First Data on smart metering in energy

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/advanced metering infrastructure (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 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.

Dean Cooper of First Data

I asked Dean Cooper, Vice President at the newly formed energy & utilities division, First Data Utilities, for his take on the merger, smart metering and information technology in the energy and power sector, and the future trends in AMI.

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 $11B USD revenue line (before spinning off Western Union in 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 recognize the criticality of reducing their cost to serve in deregulating markets.

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.

What is First Data's 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, than network assets were originally built to accommodate.

It is very expensive to replace aging 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 what are the key technology areas to watch?

The areas of commoditization 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, 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 the IT supply chain in other areas?

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 sizable 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 First Data's products fit in?

In meter hardware, Bayard Capital has 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 First Data believes our business model and company heritage for large scale transaction processing globally puts us in good stead to make a compelling offer 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.

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.

The integration and convergence of these facets is underway. End to end integration of energy services to consumers is part and parcel of a competitive deregulated marketplace, and part of the new behavior of utilities in liberalized markets.

Modern systems and processes certainly can handle “mass customization” 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?

My best top 3 are probably:

1. Consolidated billing and convergence
2. Responsiveness, and
3. Targeted campaigning and messaging in the same manner cellular and telcos 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.

You can read an extended version of Neal Dikeman's full interview with Dean Cooper here.

Interviewer Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He's also the founding contributor of Cleantech Blog.