Recurring Revenue Business Models Work

Recurring revenue strategies enhance the valuation of any company by improving the predictability of organic revenue growth and improving EBITDA by using repeatable solutions to reduce the cost of goods sold.  Whether your firm is building products or providing consulting or other services leveraging intellectual property creation can deliver high value-added results.

Often, the challenges facing the firm are the same as those faced by your clients. How can you deploy solutions that work across your core businesses, productize them using your best practices, and deliver them as repeatable solutions to your customers—that is the essence of a recurring revenue strategy:

“Build it once, prove that it works by using it relentlessly, and then sell it often.”

Source: Ventyx/Global Energy Decisions

RECURRING BUSINESS MODELS RAISE THE BAR FOR COMPETITORS

The biggest challenge for a recurring revenue business model is not building it but conceptualizing what to build. The challenges facing China are vastly different than those in California or Virginia and so are the economics, market rules, and customer expectations.  One size rarely fits all, but consistently applied best practice applications of primary business intelligence research, simulation modeling and scenario analysis and the expertise and tools to deploy them is what brings customers to your doorstep.  Retaining those customers and expanding wallet share of their services spend only happens when you deliver high quality results, consistently, and competitively.

Organizations are often built the old fashioned way block by block and turn into silos loosely organized around a common strategy.  After a while the culture of the business drives it more than logical business strategies.  Internal competition among business units is as fierce as with competitors.

Revenue absolves all sins and those who find a sweet spot and produce the revenue and EBITDA get to drive the strategy forward.  This works as long as the market conditions, regulatory regime or technology stays aligned.

Change is often swift and disruptive.  Just look at what happened in the highly profitable power generation asset valuation segment with the great recession market collapse.  A great line of business, with great clients and a growing energy demand collapsed with the credit crisis and is still stuck in the mud except with flat demand for ever more politically mandated renewable energy projects driven by government subsidies.

The growth challenge is to imagine a world of different futures and build integrated solutions that work in the “sweet spots” across more than one alternative business future for your firm and your customers.

WHY USE RECURRING REVENUE STRATEGIES?

  • Recurring revenue improves the quality of earnings and business valuation. Unlike billable hours that must be re-earned each month, recurring revenue is a predictable revenue stream from the advanced sale of a data or software license, advisory fees for access to standard analytics products sold on annual contracts, or multi-year outsourced service contracts.  Because the revenue is contracted to recur each month without the sales expense and uncertainty of billable hours projects, recurring revenue improves the quality of earning and overall business valuation.
  • Recurring Revenue provides revenue stability.  Because recurring revenue contracts are annual or multi-year deals the revenue they produce smooths the peaks and valleys and offers stability for the business in recessions or between big billable hour projects.
  • Recurring revenue products monetize R&D investment that otherwise would be overhead.  By creating a market for research and development outputs, recurring revenue products self fund or pre-fund R&D and free working capital for major investments turning overhead into a profit center.
  • Recurring revenue products have higher margins and improve EBITDA.  Because recurring revenue products are ‘produced once, used often and sold many times’ they tend to have higher margins on par with data and software products.  Standardized work scopes and methods allow products to be produced with lower cost, junior staff under supervision to improve EBITDA and speed training.
  • Recurring revenue products improve consulting productivity and quality.  By providing a high quality starting point for repeatable consulting services, recurring revenue products let consultants start work on billable hour tasks faster than competitors, improve productivity by using lower cost junior staff for standardized simulation analysis and improve the quality and consistent of consulting work by leveraging best practices.

ALIGN THE BUSINESS FOR GROWTH

Applying a recurring revenue strategy to realize the organic growth potential is the first essential step in creating a virtuous circle that aligns your business interests with those of your customers. The internal business results from such a strategy drive improvements in EBITDA and performance by:

  • Align units around a common growth strategy and modular components;
  • Hone best practices with customer engagement to align with customer interests;
  • Leverage core competencies and capabilities to create recurring revenue streams;
  • Reduce product go to market lead time using speed as competitive advantage;
  • Shifts expertise to customer facing roles focused on business solutions
  • Enable use of lower cost junior staff to build and maintain product modules;
  • Repeatable use product modules optimize performance and integration of infrastructure, information, innovative technology, and services into complete solutions to address customer needs across global markets.

Recurring revenue strategies value the firm’s core competencies by monetizing them, using them relentless inside to improve performance results and EBITDA, and demonstrate powerfully to clients that they made a wise choice that enables them to live into their own need for performance and results.

Volatility is the Start of Good Things!

untitled

Volatility is a good thing. If prices were predictable no one would make any money. Volatility is the heart beat of the market. When volatile events or ‘fears’ about bad stuff happen we take action to ‘hedge our bets’ or cover our assets. Without such rational behavior every trading day would be carnage. The sum of millions of individual decisions is called ‘market equilibrium’—the balancing of supply and demand—and the world depends upon it.

