Why embracing disruption is a good thing

Microgrid

Four years ago West Australia-based power utility Horizon Power saw that the electricity industry was in a state of flux and decided it wanted to be at the leading edge even it meant being a little unconventional.

“Our plan included customers generating their own energy,” said Horizon Power’s Mike Houlahan. “We wanted customers to use storage with their own batteries.”

Consumers generating their own energy and using storage batteries doesn’t seem like a great plan for how an energy company can grow its business. However, Horizon Power is a state-owned enterprise with a customer base of 48,000 covering 2.4 million square kilometres. It is a heavily subsidised operation due to the amount of ground it has to cover and the remote location of many of the customers it serves. The company’s general manager, commercial services and finance, Mike Houlahan, spoke at the 2017 ABB Digital Transformation Summit and outlined why the company needed to change not only the way it did business and that it recognised that it needed to embrace the coming changes – even if affected revenue.

“As consumers generate more, we lose revenue,” said Houlahan. “Most organisations would go ‘Whoa, let’s push this back as far as we can because we can’t let this happen.’ We didn’t do that because we thought if we can’t provide what the customers want then somebody else will. We had to find a revenue and business model that would enable us to meet our customer’s needs and stay in business and we had to embrace that disruption head on.

“When we started our transformation journey, most employees in the organisation would have said a couple of things – we are an asset management business and a monopoly that happens to sell electricity. We don’t think like that anymore.”

Currently, the electricity market is very fractured. From the way it generates energy, such as coal fired, solar and wind; to how it is distributed – retailers, wholesalers, or giving consumers access to wholesale prices such as Victoria-based Flow Power is doing; through to the recent trends such as self-generation and storage batteries.

A main reason people are looking to help themselves is that energy prices are increasing. According to a June report in Western Australia’s Perth Now newspaper the state’s average electricity bill went up by almost 11 per cent this year, while the national average pay increase was three per cent. The coal-fired people blame renewables, renewables people blame the coal-fired aficionados, and so it goes on.

Houlahan believes it doesn’t have to be like this if companies start looking at their customer base as those driving the changes and start being smarter especially with the disruptors coming into play – the aforementioned solar and wind power and storage batteries. He said that the change the company decided to go through was not only necessary, but was customer-centric. And for those who hate change or want the status quo, Houlahan points out that the past 10-15 years have seen many disruptions in various industries that have turned the way we do things on its head. Why should the electricity market be any different?

“There’s Uber, which is a taxi company with no taxis,” he said. “Facebook is the world’s largest media company with no content. Ali Baba – one of the biggest retailers – has no inventory. These are the business models we have to learn from. We have to go down the road of new technology and innovation. And what drives these disruptors are customer expectations. In all these cases, traditional service providers didn’t listen to the customer and their expectations. So somebody else came and enabled the technology. When you transform, you are transforming your core business, you have to stabilise that core.”

The company went through the traditional track of employing consultants, in this case the Boston Consulting Group, who told Horizon that it needed a two-pronged approach – first,  cost reduction and then drive innovation to increase business.

“We had to make sure that if we were going to drive changes that they were consistent. It was not a shortcut exercise,” said Houlahan. “We benchmarked against US co-op utilities. They are lean. There is a lot of them and they operate very well. After all the numbers were crunched we found we could reduce our subsidy by $100 million per annum. Our revenue is about $500 million a year and our costs are about $450 million per year.

“The key was that we developed 163 road maps to deliver the outcomes necessary to make the savings. The consultants left so we had to deliver. And that is usually where it falls apart. But for us, it was really simple. We believed that the result was possible.”

The roadmaps showed Horizon that the $100 million in subsidy reduction was achievable, they just had to work out how to do it. This was achieved in January this year with a $102 million subsidy reduction banked in the state budget. The company projects that it is going to have achieved a cumulative subsidy reduction of up to $638 million by 2021.

Being owned by the state, Horizon Power’s stakeholders aren’t shareholders (other than the Western Australian government) but the state tax payer. It was incumbent on them to make the savings and this included embracing digitisation.

“A digital transformation is about the customer and about optimising our employees,” said Houlahan. “So we put our platforms in place including  cloud-based platforms, in Horizon Powers case, Microsoft Azure. We are now looking at mobile applications and are launching an app that will tell customers in near real time how much they owe. It will forecast their bill and tell them their consumption. This is a data-driven app.”

Houlahan cites the example of the remote Pilbara town of Onslow in Western Australia to demonstrate how Horizon’s new approach worked. Onslow is home of Australia’s largest distributed energy resource (DER) microgrid. Situated on the northwest coast of the state, Onslow is a remote township of approximately 600 households that is about to go through a substantial population growth due to an off-shore gas operation. Horizon Power had to make sure the town’s electricity supply not only met upcoming demands but was optimised in favour of the customer, not the power company. The brief also called for 50 per cent of the towns energy needs to be met via renewables due to its isolated location.

“We are undergrounding the network to start off,” said Houlahan. “We will have 50 percent photo voltaic and 50 percent DER. We will also have gas generation and battery storage. ABB has their switchboard and inverters right in the centre of it all. What we will have effectively done once we have finished is bring the year 2050 to the year 2019. In other words, a de-centralised power station. We see this as a test case so we know how to roll it out to the other remote communities.”

Houlahan added that another issue with remote communities is managing peak demand, which is important because unlike the perception of being on a national grid, there is no never-ending power supply. With the exception of cutting off the consumer as was the case in South Australia in 2016, the easiest way to curb peak power is to offer incentives.

“We carried out an incentivised pilot scheme using 407 customers including more than 60 businesses in Port Hedland in the Pilbara” said Houlahan. “We gave them a strict target of a 20 per cent reduction during peak demand and we gave them four chances. If they went over their peak power allotment, they’d lose one of the incentives. Ninety-seven per cent of participants got incentives, which means they changed their behaviours.”

That proved to Horizon Power that not only did the customers understand the consequences of the power usage, but the outcome was good for those who consume a lot of energy but were prepared to change their behavior to reduce their demand for power during the peak period, 1pm to 8pm.

And the future? Houlahan is fairly bullish about where the company is heading. Once these roadmaps have been signed off, new ones will be created and it’s all about keeping up the momentum.

“Looking to the future we can look at sophisticated predictive load forecasting – which is all very exciting,” said Houlahan. “Then there is augmented reality in terms of training and network controls. We’ve got an innovation division and predictive analysis teams. We are hungry to put these things in place, but we have to make sure the platforms are there first.

“You have to embrace this disruption and the future because then you get the opportunity to put the cool stuff in and lead the customer expectation. That’s effectively what we are doing here.

“We’ll have new payment channels. I’m expecting that in the near future a customer will get an SMS saying do you want to pay part of this bill and they’ll say ‘yeah fine’ done. We’ll also be having prepay solutions. This is possible because we transformed our cost base.

“We are working out what the customer wants and are providing or aiming to provide those services. Some traditional revenue streams will decline with customers seeking other products and services from us, while we continue to find other opportunities and customer needs to replace that. We’re innovating and that’s how we’re getting ahead.”