferences are given,” and then ignore them for the rest of their studies (and possibly their careers) (Dietrich and List, 2013). Yet, down the hall, first year marketing students are discovering that customers’ preferences are elusive and fluid, as they are taught to gauge, shape, and fulfil consumer desires.
Understanding the future requires a closer look at customers’ preferences, behavior and responses, within a complex household energy ecosystem where incumbent grid electricity still has valued characteristics: reliability; affordability (driven by economies of scale); invisibility, a homogenous commodity supporting mostly passive customers; and ubiquitousness, an essential service and “health and hygiene” factor available everywhere on the grid. But while electricity remains an essential service, how people value it can vary with their circumstances.
For people on very low incomes, grid electricity is liable to be a superior good, where an increasing share of extra income would be spent on meeting basic “heat and light” needs better. As incomes rise, grid electricity becomes a normal good, where use rises with rising incomes but not as quickly. Finally, at the higher income levels experienced by well off customers today, and increasingly electricity customers of the future, grid electricity may be an inferior good, where usage falls with rising income as more expensive new appliances and dwellings are inherently more energy efficient and solar + storage is a possible lifestyle choice, rather than a cost effectiveness decision.
Frei (2004) describes an “energy policy needs pyramid” based on Maslow’s hierarchy of needs in order to explain different countries’ policy approach to climate change. He contends that, once access to commercial energy is achieved as a policy goal, “it can be observed that the question of supply security prevails over cost-efficiency, environmental and social issues.”14 These basement needs in Maslow’s hierarchy—physiological and security—also underpin household energy use.
The many shapes and forms of household energy use are so commonplace they tend to be overlooked. Smartphones, laptops, TV, and upmarket kitchen appliances are what engage customers’ interest but the majority of household energy use is in heating and cooling loads: hot water; space heating and cooling; fridges and freezers; the kitchen/cooking; and even lighting, most of the energy for which is lost as heat. “Low tech,” “old school,” and “low involvement” appliances consume the most energy, not the stuff of YouTube videos, Pinterest, and tweets (Fig. 18.1).
Figure 18.1 Energy usage for an all-electric household. (Source: Photo from Ausgrid Energy Efficiency Centre.)
Internet-ready fridges notwithstanding, most basic energy needs and many appliances have not fundamentally changed. What has changed are their prices. A “Flame shell” 2000 W electric heater, which in the late 1950s cost £5 17 shillings and sixpence (about $11.75 then, or $140 in today’s money), does the same job as a 2000 W electric heater that sells for only $14 today. Put another way, it took a third of a week’s pay to buy 2000 W of heating capacity on an Australian minimum wage in the mid-1960s. Today, the same can be bought for less than an hour’s work (Fig. 18.2).
Figure 18.2 The 1950s Vulcan Conray “Flame Shell.”
It is easy to overlook such dramatic changes when they occur in small steps over long periods. Yet dramatic changes have occurred, unremarked upon, in the relativities of appliances cost of purchase and cost of use.15 Depending on local tariffs, leaving a 2000 W heater on for a day costs more in kilowatt-hour tariff charges than the heater’s purchase cost. And two such heaters create as much load as charging an EV, or running a large air-conditioner in summer. The “flame shell” example of cost relativities is replicated in the broader appliance price index measures in Fig. 18.3. This shows how households’ spending to meet basic energy needs is increasingly about kilowatt-hour operating costs and less about appliance purchase costs, thereby making additional features, including energy efficiency, increasingly affordable.
Figure 18.3 Falling appliance prices and rising electricity tariffs. (Source: Australian Bureau of Statistics, 6401.0.)
The premium customers pay for higher order needs over low level needs can be substantial. Like an electric heater, an electric kettle’s function has not changed for almost a century. Modern examples have some improvements but a $7.50 Kmart model and a $199 SMEG version have similar features and do the same job. Rather than basic functionality, most of the $191.50 or 2550% price differences in the two kettles can be attributed to meeting consumers’ higher order needs. And, while not everyone chooses to boil water in a SMEG designer statement,16 it is this sort of higher order preference that affluent customers aspire to, is a driving factor in existing energy preferences and will shape customers’ future energy choices (Fig. 18.4).