I’ve written before about the factors driving oil price volatility and its impact on the economy so I’ll spare you the sermon and go straight to the benediction:

  • Fear is up because the global economy is weak. China worries about bubbles, corruption, choking air, rising costs and falling exports. The US worries our best days are behind us, that our government is choking us with regulations, that we are getting weaker abroad and inviting trouble ahead.
  • We need economic growth to purge evil spirits in market psychology so we can see opportunity as well as risk in the markets. While OPEC hates it—oil is on sale at low prices and we cheer every time we fill our gas tanks.
  • The election is OVER, it is time for our politicians to perform or be very afraid. Voters think the country is going in the wrong direction and we want to throw the bums out making each candidate sweat. The rise of both Donald Trump and Bernie Sanders was a vote of no confidence in partisan behavior as usual of scoring points rather than fixing our problems. Now is is time for them to get going or get gone.
  • We need normal again with interest rates that reflect the real cost of money in the economy, as an incentive to save and to invest and begin to have normal business cycles rather than just artificial peaks and death defying valleys. The great recession is over and the end of FED quantitative easing is still un-easing. We realize the stock market is way up because interest rates have been way down for so long. But volatility may bring stocks lower as the Fed eventually raises interest rates to smooth the rhythm of the market to something approaching ‘normal’.

There is good news out there, people! Energy—we got that! And despite the politically correct politicians, we’ve got lots of it. The US is leading a revival of energy production. Gone is the fear of peak oil—we are not running out of oil. Gone is natural gas prices soaring into the stratosphere—natural gas is at below historic average prices and creeping back to market replacement levels. The US government threatens to regulate coal out of business but the rest of the world still needs coal.

Meanwhile US technology innovation is leading a clean energy revolution driving down the cost of solar panels (with help from China), accelerating research and applications of battery storage and electric cars, and aligning the big data analytics and machine deep learning potential of the Internet of Things (IoT) into a digital revolution where abundant energy, innovation in technology and markets returning to “normal” equilibrium point the way in the build up to the next boom if we can use the 2016 election to get the government off our backs and out of our way.

You get the message right, low oil prices are good news.  We save money until ‘normal’ kicks in and prices return to market equilibrium. Normal is probably oil prices higher than we see today but not as high as we’ve seen. Normal is when fear is balanced by a perception of opportunity. When VIX is running wild, traders are running around like their hair is on fire dumping good stocks for CYA protection. Normal is when we see those same traders buying up stocks as low priced values are snatched up and held once again as they appreciate.

Normal is when we appreciate appreciation once again. Normal is good but first we must purge the evil spirits of market fear and government interference so markets are allowed to work the way they are supposed to work—find market equilibrium and it will reward you with a fair price!

‘Uber’ the Distributed Energy Future

George Russell. Sunday, July 11, 2010. Smart meters.

The future of the electric power energy value chain is being transformed by distributed generation technology, renewable resources, better battery storage, and a revolution in the century old regulated utility business model to democratize the energy value chain.

There technologies and California’s Community Choice Aggregation law empower customers to drive their distributed energy resource future (DER).   San Mateo and Santa Clara are the latest Bay Area counties launching customer community choice aggregation giving retail energy customers an alternative to their traditional monopoly utility PG&E joining Marin, Sonoma and San Francisco counties.

Virtually all commercial and industrial (C&I) customers are now in play. Technology, customer choice and changing market rules are converging to speed the transformation of traditional energy markets as well as beyond-the-meter self-generation with changes to business models, regulations, solutions and services.

California is ground zero in the West for distributed energy transformation with 50% of US private solar systems—more than half a million businesses and homes; more than 200,000 plug-in electric vehicles (PEV)—40% of total PEV sales—with a goal of 1.5 million by 2025.

Fundamentals still matter but politics and technology drives prices. We need actionable insight across the energy value chain to improve operational visibility and control to manage this disruption. Technology change is playing a big role in this transition. But weak electric power demand growth is starving the industry and forcing rationalization of capital investment, operations and the search for new solutions.

Disruptive innovation is the power of data, analytics and insight to change or disrupt usual patterns of business to create competitive advantage and manage risk.

  • Scale growth to improve valuation in anticipation of a strategic exit transaction,
  • Improve the quality of earnings using recurring revenue business models,
  • Launch software and analytics products focused on cloud-based IoT, AI markets,
  • Refine the company brand or marketing message to stand out in a crowded field,
  • Leverage IP and expertise into services for wallet share growth.

While we’ve seen advances in analytics and big data learning curve and market penetration many firms are still where no one wants to be– ‘XLS Hell!’ 

This isn’t criticism of Microsoft. In reality much of the data we still need every day to get the job done still lives in XLS spreadsheets somewhere. IoT and AI-driven analytics help to mine that big data using machine learning cloud performance analytics solutions to sense reality now, predict future operating risks and prescribe solutions and hedges to improve performance when we need it most to confront the challenges of markets.

Turning data into insight is not enough—we must make that insight actionable and agile to improve operational visibility, control and security. 

Data, new technologies and analytics apps must learn to work together seamlessly in real-time to simultaneously balance energy supply with demand across the grid. As regional markets give way to global supply chains we must be secure in the supply and demand balancing that is essential to clear markets.

We need better performance in the distributed energy resource (DER) future as the traditional utility business model ‘morphs’ into a competitive energy services markets where utilities become integrators of nanogrids (buildings), microgrids (campuses and neighborhoods) and choreograph service areas into regional grids in ways that improve security, reliability and accessibility to customers and suppliers.

Disruptive Tech will ‘Uber’ the DER Future. The rapid shift to the distributed energy resource future is playing out in response to the business need of large corporate energy users to have secure expected energy resources that assure reliability, adequacy of supply and live into their sustainability pledges to reduce emissions, improve energy efficiency and optimize costs in the emerging competitive DER market place.

Sustainability began as a politically correct business pledge to ‘ do good’ . But business realized that tech advances and falling DER prices improve operational visibility and control while lowering total energy costs.

