Michael Jary – Managing Director, APAC and EMEA, Sense

Energy retailer business models have faced extraordinary pressures for over a decade. Even before the war in Ukraine prompted a global crisis in energy markets, retailers were facing a very difficult environment.

An inexorable rise in energy costs, together with regulatory intervention and increased customer churn, have eroded retail margins and prompted several exits. Attempts at diversification to adjacent businesses such as home services have often failed because the necessary competencies can be starkly different.

At the same time, grid edge intelligence and real-time, appliance-level load disaggregation are generating huge interest in the energy sector. Advances in technology and AI mean that this long heralded technology is now a compelling proposition.

Testament to its potential, Sense has recently closed the biggest funding round yet in the sector – a $127m Series C. With millions of next generation smart meters due to roll out with Sense capability in North America, decision makers worldwide are now giving the technology serious consideration for future rollouts.

As more than three million Sense-enabled meters begin to roll out in the US, this technology is now coming to Australia, where it can integrate with local smart meters. This is particularly timely, with the Australian Energy Market Commission (AEMC) proposing 100% uptake of smart meters by 2030. Intelligent decisions made today will build an efficient and effective energy monitoring and management system for the future.

The benefits to consumers and the energy transition are clear. Sense intelligence represents a powerful tool for reducing both their energy bills and their carbon footprint. It also reduces the overall cost of managing, maintaining, and balancing the energy system.

However, the potential to transform retailer business models is what’s seizing the imagination of the industry.

So how does Sense intelligence work?

Intelligent machine learning software can run within next generation smart meters. By analysing high resolution energy data on the meter’s processor, the AI software is able to spot patterns and anomalies in the voltage and current.

This pattern recognition can be used to identify the unique power signatures of different devices in the home and determine how much power they are using in real time. Device detection and two-way communications are shared with the consumer via an app. It can also be used to spot faults on the grid or in the home.

No other hardware or smart connections are required. This high resolution processing takes place within the meter itself, so cloud costs and latency are low. Granular insights can be issued on demand into Retailer backend systems.

Reduce churn with engaged, satisfied customers

The Sense app is a powerful way to engage customers. It does this by giving consumers a product of genuine value. Sense provides them with an innovative new tool – at no charge – that is able to identify how much consumption individual appliances are using, historically and in real time.

People can see instantly whether they’ve left an energy-hungry heater on, identify an old, inefficient water boiler, or understand the behaviours contributing to big energy bills. Energy consumption is broken down to individual appliances in the home, with instant feedback when it’s turned on or off. With this insight, users find it easy to reduce their consumption.

On average they save 9% on their bill. With the marginal cost of software being so low, Sense is the single most cost effective energy efficiency investment available today – more cost effective than insulation, a new thermostat, new boiler, solar panels… anything.

Householders benefit from greater home awareness, too. They can get custom notifications to make their lives simpler and safer. Did they forget to turn the iron off? Is someone at home? Is the air conditioning or clothes dryer faulty? As a result, a typical householder opens the Sense app two to three times a week, even after a year of usage.

Retailers have the opportunity to engage more positively with their customers. Too often communication with their customers can be negative – when the bill arrives in their inbox, or a complaint prompts a telephone conversation. However, with Sense, there are myriad opportunities for regular, welcome engagement.

When a retailer is seen to help a customer, either by reminding them they’ve left the oven on or by dramatically reducing their bills, perceptions begin to change. Consumers are surprised and delighted. The relationship can be transformed – and the result is a happier and more loyal customer base.

Acquire customers with lower bills, not lower margins

Retailers that offer Sense to their customers can acquire customers without sacrificing margin. All customers want lower energy bills. However, to compete and acquire customers, retailers have had to cut the price they charge per KWh. As a consequence, retailers are surviving on wafer-thin, often negative margins. Instead, with on average 9% lower energy bills, retailers using Sense can compete on total bill size rather than cost per KWh.

To match those bills, competing retailers would need to operate on negative margins of minus 10%. Breaking the stranglehold of switching sites, retailers working with Sense can establish a clear competitive advantage over the discounters. Consumers could reduce costs and crucially, their carbon footprint too.

Reduce power costs with domestic demand response at scale

Managing the grid is going to become extraordinarily challenging in the coming years. The electrification of heat and transport will trigger a surge in load. A grid dependent on renewables will be unable to dispatch sufficient supply to balance it. The spikes in demand will exacerbate peak pricing.

