Author Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is the founding contributor of Cleantech Blog, and a Contributing Editor to AltEnergyStocks.com.
In one of the less talked about cleantech mergers and acquisitions of 2006 (but one I think will have a deep impact on alternative energy and the smart metering and AMI market for years to come), First Data recently acquired Peace Software, an early provider of IT, billing, and CRM software to the deregulated utility sector, in a bid to get into the energy market. First Data [NYSE:FDC] is one of preeminent transaction processing firms in the world, and by acquiring Peace, has made its first foray into energy.
We have felt for some time that the financial products surrounding payments can be a very major driver for technologies like AMI, BPL and smart metering, and products like green power marketing, RECs, and carbon trading. Bottom line, if you can't measure and charge for it fast and cheap, you can't make and sell innovative electric retailing products. And conversely, if they can, they will.
I think the hurdles to overcome to get adoption of next generation IT and smart metering in the electric utility sector are hugely underestimated. But by the same token, I think the windfalls both the companies and consumers will see long term from those platforms once they are in, are also hugely underestimated.
I want to welcome Dean Cooper, Vice President at the newly formed energy & utilities division, First Data Utilities, and get his take on the merger, smart metering and information technology in the energy and power sector, and the future trends in AMI.
Dean, please give us a bit of background on yourself, and First Data Utilities.
My role at FDU is Vice President - Asia Pacific, which means I am responsible for business in the APAC region. The majority of this is Australia/New Zealand at this point. Prior to that I was with a venture management firm where we had a portfolio of renewable energy and biotech businesses with the most notable being a lithium battery and power device product that was destined for the NASDAQ IPO market in the go-go nineties. The prior venture was with McKinsey & Co, looking at establishing a global forest products trading system out of New Zealand.
Your firm, Peace Software, was recently acquired by First Data to form First Data Utilities. What was the rationale for the acquisition?
First Data Corporation has been involved in outsourcing for 35 years predominantly in the financial services space and credit card processing. They had built a business of some 33,000 people and an $US11bn revenue line (before spinning off Western Union late 2006) and were looking for verticals that mapped to their expertise of high volume, complex transaction processing and settlements with an annuity revenue stream. The energy sector was acknowledged as being ripe for the outsourcing model and expertise that FDC offers as utilities worldwide recognise the criticality of reducing their cost to serve in deregulating markets.
For an interesting take, check out the FDU backed research project on hottest customer switching markets for electricity. According to this, right now it’s Great Britain and Victoria, at 20% per year.
So if you had to choose the top 2 synergies that First Data was looking for in the acquisition, what would they be?
The key synergies were to blend the utilities domain expertise of Peace Software with the outsourcing and transaction processing capability of First Data. Whereas Peace contributes the software intellectual property, First Data would add the hosting and application management capability. This is a new business model for the energy markets and moves away from the traditional model of a systems integrator installing and hosting the intellectual property of the software provider, to a model where the one entity (FDU) owns both the IP and the implementation and hosting expertise. This new model is anchored on delivering a lower cost structure for utility companies.
Not many people know that New Zealand, where Peace originated, was the first major electricity market to deregulate. What impact has that had on Peace's history?
You’re right - the New Zealand market led the worldwide movement by government to deregulate energy markets to provide greater competition and lower costs for consumers. Our founder, Brian Peace, was a computer science lecturer at Auckland university at the time the New Zealand energy markets deregulated, which inspired his entrepreneurial crusade to build a software product specifically to service the deregulating energy markets worldwide. Resultingly the heritage of Peace was as a dereg software play for large and small utility (electricity, gas, water) companies initially in New Zealand and subsequently in Australia, Canada, USA, and Europe.
Adding to that, deregulation in some Australian states is now 10 years and running. How has the deregulation changed the investment behavior of the utilities?
Deregulation in Australia and beyond has altered utility behaviour from initially being dominated by engineers with a focus on the poles and wires (distribution) business to an entity focused more on the consumer, where reducing consumer costs and providing increased consumer choice is a key driver to energy retailer success in a competitive market.The larger utilities that had been operating in Australia since the mid 1800’s and then emerged as leaders in the deregulated market of Victoria in the late 1990s were and still are carrying a higher cost to serve than necessary, due to a legacy of disparate systems that come from M&A.
This provided a great incentive for “challenger brands? and new entrant retailers to enter the market in the last 3 years with a point of difference around low-cost, green energy, or tailored customer offers.
How have these entrants fared, and what role (if any) has cleantech information technology played in their bids for market share?
New entrant brands have appealed to many consumers by the nature of their fresh branding, tailored product offerings, and lower cost structure. In comparison it is more difficult for incumbent utilities to offer a new approach through the inertia of their operations. Information technology plays a key role in a new entrant solution offering a lower operational cost to customers. This begins from the time a customer is acquired through to its energy consumption, billing, and customer management activities. Traditional energy companies would have to integrate this information across a number of disparate systems, yet new entrant retailers are able to work with one technology company to provide a seamlessly integrated solution to manage their business. This has had a dramatic effect on costs and therefore appeal to consumers.