Enter the DER Contract for Differences Deal Structure. DER experiments with new deal structures for DER include long-term corporate deals by Apple, Google and Kaiser Permanente that first made headlines in February 2015 with 300 MW of renewable energy from projects in California. Hailed for sustainability the deals also helped speed up policy shifts from traditional utility business model to competitive DER future.

The deals were not traditional bilateral energy purchases where wind, solar or battery-stored energy is delivered to the buyer. Instead, DER enters the regional grid at its source and offsets retail supply delivered elsewhere using a contract for differences (CFD) deal structure to lock in an agreed purchase price or sustainability hedge for corporate buyers both large and small.

  • Apple CEO Tim Cook announced a $845 million over 25 years to buy half the output from a 280 MW solar park owned by First Solar in Monterrey County, California.
  • Google signed a 20-year contract with NextEra Energy Resources for wind power from a 43 MW installation at California’s Altamont Pass or enough wind to offset power use at Google’s headquarters in Mountain View.
  • Kaiser signed a 20-year deal to buy 43 MW of NextEra’s updated Altamont wind farm. It also has a 20-year contract to buy the power from NextEra’s 110 MW solar project in the Mojave desert at Blythe.

Each deal used long-term power purchase agreements (PPA) with a contract for differences (CFD) deal structure to navigate the regulatory and financial requirements. Doing so allows them to retain their current retail energy supply in place while hedging against expected price increases for fossil power supply from higher natural gas prices and/or carbon fees. The CFD model allows the companies’ access to wholesale DER from across the grid off-site generators.

  • CFD is a long-term PPA for DER bought at wholesale and resold to the grid for the buyer’s benefit. The deal structure allows the buyer an energy price hedge and Renewable Energy Certificates (RECs) to offset the retail and carbon footprint.
  • CFD is negotiated with a wholesale DER supplier to set a fixed purchase price for the power — the “strike” price and serves as the reference price to determine the net profit or loss — the difference — buyers realize after power is resold to the grid.
  • CFD buyer settles with DER supplier monthly paying the purchase price minus the difference from wholesale grid sales (i.e. spot market prices) during settlement period. The difference results in a credit if grid prices are higher than the average strike price; or the buyer’s account is debited if average spot prices are lower than the strike price.
  • CFDs allow corporate customers to buy green power without taking physical delivery of the energy at the company’s load centers or without changing existing retail utility or grid connections.
  • Corporate buyers use a financial hedge against future electricity price increases, and get the environmental benefits from the DER. The financial hedge’s long term purchase power price is locked in for the DER offsetting future electricity price increases if retail electricity rates rise with higher fossil fuel costs for wholesale power. The CFD often results in a higher profit from the resale of DER to the grid.
  • CFDs include environmental rights from renewable energy certificates (RECs). The certificates are transferred to the buyer based on each MW of DER purchased. The RECs are the accounting method the buyer uses to show that it is delivering as much or more DER to the grid as it is taking from the grid at its retail locations. The RECs also offsets greenhouse gas emissions from the grid. With CFD benefits demonstrated in deals such as these expect to see its use expand.

Governor Jerry Brown signed four bills to encourage energy storage and DER. California regulatory policies are profoundly changing the power grid and powergen infrastructure sometimes before either markets, regulations or customers are ready for such changes. Among other things, utilities must add 500 MW more energy storage beyond the current 1.3 GW target under previous regulations.

  • AB 1637 adds $249 million in Self Generation Incentive Program funding; 75% goes to energy storage.
  • AB 2868 requires the CPUC to direct California IOU’s to speed up distributed storage by up to 500 MW.
  • AB 2861 authorizes the CPUC to resolve disputes over interconnecting distributed energy into the grid.
  • AB 33 directs CPUC and CEC to assess long duration bulk energy storage, such as pumped hydro, to help integrate renewables into the grid.

These community customer aggregation entities will do for residential customers what CFDs are doing for commercial and industrial customers—speed the shift to the DER future.

U.S. Shale’s War Games: Energy Economy Animal Spirits @ Work

believe,nature,words-ccf1cd548a4d35e1bac9251ccc2ed124_h

Each day a typical oil or gas drilling rig equipped with Internet of Things (IoT)-enabled sensors collects about 8 terabytes (1TB=1,024GB) of operating data to continuously assess performance and make real-time prescriptive analytics adjustments in response to optimize well performance. Multiply that by dozens or even hundreds of wells across shale or light tight oil and gas plays in the US and you see why OPEC flooding the market with oil was not sufficient to destroy the economics of the US shale revolution.

The US Shale Revolution is driven by US technology and the animal spirits of the US oil & gas industry wildcatters, engineers, traders and entrepreneurs betting their future—with their own money.

By mid-2014 OPEC leader Saudi Arabia was feeling the pain of weak oil demand in a global economy with anemic growth rates. On top of that weak growth there was the constant cheating on production targets by OPEC members. The cheaters had been conditioned by Saudi tradition of using its swing productive capacity advantage to balance the market even if it meant cutting its own production level and revenue.

Then the Saudi’s said ENOUGH! In mid-2014 oil prices fell like a rock. You know the rest of this story—oil prices tanked around the world and all oil producers felt the pain.  Speculators stored oil in ships and every other available place betting that falling prices would spell financial ruin to onshore US shale growth and slow investment in offshore oil drilling projects enough to balance the market thus driving prices higher faster on the rebound.