Energy suppliers that are able to limit consumption during those times will reduce their costs and grow their margins. However, most domestic flexibility solutions in the market today are prohibitively expensive and difficult to scale.

They require the installation of connected batteries or other appliances. Time of use tariffs have poor uptake and customers struggle to cut enough consumption at the right times. However, with an engaged and informed cohort of customers, flexibility can be secured at much greater scale and much lower cost.

Sense enables a different type of domestic demand side response that doesn’t rely on expensive in-home installations or ineffective time of use tariffs. Using real-time device detection, Sense can detect the highest consuming appliances on the grid at any time, and issue messages to consumers requesting they turn down specific devices. The same technology makes time of use tariffs much more effective. Immediately before a change in pricing, consumers can be messaged with a reminder and provided with suggestions on the precise appliances they should consider turning down. The flexibility and immediacy means even variable time of use tariffs become viable.

One clarification: the load disaggregation must be accurate, real time and appliance level. Other load disaggregation technologies using lower resolution data have been shown to be too unreliable, late and clumsy to be effective.

However, if the disaggregation is real time, householders are then able to turn off the most impactful appliances that are using power at that moment. They don’t waste time and effort on minor appliances, such as laptops or low energy light bulbs. Customers retain agency and choice, so the threat of a damaging backlash against the industry is removed.

By doing the hard work for them, retailers can increase satisfaction, participation rates and flexible load substantially. When homes without Sense are asked to shift load, an average of just 2-4% of peak consumption is typical. In homes equipped with Sense, this soars to 18%.

Crucially, this form of domestic flexibility requires only a software application on next generation meters. The software can be affordably rolled out, downloaded on a new meter, and distributed to an entire customer base with minimal marginal cost.

Once at a reasonable scale, load under control becomes predictable and reliable. For a medium sized country such as Australia, Sense on smart meters would be the equivalent of adding 2.4GW to peak capacity. That’s as much as two nuclear power stations!

Improve insight and forecasting with better data

With appliance level data, energy retailers can derive significant benefits. The most direct advantage is enhanced forecasting. By supplementing demand forecasting models with appliance level insight, future load can be more accurately predicted. Power purchasing can be finessed, and hedges optimised. With more accurate buying, supply margins can expand.

The same appliance level insight can be used to better understand customers and their needs. Service and support can be enhanced with richer customer segmentation and insights.

Creation of new revenue streams, clear competitive advantage and the requisite capabilities to excel

As part of this proposition, consumers are asked to share their data with authorised market participants, including the retailer. Their permission is sought in a GDPR-compliant, clear, and transparent manner with the broader benefits of doing so laid out. Personally identifiable information (PII) is held separately from their energy data, with the highest security standards applied.

Consumer data is not shared with any third parties without the express permission of the customer, and only in circumstances which are to the benefit of them and the energy transition.

However, once approval is acquired, new business models can be created. If the customer consents to share their appliance and fault data, energy retailers can offer new proactive services. They can offer to repair or replace a faulty appliance before it breaks.

They can identify older, energy inefficient appliances and sell more environmentally friendly replacements, helping customers save money on their bills. By identifying and pre-empting risk in the home, insurance can be made more price competitive.

Energy retailers have always been in the data business. That data may have been analogue rather than digital, collected by an army of meter readers, processed, and then billed back to consumers.

Their advantages lay in data collection and processing, anchored to a unique metered asset in the home, and the infrastructure and relationships to communicate with millions of consumers. These new business lines leverage those core capabilities.

Unlike many diversified lines of business, energy retailers have genuine competitive advantages in these new services, and are therefore much more likely to generate material and sustained margins.

Concluding thoughts: building a business model for a digital, low carbon grid

Energy retailers play a vital role in both the global economy and in the energy transition. However, their business models have experienced substantial pressure for several years, long before the crisis in Ukraine.

But with Sense, energy retailers can build a new, sustainable business model fit for a low carbon, digital grid. By improving customer satisfaction, churn falls. By enhancing forecasting and shaving wholesale price peaks, power costs fall. Influencing demand will be as valuable as providing supply.

Instead of giving away margin by competing with discounters on pence per KWh, customers can be offered lower consumption, carbon and bills. New services can be provided, founded on a rich digital relationship with end consumers, that can outlive the original supply agreement. With Sense, retailer margins and revenues can expand based on a clear and enduring competitive advantage.

Sense provides software for next generation smart meters, and we work with smart meter manufacturers, energy retailers, and grid operators. So if you’re considering your next generation business model and are readying for your first or second wave of smart meters, please reach out to discuss how we can help.