One thing is certain, like the established consumer markets of days past, utilities will need to engage consumers in a whole new way to be successful. Telephone companies in the 1980s and 1990s had to turn their marketing and consumer engagement strategies upside down and inside out to be successful, and the needs of consumers rapidly evolved far beyond point-to-point voice calls.
The next cycle of innovation in power delivery to consumers will require engaging them in unprecedented ways. The recent smart grid filing by Baltimore Gas and Electric (BGE) is based on core benefits dependent on programs that go well beyond delivering electrons. BGE is going beyond the mission of delivering energy in a reliable, safe and affordable way, because those alone will not fulfill the next generation of consumer needs. The venerable utility mission has become an afterthought for consumers, probably because utilities have done it well for so long. Also, rapid innovation of the last two decades has set the bar high. Why should consumers not have more tools, transparency and control for energy use?
Like the telecoms, electric utilities need to start thinking about how to develop and package smart grid benefits like typical consumer products. Most successful products are foundationally developed with customer-centric design (think Apple iPhone or TiVo), and then marketed on the basis of “this is needed because it can make life better.”
Smart Grid Initiatives
BGE's smart grid initiative includes two keystone products that go well beyond meter reading savings and increased reliability. These two consumer products — energy management tools and a peak-time rebate (PTR) program — should make life better for BGE customers.
Customers have never had much insight into where their energy dollars are being spent. The current meter technology allows for little transparency. With smart grid-enabled energy management tools that BGE plans to offer, customers will be able to answer the following questions: How does my usage compare to others? How much of my bill is for cooling my house? Why did my bill go up this month? Perhaps the most useful feature is the ability to get a push notification when their utility bill is trending higher than normal.
With a PTR program, customers are notified of peak system periods, typically a day in advance, and encouraged to shift consumption to off-peak times to earn rebates. The more they reduce their consumption, the higher the rebate they earn. BGE piloted PTR pricing programs for three summers and measured significant peak reductions in the range of 25% to 35%.
No matter how great the financial or qualitative benefits of products like these, it is difficult to engage consumers and change behavior. But this has been done before. Dr. Richard Thaler, a Yale University researcher, has developed a powerful notion that slight nudges and modifications in the way products are developed and marketed can dramatically alter their effectiveness. In particular, three concepts are widely practiced by successful product companies and researched by behavioral scientists:
Choice architecture. Choices can be presented in a strategic way that mutually benefits the consumer and seller of the product.
Simple design. Developing a product with straightforward and simple design will increase the effectiveness and use of the product substantially.
Feedback loops. Designing a product that gives consumers effective feedback will increase the continued use of the product dramatically.
In 1995, researchers Sheldon Kurtz and Michael Saks embarked on a rather morbid study of organ donation rates in Iowa. Their survey found that 97% of customers were supportive of organ donation. However, only 43% actually took any action to sign an organ donation card. This type of choice architecture is referred to as opting in because it requires a definitive action to enroll. Study after study shows that consumers often skip this step of opting into something, even if it will clearly benefit them.
The opposite extreme of explicit consent is forced consent, which should be resorted to only if the public, or its representatives, have agreed to a set of rules for the greater good. Most federal and state laws are forced consent — those who live here must abide by the laws.
A third type of choice architecture is presumed consent or opting out. With this method, a default choice is assumed for all people, but individuals may opt out at will. Researchers Eric Johnson and Dan Goldstein compared the opt-in versus opt-out models and found that people who were forced to give explicit consent by opting in only signed up 42% of the time. However, those who were given instructions that they were automatically enrolled, but given a choice to opt-out, participated at a rate of almost double: 82%.
PTR programs are quickly becoming one of the key benefits of smart meters. Using the hourly data from smart meters, utilities can better align supply with demand by sending price signals to customers. Significant consideration should be given to the choice architecture used to market these programs, particularly if the utility has goals for robust demand-response impacts.
For a PTR structure in which customers continue to pay their flat rate and simply have an opportunity to lower their bill through rebates, presumed consent may be the best option. Eliminating the friction of formal enrollment increases the total participation. Moreover, if programs like PTR are able to be rolled out systemwide, it allows the utility to market and educate all consumers at once. It also allows the utility to broadcast peak events through TV and radio.
Other rate structures, such as critical peak pricing and real-time pricing, which are more complex to understand and risky, should always be offered as explicit consent products. Over time, as customers become acclimated with the default PTR program, enrollment in more complex rates could grow. A strategically devised choice architecture is important to map out and align with the utility's and state regulation goals.
The city of Paris, France, recently changed its fare card machines used to check fares and allow passengers to proceed to train terminals. Only one slight change was made: passengers could now insert a fare card into the new machines in any orientation. This simple change resulted in a 20% efficiency increase in the flow of traffic.
In a 1965 study conducted at Yale University, researchers educated several hundred students about the importance of tetanus shots, which were offered at the university health office free of charge. When the researchers came back a few months later, they found only 3% of these students received the tetanus shot. They then educated several hundred different students using the same teaching method, except this time they added a basic map of the campus with a big red circle around the location of the health office. This time 28% of the students went to get the shot.