A funny thing happened on the way to the poor house—the US shale players used their entrepreneurship and animal spirits along and US technology to drive down the break-even point for new onshore production. As drilling costs went down production continued in the best onshore plays.  Financial hedges cushioned the impact. So did higher prices for natural gas liquids produced by the wells.  US export demand for the light tight condensates continued as Canadian oil sands producers used it as diluent to thin heavy crude enough to flow in the pipelines toward US Gulf Coast refineries.

OPEC spent a fortune in a failed effort to stop cheating at home and savage shale competition abroad. US onshore producers got more efficient and today are even fiercer competitors in global markets.

The 2016 US Presidential election unleashed emboldened the animal spirits so evident in the onshore energy industry and told the rest of the economy to roll-up our sleeves and get ready to go back to work. US shale production growth and technology advances had positioned the US for another industrial revolution.

The US Shale Revolution was an energy war game designed to show the rest of us the power of American ingenuity and entrepreneurship if government policies and regulations are better aligned to unleash the animal spirits within us once again.

Augmented Reality as a Service

Crime Predictive Analytics
Predictive Analytics Visualization of Crime Patterns

The graphic above is a visualization of expected crime patterns in Santa Cruz, California from a Santa Clara University research project to help police improve crime prevention, decide staffing assignments, and anticipate where crimes might happen. This is not ‘1984’ or anything spooky, it is the next stage of augmented reality technology applied to solve practical problems. Get used to it, this is big!

In every aspect of our lives new technologies are changing the way we do things. Sometimes this can be scary. Will robots and AI take our jobs? Is the government or big business tracking my every move?

But increasingly we find ourselves wondering—how did I ever find my way around without Google maps and Siri directions? How did I get along before we had (fill in the blank) —-mobile phones, internet, digital cameras, online shopping.

You get the point. Disruptive technology innovation is both wonderful and challenging as we learn to make sense of the complexity that swirls around us.

  • It is not just data; it is the context in which stuff is happening that changes the insight we get from the data.
  • It is not just volatility; it is the rapid “what if” trade-off analysis we make even in the face of fear of making wrong choices.
  • It is not a lack of new software, devices, or more apps we crave; it is the convenience that better user experience brings in putting it all together fast enough, visualize options, and make split second choices that makes the difference.

The best balance between completeness and simplicity is a solution that integrates good tools, good data, good analytics methods for fast, easy, transparent, consistent actionable decisions. The miracle of turning water into wine is in the judgment to inform, shape, and target our decisions to fit the circumstance—-and the courage to say DO IT!

The reason that artificial intelligence, machine learning and augmented reality solutions are making fast inroads into our mainstream activities is our need to quickly, seamlessly and consistently integrate vast streams of data with the context, choice and convenience filters used to make sense of it.

The 5 V’s we face:

  1. Volume-how much data and information is involved and where are you getting it?
  2. Velocity-how fast is it changing?
  3. Veracity-do you believe the data? How frequently is it updating? Is that sufficient?
  4. Visualization-can you put this stuff together and assess it to gain actionable insight?
  5. Value-is the insight you gain useful, sufficient, timely and credible enough to make informed decisions—does it empower your judgment, experience decision?

Enterprise-scale business intelligence and predictive analytics solutions help us deal with the first three V filters in the list above by slurping in big data and quickly organizing it in data structures that are searchable with other user friendly software algorithms. These solutions rely on a common data framework, consistent analytics methods, scenarios or stochastic risk analysis to help create a fast, efficient, repeatable, integrated basis for decision analysis.

These solutions are huge improvements over previous generations or business analysis done in spreadsheets and pivot tables by people. But automating and integrating it into enterprise systems has been hugely expensive, time consuming and makes the business unreasonably dependent upon the enterprise software vendor and system integrator for mission critical operations success. From the customers’ perspective, the problem is the process can easily overwhelm and defer the value. The business pain point is that to get to value you seek you must find a way around complexities that prevent you from seeing the big picture.

‘Everything as a Service’ is the emerging business model of choice enabling startups and others to avoid expensive time consuming enterprise software projects that stand in the way of going to market faster. The promise of the tech transformation requires finding a solution. This is the ‘where’s the beef?’ question in every discussion of value.

Energy Industry Example of Disruptive Change. There is a tsunami of data washing over us. Instead of monthly energy meter readings of static start/finish consumption data, for example, we have 15 minute pulses of data 24/7 enabling pattern analysis, data feeds from customer side of the meter sensors, and the meter may spin both ways as net metered customers both buy and sell energy produced to the grid at dynamic prices.

Smart grid is almost always meant smart meter deployment. But smart meters are only one factor in getting to the promised benefits of smart grid. The other components are dynamic pricing, transmission access for renewable energy projects, and peer-to-peer clean energy transactions from customer choice aggregation and direct sales ahead.

Most end use energy customers are still billed on an average cost basis for energy use. States are slow to implement dynamic pricing because it scares utilities, regulators and politicians who fear customers backlash over price volatility. Like surge pricing with Uber, demand pricing is becoming more common in the electric power sector. But residential customers hate utility bill price volatility and most utilities still have “budget plans” which offer level billing to avoid rate spikes. This completely defeats the policy and economic intent of dynamic pricing.

And let’s face it, introducing dynamic energy pricing is a BIG change not likely to win many friends or votes. And then there is the problem of the utility business model. Only a few states have “decoupled rates” so that utility earnings are not dependent upon selling more kWh of energy. But unless rates are decoupled the incentives are in conflict and few will see many benefits worth the hassle.

