Smart Energy - Business Case

Monday, July 7, 2008

Why would the energy/utility companies implement Smart Energy? What sense does it make for them? Fair questions to ask! I will attempt an answer here.

Despite the ‘green’ benefits, the most important thing to make this concept fly is for it to make business sense to the utilities companies and the slew of start-ups that have created an elaborate value chain.

The first argument is the ability of these devices to delay capacity expenses for the utility company. What does this mean? The energy companies have already invested substantial money in the infrastructure. For them, as the number of users increase, it will help them until they hit maximum usage. Once the usage hits this point, there are only two ways to go. If it has more money, and if it makes economic sense, the company will roll out infrastructure to support the load increase. If not, the user is faced with power outage.

The smart energy systems present an alternate route for the utilities companies. If the usage is controlled to a point that the capacity is reached five years later rather than today, then it delays the additional roll-out thus saving these companies billions of dollars temporarily.

Of course, the additional roll-out of capacity is inevitable. So the utilities companies should analyze what, if any, are the additional economic benefits of such a system. While I am sure there are research studies with cost-benefit analysis, the usage models and the consumer participation levels are unclear. So, the energy companies are likely to roll out minimal monitor systems to experiment and add incremental features to get a sense of what the consumer wants and what he is willing to pay.

Secondly, once implemented widely, the industry can have a sustained revenue stream. One way to accomplish this is the Software as a service (SaaS) model. The utility company can charge a nominal monthly rate per household per month for the software monitor and control platform. The company, in turn, can share this revenue with the software platform provider. Alternately, the utility company can pay a one-time fee for the platform vendor and monetize the service by itself.

To conclude, Smart Energy can make very good economic sense to the companies involved if they can combine creativity, common sense and a basic understanding of consumer behavior.

Posted by Vijay Nagarajan at 2:22 PM  

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