In this world view utilities will need to develop the

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In this world view, utilities will need to develop the capability to manage and coordinate a wide variety of complementary partners, and will need to clearly define their role in the ecosystem. Accelerate the pace of testing. The two-way reach of smart grids will allow utilities to speed and widen the testing cycle for new products. They will be able to “test and learn” to understand which program features are most effective for specific segments, thereby reducing the time to market for new ideas. Some day,
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44 McKinsey on Smart Grid Summer 2010 utilities may be more like Capital One Bank, whose rigorous analytics and iterative marketing strategy measure the relative impact of hundreds of thousands of different offers (rates, card designs, promotional materials), to determine which ones have the greatest effect on customer behavior. Build account management capabilities. The Federal Energy Regulatory Commission estimates that two-fifths of the DSM opportunity in the U.S. lies in about 262,000 large commercial and industrial customers. While many of these customers participate in fledgling DSM programs such as curtailment and direct load control, some have never been directly affected by these programs. Utilities will need to develop full-service support for customers to navigate and manage what will likely be increasingly complicated DSM programs. Educate residential customers. Almost half of the demand reduction potential for 2019 comes from the highly fragmented residential market. To reach this market, utilities will have to develop easy to understand programs that give customers the tools (and the incentives) to better manage their energy use. Even with these new capabilities being brought to market as part of the smart grid, two hurdles remain for DSM to become a reality: the right blend of technology and program design must be adopted to optimize results; and, importantly, regulatory reforms that will allow utilities to capture value from demand-side management need to be established. Utilities have every reason to be skeptical about projections of demand-side management results. Since the 1970s, they have tried to capture load shifting and load reduction benefits, with mixed results. These efforts, however, were limited in scope and relied on costly, proprietary technology solutions. The good news is that there has been significant progress in areas vital to the success of DSM. Utilities are using federal stimulus funding opportunities to deploy statistically significant pilots to measure the impact of various DSM program designs. And regulators are considering reforms that credit utilities for demand-side reductions. Still, much work at all levels remains to be done if the economic and social promise of DSM is to be fully realized in the next decade. Robert Uhlaner is a director in McKinsey’s San Francisco office, Humayun Tai is a principal in Atlanta, and Brandon Davito is an alumnus of McKinsey. Copyright © 2010 McKinsey & Company. All rights reserved.
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