A goal of getting more of our energy supply from clean and renewable sources such as wind and solar is a popular. Many states have renewable portfolio standards (RPS) requiring utilities to buy ever larger percentages of their energy consumed from renewable sources. But shifting power to customers to choose energy options also brings risk and potentially reliability issues.

The business challenge ahead as many states and their utilities near their RPS goals is will the state ‘declare victory’ or do as California has done and raise the target. The rate consequence of higher targets is substantial and when combined with rate increase pressures from smart meter deployment, emissions reduction and other regulatory demands make declaring victory an attractive but not politically correct decision.

Renewable energy cost more than traditional ‘least cost, best fit’ power supply options. Those higher costs have been offset by subsidies, tax credits and leasing options. But the future of subsidies long term is uncertain.

The political reality is solar photo-voltaic (PV) panels prices have fallen rapidly as the market is flooded with supply and energy demand growth is flat. Have wind and solar prices dropped enough that we don’t still need subsidies? This prospect of lost subsidies terrifies the renewable energy industry causing consolidation of the players. Meanwhile, competition ruthlessly and efficiently forces every player to get to grid parity pricing to be sustainable as prospect for energy industry business model and regulatory changes usher in competitive, peer-to-peer energy services markets to replace the traditional utility average cost business model. Think: like from a Ma Bell land line to multi-carrier iPhone.

So what about the value and benefits to customers?

Everything as a Service. From regulated monopolies and government control the disruptive technology revolution is giving us choice but getting to the value we seek from putting all that data, analysis and user-friendly apps together requires that we MAKE CHOICES! To put it all together involves all the complexities of V1-V3, but so far it has been hard to organize and visualize all this data and get to insight sufficient to make decisions.

The energy industry like many others faces the triple threats of rapidly changing technology, highly volatile, competitive business conditions, and the systemic loss of talent and expertise when it can least afford it. It needs new solutions that help bridge the gap and enable energy choice consumers to make informed, prudent decisions.

Augmented reality technology helps us quickly assemble, organize, analyze and choose between options recommended by algorithms, automatically comparing, updating with new data and experiences, evaluating probabilities and presenting it visually so it looks easy. The result is good stuff happens, bad stuff is avoided and both are made actionable by solutions that put all these moving parts together to enable us to just DO IT!

Our world is full of disruptive technology that is replacing old ways of doing business with new tools and capabilities we could scarcely imagine only yesterday. This continuous process of change empowers us. Augmented reality and other disruptive tech solutions harvest the data, knowledge and our experiences and apply it so we can visualize it all together and quickly analyze our options and trade-offs.

People, Products and the Power of Ideas

TCLABZ Energy Machine Learning

I joined Dan Yergin’s Cambridge Energy Research Associates in 1996 as a Director in its Global Power Practice.  My role was to leverage my hands-on utility operations, regulatory and data-driven tech experience to help our clients plan strategies for their business future.  It was very satisfying work at a very strategic level with Fortune 1000 sized global market leaders.

One of my business and professional strengths was the ability to see through the details of a problem to focus on the Big Picture and help the client play ‘what if’ in considering strategic choices among alternative approaches to both opportunity and risk. At CERA we used scenario analysis as a strategic platform to ‘test drive’ alternative solutions to business options.  With my knack for conceptualizing and summarizing big picture ideas I made a good living as the builder of recurring revenue information solutions then putting them to use as a strategy adviser for the next 20 years through the rest of my career.

Those years of front-line energy domain expertise with emerging technologies helped clients leverage their capabilities for the future. Later those lessons learned at CERA were put to work as head of consulting and advisory services at an eager to grow start-up called Henwood Energy Services.  The business problem Mark Henwood faced was while he had great software for doing energy modeling and portfolio risk analysis the solutions were difficult to learn and for the client to apply.  That difficulty limited growth.  Mark was looking for ways to improve user experience and thus scale the growth of software and associated services to help the business scale.

Moving from CERA to Henwood in 2000 proved to be one of my best career decisions.  At CERA I was part of a great team of well-respected energy strategy and risk advisers.  At Henwood I was a principal in a smaller but well positioned solution provider for the rapidly changing energy industry need for advanced analytics technology and portfolio risk solutions sweeping as competition and disruptive change swept the industry.

Mark Henwood asked Ron McMahan, the founder of RDI, who had sold his energy data services business to Platts to join the Henwood Board to advance the M&A agenda.  What followed was a rapid series of transactions that saw Henwood transformed as the platform for a $50 million capital injection from Steve Rattner, Managing Partner of Quadrange.  Henwood morphed into Global Energy Decisions with McMahan as the CEO in 2003 and a string of tuck under acquisitions built a powerhouse portfolio of advanced analytics solution over the next four years when Global Energy was flipped to form Ventyx in 2007 in a merger with principal competitor New Energy Associates.  Several more acquisitions were made before Ventyx itself was sold to ABB as the basis for ABB Enterprise Software in 2010. I cashed out in 2008 but it was a very fun ride.

The energy future is not like Thomas Edison’s dream—it’s better, faster, more dynamic blurring the lines between energy and technology.

We formed Global Energy Decisions and Ventyx at a pivotal time in the energy industry.  Disruptive technology was breaking down barriers to entry and democratizing the power grid with renewable energy. Cloud computing and advanced analytic made possible even faster changes in the use of microgrids, demand response, customer aggregation, distribution automation and machine-to-machine (M2M) to teach the old grid new tricks.