Figure 18.4 Electric kettle preferences.
Some household spending, particularly on energy, will always be about Maslow’s basement “physiological and security” needs. Yet after these needs are met the majority of spending, now and in the future, will likely be about the upper reaches of Maslow’s pyramid—preferences, wants, and aspirations for social standing, positioning, and esteem. About who customers are, who they want to be, and how they fit in. Influences that are already evident in households’ energy choices.
Grid electricity is the dominant form of energy supply for the majority of uses in the majority of households but it is not an energy monopoly. Grid electricity’s major advantages, compared to traditional competitors, particularly local cleanliness, low maintenance, and low costs, has not wiped out all competition. Customers’ preferences support diversity. Grid electricity often coexists and competes with gas, fuel oil and wood, in order to supply households with energy services, particularly cooking and heating loads.17 Product characteristics and people’s preferences, not only cost effectiveness, drives these choices.
Moreover, households’ energy use encompasses a diverse and eclectic collection of sources and options as complements or specialist niche players, as well as substitutes. Esoteric energy sources lie hidden within households including: chemiluminescence in glow sticks; pyrophoricity in lighter flints; exothermic chemical reactions in heat pads and cold packs; piezoelectricity in a self-winding watch; pneumatic pressure (in aerosols, bottled gas and CO2 canisters); and hydro pressure in water pipes. Energy diversity, not grid monopoly fuels households.
Household energy storage is already here as more and better batteries play a bigger part in consumers’ lives. Mobile devices make batteries ubiquitous in phones, tablets, laptops, toys, and rechargeable appliances. Almost unnoticed, these mobile devices have reduced the potential disruption to households from short term electricity outages as, in combination with thermal storage (in hot water systems, building design, and refrigerators), other energy sources and efficient uses (such as LED lights), they create a viable off-grid service buffer of 1–4 hours. So, electricity, the textbook natural monopoly (Kishtainy, 2014), already operates in coopetition with a growing number of energy supply, service, and storage alternatives.
In the midst of this energy coopetition, what the electricity utility industry does best is “keep the lights on”—maintain reliability. In modern cities, this reliability is a fundamental need; an essential health and hygiene factor that allows the ordinary business of life to continue.18 But once lower order needs are met higher needs take over and customers are likely to seek a bundle of characteristics to fit their needs and preferences. While environmentalists may be queuing on the left for solar + storage, survivalists may be queuing on the right to buy the same thing for very different reasons.
To fit into customers’ households, new energy technologies, like solar + storage, need to balance price and product characteristics against both customers’ basic needs and higher order preferences.
4. Grid parity in prices and product
A key trigger seen as pushing the grid to endangered species status is “Grid parity,” the current or imminent equating of distributed small scale solar + storage with centralized grid electricity prices.
The potential benefits of solar + storage are substantial, notably: free energy from the sun; independence; protection from grid price rises; no grid outages; and reduced environmental impacts. But the indirect costs include “insourcing”19 operation, and maintenance of panels, inverters, and battery storage. Most significantly, indirect costs include the reliability impacts of being off-grid, or else the additional cost of retaining a grid connection.
Assumptions of “grid parity” in current retail electricity prices are not necessarily accompanied by a like-for-like grid parity in product characteristics or underlying costs. True grid parity for solar faces two issues: volumetric tariffs are not cost reflective, and product characteristics are not the same.
The cross subsidies in volumetric kWh tariffs for solar are well recognized.20 So it is likely that utilities will move to increase capacity and connection charges, while lowering kWh tariffs and thus reducing the volumetric component of customers’ bills. This is a substantial readjustment for incumbent electricity utilities, but is both technically achievable and capable of customer acceptance. In Australia, as in most OECD countries, capacity and demand tariffs only exist for larger commercial customers. Yet households cope with significant fixed charges, and declining block tariffs (lower usage pays a higher average per unit cost) in gas bills, water bills, and local government rates, so it seems entirely possible that households will eventually accept this in their electricity bills, just as business customers have.
Predictions of “grid parity” solar + storage leading to mass grid or load defection reflect a combative “all or nothing” approach—Schumpeter’s “creative destruction” view of innovation meeting Schumacher’s “small is beautiful” and “appropriate technology” philosophy. Reality is more nuanced. Even with significant price falls for solar + storage, a mixed model with load defection but a low possibility of grid defection appears most likely because of the reliability characteristics of household grid, PV, and storage options, shown in Fig. 18.5.
