Sending clearer price signals in the energy sector with analytics
Price signals in the energy sector have significant ramifications that extend far beyond the industry. Gary Holden, Chief Executive of Pulse Energy, illustrated this during his presentation at NZ Downstream 2017 - Energy fundamentals, strategic opportunity and a future view of energy.
Of particular importance, he noted, is ensuring that the price signals organisations deploy are effectively picked up by the right consumers, and that the effects of those signals align with desired outcomes in the industry.
Price signals will have a key role to play in the future of energy in New Zealand. Let's take a closer look at these mechanisms and the challenges ahead in 2017.
"Whale oil was the first example in our energy history where the substitution - kerosene - was about 700 per cent cheaper than the supply."
What are price signals?
The concept of price signals is rather intuitive; the cost of a resource will convey a message to consumers about how to alter their use of that resource based on available supply. Petrol is an excellent example. When there is a shortage, prices rise and consumers change their behaviour; they might take public transportation or walk instead of driving.
For consumers, this is mainly done to save money. But, for the overall industry, it's a method of encouraging behaviours that ensure more stability in oil supplies. Such mechanisms have long played a role in the energy and transportation sectors, going as far back as the 1800s.
"Whale oil was the first example in our energy history where the substitution - kerosene - was about 700 per cent cheaper than the supply," Gary noted.
"Some historians would say that if it wasn't for the discovery of crude oil and the refinement of kerosene, nobody would have even had the thought to build the car. This was the first moment in energy history where a 700 per cent signal created some massive ideas."
That history carries important lessons for the contemporary industry as well.
Price signals and the future energy market
It's no secret that the energy sector in New Zealand is in the middle of a drastic transition, thanks to the growing prominence of renewable forms of generation, new technologies and the potential to supplement traditional markets with peer-to-peer energy retailing. With so many experimental avenues to pursue, organisations in the sector will rely on clear price signals more than ever.
Facilitating a discussion on customer competitiveness, Simon Coates - Director of Concept Consulting - summed up the challenges ahead.
"Customers want simplicity. We need to move to cost-reflective prices and send signals to customers to do sensible things at sensible times," he observed.
"How do we balance this desire for simplicity against the need to send signals to consumers?"
This need becomes even more pronounced given the shifts facing the sector, particularly with electric vehicles. We learned in other presentations at Downstream that we're not far off from widespread adoption of electric vehicles, which will introduce complications to grid stability if charging behaviour isn't properly guided. This calls for effective price signals, but historical examples show that we could be in trouble there.
The danger of muddled signals
As a mechanism for shaping customer behaviour, price signals work - but only to the extent that people pay attention to them. Gary Holden showcased the difficulties here using the Toyota Prius as an example.
He explained that the Prius represents one of the first major breakthroughs in automobile technology since the internal combustion engine; it moved the adjusted cost of travel to below $10 per 100 kilometres, thanks to the ability to reclaim energy from the brakes.
By all accounts, this should have been the catalyst for a massive shift in the car industry. That's not how it panned out.
"For 100 years, we had the same cost, and then there was a step change. And only 15 million people in the world actually took this step change. There are 1 billion cars, but only 15 million people reacted to that price signal."
So, how do we learn from previous attempts at price signalling in order to send effective ones in the future energy market?
Boosting signals with analytics
Consider performance analytics in sports. It tells us how well different players perform under a wide range of variables. That capability could carry over to analytics leveraged for effective price signalling.
How much of a cost increase is necessary to alter consumer behaviour without sinking the industry? Which customers respond most clearly to different types of price signals? Analysing and deriving insights from large volumes of historic and current data sets will be the key to answering these questions.
Given the scale we're dealing with when it comes to these data sets, we will need highly capable analytics tools that offer a strong degree of flexibility to carry out investigations of data outside the box. Of course, analytics is just one part of the recipe for success in this regard. Achieving these outcomes will require efforts across an organisation - bringing on or training highly skilled people who are able to work collaboratively across a number of disciplines to get the most out of analytical tools.
Much like overall analytics success, this centres on people, data, process, technology and cultural change.To learn more about how analytics tools from SAS can support more effective price signaling in the energy sector, get in touch today.
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