On the oil and natural gas side of the energy value chain the emergence of hydraulic fracturing, horizontal or directional drilling and 3D seismic mapping made access to light tight oil and gas formations in shale and tight light oil onshore economic.  Rapid advances in these tech applications turned the US from a net energy importer dependent upon OPEC for oil and imported LNG for gas into a global oil and gas superpower in less than a decade.

TCLABS Technology Drives Energy Transformation

The Principles of Product Leadership 

I credit my teachers and my first boss for teaching me the principles of leadership which I was able to successfully apply to the products I built for my customers.

Bear with me for a moment as I tell you a quick series of stories to set the stage for this broader discussion of product leadership and why assembling the right team of people with the vision, passion, and skills will make all the difference in your success.

Billows, Reed & Tedards. These were the teachers with the most profound impact on my life not the name of a law firm.  Mr Billows taught Civics and History, Miss Reed taught Latin and the Classics, and Mrs Tedards was my Speech teacher. Each saw something in me that I was only discovering for myself.  No, it was not just that I was a wise guy!

Separately, I don’t know whether they would have had the same impact, but unwittingly having all three during my formative years made a big difference.

  • Mr Billows loved history and stories of the formation of our country.  He told them passionately, made them interesting and sent us on detective assignments passed off as homework to force us to figure out not just “what” was decided but “why” and “how” it affected the formation and future of America.  It was this quest for why and so what does it mean that shaped my mind to see beyond the tree to the forest.
  • Miss Reed fit all your stereotypes for a Latin and Greek language teacher.  Stern, no nonsense, and relentless about completing our assignments.  She had a ruthlessly effective way of enforcing those rules.  In her Latin class, we read aloud—in Latin, of course—taking turns until everyone in the class had an opportunity to demonstrate they had studied their lessons long enough to recite them and translate them for the rest of us.  Talk about pressure.  But the discipline, precision and importance of results it taught us served me well my entire career.
  • Mrs Tedards our speech and debate coach was our self-confidence builder.  Her class routine was to use current events to force us to get the facts, boil it down to its essence and stand up in front of the class to tell the story persuasively while our peers evaluated us.  Time and Newsweek were our friends as they were the pages ripped from the magazines she handed us each day in class.  “You have 15 minutes to prepare a three minute improvised speech,” I can still hear her saying.

But while getting the story straight might have satisfied Mr Billows and Miss Reed, Mrs T wanted it told with style, presence, confidence and passion.  This daily torment is the stuff every business executive needs to stand up before a crowd and deliver his pitch, sell his product, and convince the skeptic.  Get it right and it feels wonderful.  Get it wrong and you’re out on the curb with no sale. These are the core competencies so many young people today still need to succeed in their careers.  But what I learned from these teachers I often had to teach to my new employees before they could live into their full potential.

Put together a high performance team with big picture strategic thinking skills to imagine new products from the ideas of clients and staff.  Ask “why” and “so what” until you understand the business problem that must be solved and the pain points that will get your customer to buy the product.  Then get the technical skills and production precision to deliver what you promise, on time and budget, every time.

  • Larry Rice. I finished my master’s degree courses at the University of Kansas, but to graduate required that I do an internship in addition to a thesis.  Larry Rice was a graduate of my alma mater and he hired “interns” from the program every few years.  The University organized the  process of placing interns, sending resumes to the alumni and others in the market for interns along with the phone numbers of the candidates and their faculty adviser.  Being on good terms with your professors in grad school is a lesson in networking every student learns fast. I got a call from Larry Rice one afternoon asking me if I was interested in being his intern.  Of course I was but I had not yet applied for Larry’s opening.  ” I know” he said, “but I already talked to Dr. Stene about you and he thinks we’d be perfect together, so how about it?  Do you want to come to Oregon and work with me?”

I worked for Larry Rice in Albany, Oregon for three years and from him I learned that integrity was the gold standard by which professionals are measured.  If you have integrity and treat people honestly, respectfully they will work hard to be part of your team.  Larry also taught me another important lesson.  Sometimes you have to think differently and break the rules if you are going to solve the problem.

The third lesson I learned from Larry was the “art” of leadership.  When he’d give me assignments he would take the time to not only tell me what he wanted accomplished but “WHY” and the “SO WHAT” result he wanted accomplished when I finished the task.  I still remember how it made me feel.  He trusts me—and he is counting on me to deliver for him.  He’s giving me direction and coaches me but lets me do it myself.  He asks me questions and offers helpful suggestions.  I worked hard to please him because I respected him and understood the objective to be achieved.  I was part of the solution not just a pawn used to move two spaces on the game board.  Give your staff that same sense of purpose, alignment and respect and they will work hard for you too.

Infect your team with your vision of the product and the ‘why’ and ‘so what’ that will come from building it.  Your job is to empower them as a team and as individual professionals to act for you. They must know that you believe in them!  You are counting on them! You have confidence in their skill and judgment and you will back them up. You must not only give them the task but help them to understand the importance of precision and care so that they bring the product in on specification, on time and on budget every time—and make it work to solve the intended business problem because—that is the way we do things here—-we do it right the first time and we solve our customer’s problem.

Over the course of my career in the software and information services business I have built many fine products.  I didn’t build them myself–it was a team effort.  I hired people who wanted to be part of great teams and grow as professionals.  I gave them great mentors and the best tools.   I promised that if they would work with me for three to five years that I would give them more experience in the driving force issues shaping the industry using the best analytics tools available than they would get going to work for one company in an entire career.  And when they were ready to move up I would help them however I could to be competitive with the best companies in our industry.