Figure 18.5 Reliability with Grid DG and storage options.
This is supported by the modelling by Khalilpour and Vassallo (2015) of real PV and household consumption data that uses combinations of tariffs, sizes, PV, and battery costs to estimate financial benefits and unserved energy:
A small PV-battery system has the highest NPV, but also the highest amount of unserved energy… The results of the study imply that leaving the grid is not a feasible option even at low PV and battery installation costs.21
So, grid defection may be palatable only where people are willing to forego reliability, to buy uneconomically large combinations of solar + storage, and/or an additional supply like a small genset.
The off-grid reliability outcomes shown in Fig. 18.5 also assumes household solar + storage can be islanded from the network, in the event of an outage, currently an additional expense only justified for major commercial and critical services customers. Without an islanding option, the reliability experienced by customers is the same with or without PV and batteries but the costs are borne more by customers without generation and storage.
Technology-based forecasts seem to favor a heavily distributed grid or grid defection, over a mostly business-as-usual scenario. But, while little is really known about customers’ preferences, it seems reasonable to assume customers are primarily concerned with outcomes, and should be largely indifferent to the generation structures and business models that deliver them. Indeed, the majority of the world’s population now chooses to live not with greater self-sufficiency but in cities that create value from the opportunities they offer for shared infrastructure, endeavor, and exchange.
Once generation is freed from the economies of scale constraint placed on cost effective fossil fuel and nuclear plants, there is no longer a size barrier to decentralization. Generation and storage may now be cost effective at many sizes and many locations, not just the smallest and nearest to home. Scalable solar + storage may be as effective at an aggregated local level, or within and supporting a distribution network, as when distributed with individual end users. What can we expect from new energy technologies?
5. S-curves, S-bends, and can EV’s save the grid?
If the cost of solar + storage falls substantially, it will entail lower costs for household batteries and hence batteries everywhere, removing one of the major barriers to Electric Vehicle (EV) adoption. So, just as solar + storage appears to be threatening the grid, could EVs emerge alongside to be its savior? Could the EV’s combination of significant load growth, inbuilt battery and charging flexibility counterbalance load defection from solar + storage?
EVs provide the prospect of a disruptive technological change, yet they have been the “car of the future” for over 100 years, so also provide cautionary lessons on technology challenges from the past, as in the quote below.
The electric vehicle is coming! It is an integral part of man’s future and survival on this planet. Today we are observing the stepping stones that will bring technology and imagination together to create truly efficient vehicles and energy systems worthy of the 21st century… The threshold of a new age is upon us. It is ours to behold.
The Complete Book of Electric Vehicles, 2nd edition, 1981 (Shacket, 1981)
Toyota with the Prius, and now Tesla, have demonstrated the EV’s mechanical reliability, desirability and commercial viability, at least in niche markets, so EV’s do now seem poised to reshape the transport and energy industries. Yet EV sales in Australia and internationally are still below a “take-off point” for widespread acceptance and mass market sales. Of more than 1.1 million cars sold in Australia in 2014, only 1,181 (around 1 in 1000) were EVs, and in only five countries are EVs more than 1% of new car sales. The focus for EVs is now on range anxiety, energy density, cost, and recharging infrastructure—barriers predominantly around battery development and customer preferences.
The typical forecast path of a new product involves applying S-curves after a trip thorough the “valley of death.” This involves surviving a period of negative development, set up, and production cost cash flows in bringing a product to market before revenue from accelerating sales volumes are sufficient to offset costs.
S-curves models allow mathematical forecasting of an innovation’s long-term future from small preliminary data sets that effectively overlay a predetermined S-curve success story on top of the data and make it fit.22 Rather than progressing up an S-curve, most technologies falter before crossing the “valley of death,” and disappear down the S-bend. One reason is the overestimation by innovators of their product’s benefits, compared to end customer’s views (Gourville, 2006).
Success of EVs will need to be part of the long and winding road taken by the modern passenger car.23 Today, backward looking technological determinism would see the success for petrol engine vehicles as inevitable yet, like the EV today, the petrol driven car needed to find what Adam Smith called “effectual demand.”