The importance of simple and customer-centric design is evident everywhere, and every successful mainstream product is backed by years of focus group research and usability studies. Utilities need to learn to let customer “experts” design products, such as the energy management tools and dynamic pricing rates. The 30-year utility rate expert can design a perfect rate, but unless it is easy to understand, does it really matter? The metering engineer can design an energy management application that gives consumers minute-by-minute demand readings directly from the meter, but is that what the consumer really wants? Sometimes simple design needs to trump perfect engineering design. Focus groups and usability testing should be embedded throughout the design and development of any product or program offering.
Feedback loops are engrained in daily routines. Think about a laptop battery and the feedback it gives when its running low. Think about the feedback a car gives when it needs service. Effective and rapid feedback should be built into all products and programs. But feedback also can come from peers in a social setting.
In 1937, a psychologist named Muzafar Sherif asked people to estimate a distance between two objects. Each person first wrote the estimate and kept it private. Everyone then publicly stated their estimate. Results showed more uniformity among stated answers, as compared to the written estimates. When made aware of what others are doing, people conform. Next, Sherif put a secret ally into the room who stated his estimate at the beginning of the experiment. Nearly everyone conformed to the ally's answer, even though his estimate was obviously incorrect.
Between 2008 and 2011, BGE conducted several dynamic pricing pilots. A key element of these pilots was to give customers quick feedback on their performance during peak event days (for example, that they earned a $7 rebate yesterday). This feedback was found to be very popular and effective in increasing the impact of the program. Utilities need to get out of the mode of thinking about feedback through the lens of a monthly bill. By the time a monthly bill is generated 30 days later, the effectiveness of the feedback will be lost. Also, keep in mind that initial feedback should be a passive process, pushed out to customers in the form of a paper or electronic report.
Over time, as customers come to rely on the feedback and understand its value, they may be motivated to access the information actively and independently from a channel like a Web portal. A multi-channel delivery is particularly important because consumers are becoming more and more heterogeneous in their preferences. E-mail, SMS, mobile applications, regular mail and automated voice calling have to be offered simultaneously to fulfill the needs of various customer segments.
There is another lesson from Sherif's study: start embedding messages with comparative data. Telling customers that their peers are spending $400 less annually on energy bills has a profound impact on behavior. Better yet, let the customers who are super achievers and advocates of the programs do the talking. Customers trust other customers before they trust the big bad utility.
Can Utilities Design Must-Have Products?
Before designing game-changing smart grid products, utilities may need an honest evaluation of their organization. The department driving requirements and product design should have a holistic understanding of customer needs. Utilities often use themselves as use-case examples during product design, which is a bad idea. The average customer does not know about locational marginal prices or the difference between kilowatt-hours and kilowatts. Customer-centric organizational change is already being implemented at progressive utilities where chief customer officers are being tasked to deliver real value to customers and create a culture where the customer is king.
The challenge of implementing new products is a tough proposition for the utility industry because there has been about 130 years of stellar service delivery. The smart grid opens the floodgates of product possibilities; this should make for an exciting ride.
Neel Gulhar (email@example.com) has been with Baltimore Gas and Electric Co. for nine years. Starting in 2007, he led the utility's dynamic pricing program called Smart Energy Pricing. Recently, Gulhar has been involved with the development of BGE's smart grid strategy, state regulatory process, Department of Energy application submittal and overall smart grid implementation. He is now accountable for delivering the customer-side benefits of smart grid. Gulhar holds bachelor's degrees in computer science and finance from the University of Maryland and a MBA degree from Johns Hopkins University.
Simple Design: The Car Sticker
An analogous example of a simple design can be found in the evolution of the U.S. Environmental Protection Agency (EPA) fuel-efficiency sticker. The sticker shown is typical of what would be seen at the car dealership more recently. Prior to this, the EPA did not have annualized fuel cost, but it eventually realized that the dollar impact of information is important. As the sticker evolved, the miles-per-gallon information was de-emphasized (as it is a hard statistic for most consumers to grasp), and the annual fuel cost and comparisons became more predominant. Comparative analysis has been shown to be effective in study after study.
Now the EPA is considering including the ultimate easy-to-understand metric: a letter grade. Most consumers are familiar with the school grading system, so the EPA thought using a letter grade would make it even more simple for consumers to understand. True automotive engineers probably think that this new letter grade system is full of inexactness. But, if the sticker ultimately leads to more fuel-efficient cars on the road, then the preciseness of the data can take a backseat.
This EPA progression is instructive for utility product designs, particularly energy management deployment tools to help customers understand energy use and what they can do to lower their bill. OPOWER is a company doing a great job in this arena by taking complex data and simplifying it into meaningful information. While there is probably a small segment of customers interested in real-time metered data that can be downloaded into Excel for intense analysis, the overwhelming majority of customers want simplicity.
Baltimore Gas and Electric www.bge.com
Environmental Protection Agency www.epa.gov