Advisory Products 4

I tell you candidly that of all the success I have had in my professional career, none is more satisfying to me that the success of the great teams and individuals who called themselves Global Energy Advisors.  Their enduring industry impact will be my most lasting professional accomplishment. I congratulate and celebrate and give thanks for each of them and the work they are doing today to improve the lives of their millions of customers.

Today those skilled professionals are leaders in companies around the world training new generations of talent about “why” and “so what” and the discipline of delivering on time, on spec, and on budget every time.

Energy Customer Choice Power to the People

Technolog09759y is empowering customers to drive the distributed energy resource future (DER). San Mateo County is the latest Bay Area county launching a customer community choice aggregation giving retail energy customers an alternative to their traditional monopoly utility PG&E joining Marin, Sonoma and San Francisco counties and Santa Clara county is about to launch. This means that virtually all customers across the greater Silicon Valley area are now in play. Technology, customer choice and disruptive market rules are converging to speed the transformation of traditional energy markets and beyond the meter self-generation forcing changes to business models, regulations, solutions and services.

California is ground zero in the West for energy transformation with 50% of US private solar systems—more than half a million businesses and homes; more than 200,000 plug-in electric vehicles (PEV)—40% of total PEV sales—with a goal of 1.5 million by 2025. California regulatory policies are also profoundly changing the power grid and power gen infrastructure sometimes before either markets, regulations or customers are ready for such changes. Governor Jerry Brown recently signed four bills to encourage markets for energy storage and DER. Among other things, utilities must add 500 MW more energy storage beyond the current 1.3 GW target under previous regulations.

  • AB 1637 adds $249 million in Self Generation Incentive Program funding; 75% goes to energy storage.
  • AB 2868 requires the CPUC to direct California IOU’s to speed up distributed storage by up to 500 MW.
  • AB 2861 authorizes the CPUC to resolve disputes over interconnecting distributed energy into the grid.
  • AB 33 directs CPUC and CEC to assess long duration bulk energy storage, such as pumped hydro, to help integrate renewables into the grid.

The challenge facing public policy is to re-define sustainability to include the cumulative economic costs of regulation and the impact on jobs growth. What changes do we embrace, which one should we resist and when should we just ‘get out of the way’ and let the market work to encourage stronger sustainable economic growth?

The distributed energy future so many in California dream about is bearing down on them. When technology and customer choice aggregation plays out one of the first consequences will be that customers will look out for their own self interest and they may not like the politically correct choices that California policy makers and regulators have chosen for them. The inevitable outcome is a peer-to-peer energy marketplace where neighbors sell their excess power to others is a kind of energy farmers market. More than the traditional utility business model is at risk—so are the politically correct policies and regulations imposed by the state as customers decide what is sustainable and what is not based upon the economics of their own self interest. Sound crazy? Welcome to California!

U.S. Shale Revolution Animal Spirits

Each day a typical oil or gas drilling rig equipped with Internet of Things (IoT)-enabled sensors collects about 8 terabytes (1TB=1,024GB) of operating data to continuously assess performance and make real-time prescriptive analytics adjustments in response to optimize well performance. Multiply that by dozens or even hundreds of wells across shale or light tight oil and gas plays in the US and you see why OPEC flooding the market with oil was not sufficient to destroy the economics of the US shale revolution.

The US Shale Revolution is driven by US technology and the animal spirits of the US oil & gas industry wildcatters, engineers, traders and entrepreneurs betting their future—with their own money.

By mid-2014 OPEC leader Saudi Arabia was feeling the pain of weak oil demand in a global economy with anemic growth rates. On top of that weak growth there was the typical cheating on production targets by OPEC members. The cheaters had been conditioned by Saudi tradition of using its swing productive capacity advantage to balance the market even if it meant cutting its own production level and revenue.

Then the Saudi’s said ENOUGH! In mid-2014 oil prices fell like a rock. You know the rest of this story—oil prices tanked around the world and all oil producers felt the pain. Speculators stored oil in ships and every other available place betting that falling prices would spell financial ruin to onshore US shale growth and slow investment in offshore oil drilling projects enough to balance the market thus driving prices higher faster on the rebound.

A funny thing happened on the way to the poor house—the US shale players used their entrepreneurship and animal spirits along with US technology to drive down the break-even point for new onshore production. As drilling costs went down production continued in the best onshore plays supported at first by higher priced natural gas liquids produced by the wells and then by the export demand for the light tight condensates used as diluent by Canadian oil sands producers to thin their heavy crude enough to enable it to flow in the pipelines toward US Gulf Coast refineries.

OPEC spent a fortune in a failed effort to stop cheating at home and savage shale competition abroad. US onshore producers got more efficient and today are even fiercer competitors in global markets.

The 2016 US Presidential election unleashed the animal spirts so evident in the onshore energy industry and told the rest of the economy to roll-up our sleeves and get ready to go back to work. The US shale revolution and the IoT and other technology advances position the US for another industrial revolution. The US Shale Revolution was an energy war game designed to show the rest of us the power of American ingenuity and entrepreneurship if government policies and regulations are better aligned to unleash the animal spirits within us once again.

Boom and Bust is Alive and Well

Energy Business Cycle 2

Several lessons are emerging from the impact of low oil and gas prices encouraging market participants to adapt to the business cycle change, stay agile, and maintain operational visibility and control for what comes next in price movements.

What are the lessons?