A very poor man may be said in some sense to have a demand for a coach and six; he might like to have it; but his demand is not an effectual demand, as the commodity can never be brought to market in order to satisfy it.24
Effectual demand can be interpreted as the combination of price and product characteristics, compared to other alternatives, that matches customers’ needs, preferences, and budgets. Historically, EVs have failed to satisfy effectual demand and the path to commercial success is strewn with the wreckage of carmakers’ unmet ambitions and customers’ unmet preferences, like the Segway and Sinclair C5.
The Segway, middle right in Fig. 18.6, was the secret US$ 100 million “project Ginger” launched to great publicity in 2001 by its inventor, Dean Kamen, who predicted it “will be to the car what the car was to the horse and buggy’. The Sinclair C5, computer pioneer Sir Clive Sinclair’s three-wheeled vehicle, in the bottom right hand corner of Fig. 18.6, was supposed to revolutionize personal transportation for Britons in the mid-1980s, but bankrupted its inventor, and has been voted “the worst gadget in history.”25
Figure 18.6 Electric vehicle innovation gallery.
Effectual demand for EVs will come when prices fall (which requires battery costs to plummet) and customers are satisfied that EV’s characteristics can meet their preferences, particularly around range anxiety, but also for status and acceptance.
When we do a reality check, imagined technology futures have a tendency to turn out more mundane than we expected. The robot we looked forward to owning in the 1920s, Maria, star of Fritz Lang’s Metropolis, and again in the 1960s, Rosie, star of the Jetsons, is here—although not as we imagined it as Roomba, star of the shopping channel (Fig. 18.7).
Figure 18.7 Imagined futures in robotics.
Even adoption of simple, proven, and cost-effective products can lag expectations. Proponents had championed the whole-of-life cost effectiveness advantage of fluorescent lights over incandescent from the 1950s onward, yet their eventual success took multiple advances in product characteristics, such as size, shape, light output, color temperature, color rendering, mercury content, dimability, distribution channels, and social acceptability. CFL’s “price parity” with incandescent lights was a necessary but not sufficient condition for widespread adoption. Ultimately, government policy, through efficiency standards effectively banning incandescents from most uses, combined with price and product improvements, was necessary to put CFL into households. Price parity and payback periods in energy markets don’t guarantee “effectual demand” and customer acceptance.
Currently, “Smart” technologies are being championed with smart meters, smart appliances and the Internet of Everything promising unprecedented flexibility and control (including economic efficiency through prices to devices). Unfortunately, this seems to rely on a value proposition driven by technology push, rather than customer preference pull. For example, recent trials of energy usage in-home-displays failed to engage customers, and only delivered high MTKD—mean time to kitchen drawer—performance.26
Google-owned multibillion dollar home automation company Nest Lab have plans to change energy management, “one unloved appliance at a time,”27 starting with thermostats and smoke detectors. But Nest’s initial products have a significant price premium—like Smeg kettles—and the combination of low price, ubiquity, and functionality to deliver an Internet of Everything may not have arrived just yet. If and when it does, utilities might not have a central role.28 Utilities’ view that smart utility meters will be a gateway, portal, or hub to the home could prove to be wishful introspection. Ubiquitous low cost computing power and internet conductively could make an electricity meter no more special than a kettle—a thing or at best a node amongs many within a complete home automation system. When all household equipment becomes smart, the main advantage of a smart meter are likely to be its old school virtues—a hard-wired connection for mains power and outside communications. Creating attractive cost-effective solutions to the unrecognized problems of customers’ unloved appliances will not be an easy task.
Forecasts of energy technologies, including household solar + storage, are being made principally in terms of price parity, rather than how they meet customer’s needs, compared to viable alternatives. Yet, there is a long history of substantial consumer surplus in grid supply supported by the low consumer involvement, satisfying behavior, and bounded rationality to be expected of a basic need. So, even where prices and preferences are favorable, new technologies may still face practical barriers to customers’ acceptance of new technology (Fig. 18.8).
Figure 18.8 Barriers to new energy technology adoption.
