Moving to the Middle. How to Navigate the Ins and Outs of C&I Midstream Programs. Part II: The Challenges of C&I Midstream Programs
This article originally appeared in the April 2016 issue of Strategies, the monthly magazine of the Association of Energy Services Professionals (AESP.ORG).
Dave Backen, Director, Evergreen Consulting Group
Christopher Burmester, PhD, Vice President, Energy Solutions
Mary Ann Sheehan, Service Line Lead, DNV GL
Upstream. Midstream. Downstream.
In the first installment, we provided the definitions and distinction of these terms – and the myths and benefits surrounding their implementation. But what about the challenges programs face when trying to incorporate these ideas into a larger energy efficiency portfolio?
With any midstream program comes many implementation, regulatory, and administration counterpoint challenges that must be overcome with careful planning. Some programs have launched C&I midstream programs mirroring their successful residential retail program only to learn that participation barriers for distributors are much different than the issues faced at retail, which largely revolve around customer-facing signage and displays.
- Ability to Broadly Influence Stocking
Stocking decisions are made primarily at the upper end of the distribution chain, with distributors and retailers overwhelmingly influencing what products compete for scarce shelf or warehouse space. Stocking decisions are made on a quarterly, seasonal, or annual basis, based on what has sold or is expected to sell in the coming time period. Businesses succeed or fail on their stocking decisions, and those decisions are made based on an expectation of both bottom-line profit and driving top-line sales revenues. Changing stocking practices often initially involves risk, but that initial risk can be offset by organizations that offer a clear incentive that the market actor is free to leverage in whatever way works to move the product. These incentives are typically used for additional sales force training, sales incentives, and other costs to initially move the high-efficiency product. Later, as sales are established and competition increases, experience with existing programs demonstrates that the incentive is increasingly moved into the market in the form of price reductions.
- Extensive Market Outreach and Engagement
Downstream programs typically have a single transaction with a large number of individual customers. Midstream programs typically have a high number of transactions with a small number of market actors over the entire duration of the program and, as such, you form a much deeper and ongoing business relationship with these trade allies. The market outreach relationship is therefore much more extensive than that of downstream promotion and outreach, requiring regular in-person visits, detailed analysis of sales statistics and comparisons against industry, and other market actor performance in the program – and a willingness to deeply understand the trade ally’s business requirements and perspectives.
- Automated, Paperless Application Processing
Because successful midstream programs typically involve a greater number of transactions by an order of magnitude, end-to-end automation and paperless application processing is an absolute requirement. Early midstream programs piloted in the 1990s by California IOUs found that distributors simply refused to participate if the hassle factor with tracking and submitting applications was too great: the opportunity cost for the sales staff for midstream market actors was too great. As a result, the program implementers must use a system that fully automates all aspects of application processing and provide market actors with interactive dashboards to rapidly process and address issues with applications, payment tracking, and streamlined reporting.
- Timely and Reliable Incentive Payments
Timely, regular, and reliable payment is also vital to program performance. Cash flow is a great motivator to any business person. By paying incentives in less than two weeks from the submission of applications, the program ends up speeding up the delivery of profit to the trade ally, as the incentive often represents the majority if not all of the profit margin on a transaction. Most trade allies typically operate on a net 60 or 90 credit terms with both their suppliers and their customers, so by participating in an incentive program, trade allies reduce their accounts receivables from net 60/90 to net 14 – or whatever the program reliably pays. This is a huge financial motivator to the market actor. However, in order for this benefit to be realized, the program must establish and maintain transparent program rules, rapid and automated processing, clear online reporting, and regularity in payment fulfillment to create trust and confidence with trade allies.
- Need for Program Stability
Because trust and certainty are central to building a relationship with the trade allies, program implementers must seek to insulate the trade allies from start/stop utility planning or regulatory cycles. Changes to the program must be communicated far in advance and should seek to recognize any planning or stocking cycles and seasonality inherent in the market distribution chain for the product. For example, in the business and consumer electronics industry, all manufacturing and purchasing decisions are aligned on an annual plan-and-buy cycle. The HVAC industry’s alignment is with summer and winter seasons. Having trade allies make stocking and purchasing decisions influenced by the presence of a program that is then abruptly changed or discontinued is a recipe for permanently damaging a relationship with a large segment of a product industry. Care must be taken to ensure that all decisions are made with those market considerations. Midstream programs are large-scale programs – like large scale base-load power plants – which do not lend themselves to rapid start and stop cycles. Implementers benefit from the momentum and scale of these programs but they require time and notice to change.
- Access to Utility Customer Information
Another challenge to upstream program implementation is access to utility customer information – such as the service address, correct service customer account name, and customer utility account information – to verify that the affected downstream customer is an eligible program participant. Point-of-Sale programs can gather some of this information, but most customers typically do not keep their utility account number with them at all times, so may not have it at the point of sale. In addition, distributors may “drop” ship to a location or provide a stocking shipment to a contractor warehouse, so will not know where the unit is ultimately placed. Some programs have investigated split incentives or coupons to be filled out by the contractor or end customers, but these universally have low participation and raise questions from the rest of the market not directly targeted by the incentive portion of the program. Solutions involving machine learning and automated address matching, statistical attribution of sales, and other approaches have been successful in building a case for utility program attribution of impacts, and are especially useful when operating a multi-utility territory program.
- Representing Value to the Downstream Customer
The loss of the ability to “give” incentive dollars to their customers is often a difficult change to accept for a utility charged with achieving high customer satisfaction; as a result, may struggle to represent the value of the midstream program to their downstream customers. Many different approaches can be taken to communicate this value, including post-sale direct-to-customer communications. These communications explain that the availability of the unit was made possible by the utility, together with the savings over the lifetime of the equipment that were not readily available without the program intervention.
- Regulatory and EM&V Barriers
There are also regulatory and EM&V barriers to consider and overcome. Many regulatory environments do not allow utilities to provide incentives to non-ratepayers or to anyone but direct utility customers. In these instances, a multi-year preparatory cycle on the part of the utility regulatory team may be needed to educate and influence regulatory bodies to the benefits of midstream market programs for utilities, customers, and the industry. Evaluators, long accustomed to the program theory behind downstream resource acquisition programs, may not understand the realities, objectives, and program theory behind a midstream market transformation program. In some historic cases, evaluators have naively contacted downstream customers to ask them if their purchase decision was influenced by the program – even though downstream customers typically have no direct knowledge or interaction with most midstream programs. Developing the program theory plan and reviewing it in detail with program evaluators in advance is a best practice, as is gathering intervention documentation and, when possible, full category sales data from market actors in order to establish changes in product mix over time as a result of program intervention.
In our next installment, we will examine how some programs leveraged the benefits and tackled the challenges of implementing C&I midstream programs in their energy efficiency portfolio.
Dave Backen is the Director of Evergreen Consulting Group; Christopher Burmester is the Vice President of Energy Solutions; and Mary Ann Sheehan is the Service Line Lead at DNV GL. This article is contributed by the AESP Implementation Topic Committee.