  1. The cure for low prices is low prices. Lower prices provide the pressure to make decisions and take action—or else. Cuts in rig counts, deferred CAPEX and delaying projects mean impairments, write-downs, volatility and fear of future supply disruption. But action works to bring the market back into balance and eventually stabilize supply with demand.
  2. US shale producer productivity surprised everyone even in the face of falling rig counts. If Saudi Arabia thought it would drive US shale producers out of business it miscalculated. US oil production is now falling, but it has taken a lot longer and cost KSA a lot more to get to this point. US imports are creeping up as a short-term tradeoff against producing higher cost output.
  3. Deep cuts in CAPEX are creating a deep hole in reserves that threatens the ability of even the large players to meet future demand. This is classic boom and bust behavior alive and well in global markets. The worry is that the deferrals and cancellations will go too far and result in future supply disruptions if and when demand picks up faster than supply can recover.
  4. Saudi’s feel the pain of market share battles increasing competition inside OPEC and with non-OPEC producers. BRICS are in deep trouble with weak economic growth in China chilling global demand. Corruption problems plague many of the BRICS and other OPEC and non-OPEC producers. In a supply-short market customers may put up with corruption to get supply—but not in oversupplied markets as the crooked are learning.
  5. Technology is still US advantage and everyone wants it. We should see increases in M&A volume as weaker players are bought by stronger ones. Consolidation ‘sweats the fat out’ from over-extended players larded with debt. It also encourages investment in technologies to create advantage for the next boom in the market. Good deals and good technology attracts foreign buyers. It also raises cyber threats. Big changes also loom from IoT, machine learning, and cloud computing that are the next big things in advanced technology.

The bottom line is low prices are shifting market sentiment from worries about excess supply to worries of future shortage—classic boom and bust with contango. The longer prices stay this low the deeper the hole in future reserves and the more pressure market participants will face to get back to work or be ‘left behind’. The seeds of the next market boom are being planted now in the fears of being left behind in the current bust in oil and gas prices.

Scrambling the Eggs in the Energy Value Chain

Low energy prices, weak demand, and costly regulatory drivers are scrambling the eggs in the energy value chain but the recipes in traditional utility business and regulatory models prevent customers from creating a better tasting omelet.

Technology advances and the ingenuity of non-energy industry players promise quick and easy omelet recipes offering endless mealtime possibilities. Loaded with your favorite meats and vegetables (read: added cost services) these omelets are sure to satisfy.  But will customers see the value from the new dishes on the energy menu?

  • Will the energy utility go the way of mobile phones? We’ve seen this movie before! In 1984, the Bell Telephone System was broken up into regional carriers.  Technology advances in cellular communications competed head to head with traditional landlines.  Fast forward to today—landlines are a dying business line.  Mobile phone companies ruthlessly compete with each other to aggregate customers.  And the most influential ‘phone company’ isn’t one—it’s Apple!  The graphic above shows you Duke Energy’s view of the rapidly changing energy industry future.
  • Will our energy future focus on Smart Homes, Smart Cars, and Smart Buildings? Navigant’s Energy Cloud: Emerging Opportunities on the Decentralized Grid white paper describes an energy industry transformed into a modular microgrid powered network of networks far more sophisticated than the traditional grid model today. The multiple mega-trends transforming our energy future is expected to be cleaner, distributed, and will use the Internet of Things and cloud computing to deliver smart, predictive to prescriptive self-healing services. Stuff is happening fast to rewrite the rules of the traditional energy market place as profoundly as it did to mobile phones, newspapers, airlines, retail, computing and other industries.
  • Will energy cost savings be worth the hassle for customers? Oracle is acquiring OPower at a 30% premium over its stock price of $10.30 per share, which is less than half of Opower’s $23 IPO price in April of 2014. This is both a good price for OPower and a great value for Oracle. Oracle gains access to OPower’s behavioral science apps for energy efficiency and demand response strategies that enable utility customers to use energy data to compare their energy usage to other users. The bet is customers will take action to save energy and thus money.
  • Who is the customer for these new energy services? Big energy data applications are music to the ears of Oracle investors seeking to leverage cloud computing and enterprise software solutions. Opower focused on scalable energy efficiency programs by partnering with leading utilities ranging from National Grid in the East to Pacific Gas & Electric in the West.  Utilities are working on their own models of the future.
  • Will utilities be permitted to reinvent themslves? Southern California Edison is developing a consultancy business model with a white paper titled “The New Energy Future – Challenges and Opportunities in Corporate Energy Management.” Among the findings: a quarter of companies do not accurately understand their total energy spend, and 94% believe there are remaining opportunities for them to save.  SCE’s new unregulated business is focused on serving these corporate business needs.
  • Will Community Customer Aggregation targeting residential customers work? Community Choice Energy (aka Community Choice Aggregation) has been taking hold in California, with Marin Clean Energy (2010), Sonoma Clean Power (2014), and Lancaster Choice Energy (2015) currently offering service. CleanPowerSF (San Francisco county) began service in April 2016 and Peninsula Clean Energy (San Mateo county, targeting 10/1/16) are among several new Community Choice Energy options coming soon.  Community aggregation enables cities and counties in California to create ‘joint powers authorities’ to offer group purchasing of renewable energy resources to residential customers in their jurisdictions. The incumbent investor owned utilities hate the idea, of course, but have been unable to derail the law empowering it.

Taken together these experiments are rapidly altering the energy landscape, but success is by no means assured. But doing nothing also seems an unlikely option.

Stay tuned.