In behavioral economic terms: Nous is imperfect information; Squint is hyperbolic discounting; Din is cognitive overload and attention constraints; Clout is principle agent problems and split incentives; Grunt is satisficing behaviour for basic needs; Nimby is unpriced externalities; and Sloth is endowment effects, status quo effects and non-optimising behavior. See Gillingham and Palmer (2013) on this and the energy efficiency gap.
In behavioral economic terms: Nous is imperfect information; Squint is hyperbolic discounting; Din is cognitive overload and attention constraints; Clout is principle agent problems and split incentives; Grunt is satisficing behaviour for basic needs; Nimby is unpriced externalities; and Sloth is endowment effects, status quo effects and non-optimising behavior. See Gillingham and Palmer (2013) on this and the energy efficiency gap.
The immediate future holds out the prospect of exciting technological change, within the last year Tesla’s PowerWall and Model S, Google’s NEST, and the Oculus Rift have hit the market and are pushing against the barriers to effectual demand. Sometimes, the future arrives on time, often it is too early or too late. Effectual demand for new energy technologies may be hard to achieve while the understanding of customers’ needs remains elusive, and engaging them problematic.29 Consumer research and literature review by the CSIRO (2015) supports this as:
Consumer engagement with their electricity supply has recently increased, but it is uncertain how much consumers will want to engage in the future… up until recent price events and solar uptake, electricity use was invisible to the residential consumer.
Despite saying they are willing to change their behaviour to reduce their energy bills, many residential consumers continue to behave in ways that are contradictory to their intent (for example, they increase their use of energy-intensive appliances). Research suggests that motivations (for example, to help the environment) do not necessarily translate into behaviour (such as turning off lights or installing solar panels) and other factors also come into play (for example, social norms, ingrained habits, and the extent to which the person believes it is easy or difficult to take action).
So, while completely business-as-usual is unlikely to remain the fate of the utility of the future—given the history of customers’ responses to technology—the anticipatable benefits of current technologies don’t yet appear sufficient to push consumers’ effectual demand through the valley of death, past the S-bend, and up the S-curve, and warrant a switch to a major grid substitute in the near term.
6. Conclusions
Technologies alone will not shape the utility of the future—customers also will. Both supply and demand will. Technology and policy shape customer’s options but their budgets, needs, and preferences drive effectual demand. The customer of the future will still be rational and value cost effective solutions, but will do so on their own terms. Terms which, once basic needs are met, may include higher order fashion, status, esteem and social cachet preferences, and that could favor renewables, distributed generation, and storage. Or they may not.
Customers in the future will be different than today. On reasonable expectations and existing trends, customers will be: older; more educated; more urban; higher tech and more connected; richer; healthier; greener; and there will be a lot more of them. How will this affect electricity utilities and distributed generation’s future? Part of the answer will be in what will not change. Customers are unlikely to become mechanistically rational in their choices, making decisions based on cost benefit analysis and spreadsheets. Neither will Maslow’s higher order self-actualizations goals overwhelmingly drive their energy use. Despite the turbulence in the industry, electricity is likely to remain a “low involvement product,” stuck in Maslow’s basement, while customers’ attention is elsewhere, focused where their higher order interests and preferences are met.
A mass exodus off-grid or a death spiral from load defection remains unlikely in the reasonably foreseeable future. Ultimately, customers’ “basic need” for grid-like reliability and preference for trading DG output should prevent grid defection.
Grid parity prices of solar + storage will need to be accompanied by “grid parity” service for customers. Product differences, particularly reliability levels, still provide a damper on grid and load defection rates. At high levels of grid defection, tariffs will adjust, or stranded assets and sunk costs will come into play and this will extend the life of the grid beyond the true price and product parity point of solar + storage.
Technological determinism may suggest an imminent triumph of cheap PV and batteries, compared to the current grid. Yet it is people, Kant’s “the crooked timber of humanity, out of which no straight thing was ever made,” that are the hardest part to predict, not technology. Actual market outcomes involve mixes of price and product where, once their basic needs are met, customer’s decisions and effectual demand are defined by perceptions and preferences, as much as simple cost comparison. The utility of future will be shaped not only by electricity supply technologies and their cost but what they do for us as the customers of the future, including, surprisingly, how they make us feel.
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