A few days ago I met with Greg Guthridge, who is the Managing Director of Utility Customer Care Practice at global consulting giant Accenture. We discussed international leading practice on how energy companies are using technology to better manage their relationships with customers.
Where the conversation became particularly interesting was on the issue of how we might bring spiralling electricity costs – due to excessive peak demand and poor energy efficiency – under control.
The discussion with Guthridge was like a breath of fresh air compared with what we tend to hear from policy mandarins in control of the energy policy levers. Often it seems as if any commonsense understanding of human behaviour and psychology these people once had was completely knocked out of them by their university economics lecturers a long time ago.
According to Guthridge, trying to change customers’ energy consumption behaviour purely through price signals was futile in most cases. Based on Accenture’s research, most electricity consumers fall into a category they call ‘set and forget’. For these people electricity is something they don’t want to have to worry about, and they absolutely hate energy bill surprises.
Efforts to impose prices on consumers that vary regularly in order to accurately reflect costs and constraints on the system were likely to backfire. Companies with complicated pricing end up losing customers and facing higher costs as angry customers chew the ears off call centre staff with complaints and queries on bills. Such pricing structures also lead to damaging political fall-out as consumers take their complaints to politicians.
Guthridge points to the evolution of mobile telecommunication and banking as the models for where electricity pricing is most likely to end-up once electricity prices are allowed to vary. Both these industries used to set prices and fees in a myriad of ways to encourage less costly behaviour by customers. For example telecommunications used to charge different prices depending on the time of day to better ration bandwidth. Banks would employ assorted fees for various transactions to encourage fewer transactions and use of automated services.
Banks are now abolishing fees however, while mobile phones are largely sold on fixed monthly caps.
At this point I began to get worried – if electricity consumers are just charged flat fees then how the hell are we going to bring peak demand under control?
And this is where energy companies have discovered something amazingly obvious. It’s actually better to help customers rather than stab them with a sharp price shock.
The reality is that most customers don’t have much of an idea how best to reduce peak demand and improve energy efficiency. And while they might complain like hell about high electricity prices, they can’t be bothered boning up on the amount of watts their TV, air conditioner and pool pump draw and then installing a ‘home area network energy management control centre’ to manage them. Nor do they want to be checking electricity prices every hour and calling their kids to turn-off the air conditioner.
They want someone else who understands energy to handle this boring stuff on their behalf.
Guthridge explained that one of the best examples of how a company was working with human behaviour, rather than against it, was Southern California Edison. They don’t reduce peak demand by just sending the customer a price shock and leaving the customer to work out what to do. Instead they wave $200 in cash in front of the householder at the start of the year to sign-up to a peak load management program. In return the householder allows SCE to install control devices over discretionary appliances like pool pumps and air conditioners, which are only used a few times a year when the electricity system is at maximum capacity.
This has worked incredibly well, reducing costs for SCE while customers have elected to renew their involvement at the end of the year.
The future model that Guthridge sees is all about bundled product offerings that take the worry and hassle out of energy for householders. Householders get a fixed charge for energy supply which is cost and risk effective for suppliers because they have put in place a range of technical solutions to reduce the household’s energy demand.
The problem in Australia though is that there little capacity for companies to get paid for helping consumers to reduce peak demand and improve energy efficiency. The NSW, Victorian and South Australian energy efficiency credit schemes are a good start. But ideally need to be national in scope and fall well short of the cost-effective potential. Also they need to be complemented with an initiative to encourage reductions in peak demand.
Unless there’s a widespread roll-out of smart meters and a requirement for networks to charge retailers based on the peak demand profile of their specific customers, then retailers have little need to innovate themselves.
And Australia is stuck in a deadlock of rising energy costs. Politicians won’t sign-off on a roll-out of smart meters and electricity price deregulation because they fear a consumer backlash. But at the same time powerful policy mandarins refuse to consider alternative policy mechanisms to hitting consumers over the head with a sharp price shock – such as a national energy efficiency and peak demand reduction target program.