I'd love to get the FDU take on the future of demand response programs (in both deregulated and regulated markets). What is the state of the art now, both in the programs and the technologies powering them? How is this tying in with the rise of smart metering?
Demand response is proving to be a very trendy area globally in energy, with Australia being a leading market worldwide on this topic with legislation mandated in Victoria to implement a smart metering program as one means of managing demand response. There are many alternatives to demand response including price incentivisation through pricing monitors installed in households, peaking generation plants, time-based pricing mechanisms such as a smart metering program (such as the telco industry where we pay varying usage rates depending on the time of day – peak/off peak), and suchlike.
One of the major reasons for demand response is the growing age of electrification that we live in where households consume a lot more power due to home appliances, that the network assets were originally built to accommodate. It is very expensive to replace ageing network assets or build generation plants, (along with the debate over environmentally friendly generation assets) meaning a demand response program may be a better means to the consumption/generation imbalance by focusing more on the consumption part of this equation.
Can you give us some ideas of the technology changes that will need to happen? What's going to get commoditized, and where are the key technology areas to watch?
The areas of commodisation are likely to be meter hardware, remote communication, data acquisition, and data management. Because we will be looking at an order of magnitude increase in data volume from smart metering programs you get a sense for the size of the technology challenge. In a situation today where we may have 3 million consumers who have their energy consumption measured on a bi-monthly or quarterly basis. With a smart metering program we would move to 30 minute measurements which would be approximately a 4,000 fold increase in data volumes.
Already players that are grabbing a foothold in this space include Bayard Capital, run by Cameron O’Reilly for meter hardware along with GE, the comms companies, and all IT vendors for the data component, which is where FDU also fits in.
Are we going to see the rise of major IT giants in the smart metering sector, like we did in supply chain IT in other areas?
Good point, we could very well see this happen as the smart metering sector emerges and grows worldwide - smart metering measures consumption on a more granular level (30 minute intervals vs monthly intervals). We are still in the early stages of market trials and legislation worldwide yet already a number of sizeable markets are embarking on smart metering programs such as Australia, New Zealand, Canada, parts of the US, Italy, and Scandinavia. As standards are established for communication, data acquisition, and reporting we will see solutions to these markets develop. As is typical of emerging markets, suppliers are cautious of over-investing until regulators confirm market standards.
All major energy sector IT giants are poised to invest in the smart metering sector and you will see the leaders emerge once standards are confirmed in the leading markets of Australia, New Zealand, and Canada.
Have any IT players started this move? I’ve noticed IBM’s name on some press releases in North America.
Many players are establishing “thought leadership? positions in smart metering. IBM certainly have a large pool of resources dedicated to this space so expect them to feature in most smart metering roll outs.The majority of IT players are also positioning themselves but refraining from significant investments until market standards are set.
Who are some of the market leaders in this game, and where do FDU's products fit in?
In the meter hardware hardware frame Bayard Capital have amalgamated a strong set of assets and are the leader at the front end of the value chain. There is no clear leader in the remaining part of the value chain but FDU believes our business model and company heritage for large scale transaction processing globally puts us in good stead to make a compelling over to the market place.
FDU would therefore be able to continue its meter-to-cash outsourcing business model to include both basic and smart metering worldwide – with the scalability and complexity challenge involved there are not many competitors that would be able to make a similar claim.
“Meter-to-cash? – I like that phrase, can you elaborate on what that means?
Essentially it means the process whereby consumption data from the household meter is acquired, through to the billing and exception management process, and on to collections and credit checks. Effectively the engine room of an energy company’s customer management function.
Obviously, First Data is a financial services and transaction processing giant. Where (and when) do you see the convergence between financial services and areas in energy and electricity retailing like bill payment, smart metering, demand response? I would imagine that improving bill payment is one of the first areas. I know I can't even use my debit card to pay my personal utility bill, because my electricity provider does not accept debit cards from the two major banks in my region - so I use online bill pay. What's your take on what happens next?
Already the integration and convergence of these facets are underway and working in the market place today. Not being able to pay your electricity bill with a debit card is probably more a deficiency in the system capability of your utility than what the market (and FDU) can deliver on. End to end integration of energy services to consumers is part and parcel of a competitive deregulated marketplace, and part of the new behaviour of utilities in liberalised markets.
Modern systems and processes certainly can handle “mass customisation? of consumer needs and you will see significant positive change in utilities of the future as they become more consumer focused rather than solely on poles and wires.
If you had to pick the top 3 differences the consumer will see from all of this, what are they? And when do you see most of us as getting them?
Top 3? My best Top 3 are probably:
1. Consolidated billing and convergence;
2. Responsiveness;
3. Targeted campaigning and messaging in the same manner cellular and telco’s have been operating.
Customers in the advanced Australian energy markets are getting these benefits already, so it won’t be long before all global energy markets are experiencing a greater level of service.
Dean, thanks for the time today. I am really excited about the IT moves in the energy sector, and I think the play FDU is making to combine CIS solutions and financial payments has been a long time in coming.
You can find more information on FDU at Peace.com.
