HomeDecentralized EnergyCogeneration CHPPutting customers first: a better route to commercializing DE in the US

Putting customers first: a better route to commercializing DE in the US

The North American market for distributed energy is healthy, yet many manufacturers there are not optimizing or accurately targeting their commercialization effort, says Jamie Wimberly.What is needed is a better method of analysing both the potential customers and their needs.

The time would never seem to be riper for increased cogeneration opportunities and on-site power production. The external drivers are pointing to the need for complements to traditional power plants. Customers are asking for alternatives to manage expected high energy costs and reliability needs. Yet, at least in many mature markets, there is a sense that the market for cogeneration and on-site power production is progressing very slowly.

If the value proposition is so strong, why are customers not showing the expected interest to match the trends? What is holding back the cogeneration and on-site power industry?

One could point to the fact that the value of any given project is determined by the site-specific function, economics, regulations and customer needs for that individual project. In other words, each project is unique, tailored and must be evaluated by its own metrics. While there is truth in that observation, the answer is unsatisfying and incomplete.

Let’s be frank, though, about one of the primary reasons for the on-site power industry’s lack of traction and success: the industry continues to grapple with the challenges of commercialization.

When the Distributed Energy Financial Group, LLC (DEFG) analyses the sector, especially the financial prospects of publicly traded companies in the sector, what we see over and over again are immature or dysfunctional sales and marketing strategies and operations. As one would imagine, this is especially true for start-up companies, which are attempting to move from an engineering-focused research mode into marketing. But even established companies have had a great deal of trouble matching opportunities with the appropriate markets and sales structure.

DEFG’s market research and survey results increasingly point to bullish market demand for distributed energy. However, our research is also showing a clear mismatch between what customers are asking for, and the offerings currently being provided in the market. Now is the time to rethink and optimize the sales and marketing operation to bridge this gap.

To revamp a company’s sales and marketing strategy, a step-by-step approach is required. DEFG has developed a propriety tool, the Distributed Energy Market Index (DEMI), which utilizes three screens and a fact-based analytical framework to benchmark progress over time. This framework should prove to be useful to sales and marketing professionals in the cogeneration and on-site power generation market.


To understand the exogenous drivers impacting your market opportunities, it is necessary to start at the macro level to accurately assess the most important drivers on your specific market space and offering.

Most companies have completed a macro analysis using a framework like the one shown in Figure 1. However, the marketing models and strategies that DEFG has reviewed are usually limited, tracking a few variables at most, and static in nature. What the DEMI framework makes clear is that new inputs are consistently required to reflect the ever-changing nature of the market itself.

Figure 1. Market analysis framework
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DEFG’s focus is the North American market; however, certain macro trends and drivers can be found in most major markets that will impact the cogeneration and on-site power generation sector. These trends and drivers include:

  • regulation and public policy – Traditionally, governments and policymakers in every market have been very active in regard to energy prices, reliability and siting, to name a few areas.
  • ageing infrastructure – Ageing infrastructure will contribute to increased replacement costs and strain transmission and distribution systems.
  • environment – The consensus viewpoint is that global warming and other environmental concerns are real and governments at all levels are beginning to react to that reality.
  • financial – For utilities and other established companies in the energy sector, the financial environment will reflect increasing pressure as interest rates rise, regulated return rates decline, and fuel prices increase, especially for regulated utilities.
  • fuel and energy prices – Escalating fuel prices, the termination of rate caps in some regions, and the replacement of ageing infrastructure will continue to drive up costs and prices
  • demographics, load and economic growth – The rate of increase in load will decline in many mature markets, but high-growth pockets will exist, reflecting demographic shifts. For the developing world, demand far exceeds supply.
  • customer preferences and expectations – Changing customer expectations will be highly correlated with shifting demographics, exposure to service innovations in other industries, and concerns over higher energy prices, increasing expectations in regards to digital customer interfaces, greater choice of service offerings, and new tools.

The above trends and drivers are strengthening and largely positive for the cogeneration and on-site power generation market. However, each driver does not have the same impact on a particular offering, and should not be treated the same. For example, high energy prices will usually have a much stronger impact on market opportunities than demographics and load growth, at least in the short term. Moreover, the trends and drivers are not static. Scenarios should be used to test assumptions on a going forward basis.

By assigning ranks and weightings to inputs, the DEMI macro analysis results in a narrowing of suitable market opportunities on a geographic and segmented basis. It is important to use a macro analysis in order to avoid the common pitfall of being all things to all consumers, and simply throwing darts at a map.


With the macro analysis, we now have a set of geographic locations (such as targeted states or metropolitan statistical areas in the US) and customer segments, but a further winnowing process is required. Moving from the macro analysis, the DEMI tool utilizes a micro analysis comprised of three evaluation screens: a technical assessment, an evaluation of critical customer success factors, and a utility evaluation screen – see Figure 2.

Technical assessment

The targeted geographic areas and customer segments now must be assessed for technical potential, meaning that data must be collected on demographics and the number of various types of buildings for each of the identified customer segments in those targeted geographic areas. The purpose of the technical assessment is multi-fold, including:

Figure 2. Three evaluation screens
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  • calculating market potential within that geographic area for identified customer segments
  • translating data from the macro analysis into dollars for the sake of business case analysis and a pro forma
  • most importantly, further refining focus by discarding geographic areas or customer segments that do not have enough intensity to support marketing and sales operations in those areas or segments.

Critical customer success factors evaluation

Each of the identified segments now are further screened and evaluated against three buckets of drivers:

Figure 3. Critical customer success factors evaluation
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  • customer awareness – refers to the ability of customers to learn and apply knowledge about your offering or how difficult and costly it would be to make customers aware of your offering
  • customer economics – represents the costs and payback of your offering to customers in that segment
  • customer preferences – refers to any other issues, including subjective matters, which the customer considers to be important. The inputs for the critical customer success factors evaluation are derived from a number of sources, but surveys and customer information gleaned from your sales force about these three areas are very important – see Figure 3.

Utility evaluation screen

Finally, the DEMI incorporates a utility evaluation screen to assess the market potential in specified geographic areas. Utilities provide a proxy to compare with the alternative offering. In most jurisdictions, local utility company provides the alternative or competing service. In competitive electricity markets, the competitive situation is more complex. The utility evaluation screen is comprised of four buckets of drivers:

  • pricing and tariffs – refers to the price of power to beat and the various tariff structures that are offered by the utility to specific customer segments
  • utility receptivity – refers to how receptive the utility is either working with or, at least, not hostile to, vendors of cogeneration or on-site power
  • utility structure – refers to how the utility is regulated and structured to meet customer needs; for example, if the utility has an ESCO as part of the holding company
  • regulatory and environmental – refers to the regulatory mandates placed on the utility or other policies in place that encourage or discourage cogeneration and on-site power generation in that service territory.

While the DEMI tool actually incorporates many more factors, a sampling of success factors evaluated would include the information shown in Table 1.

Much of the data for the utility evaluation screen is publicly available; however, DEFG found it necessary to conduct surveys with the utilities themselves to create rules and rank more subjective inputs such as utility receptivity.


The final step in the evaluation process is to bring the screens together to create an optimization matrix. During the screening process, each individual factor has been ranked and weighted within their assigned bucket. For example, the incremental commercial price of electricity in a utility’s service territory would be ranked and weighted within the ‘price and tariffs’ bucket of the utility evaluation screen.

Weights now must be assigned to the overall buckets of factors in the critical customer success factor evaluation and the utility evaluation screens. Then the two screens must be further weighted to produce an aggregated weighting scheme.

In a recent application, DEFG used the Distributed Energy Market Index to evaluate a number of utilities and customer segments for a client that had targeted particular commercial customer building segments. The geographic regions selected became evident after conducting the macro analysis for this client’s particular offering.

Figure 4. Optimization matrix (x = value in the matrix)
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For this particular client, the combined screens produced an optimization matrix that showed the characteristics in Figure 4.

Using the DEMI tool, the optimization matrix is capable of clearly demarcating the geographic territories and customer segments within those territories that should prove to be most conducive to a particular offering, including cogeneration and on-site power production.

In this generic case above, the dark boxes and lower numbers (and thus, being of great interest) point to opportunities in the service territories of Utility A, D, and E. The optimization matrix also highlights the customer segments that show the most promise for this generic offering, with hospitals, care facilities, hotels/ motels, military, prisons and universities scoring the best.

The output begins to address questions around the appropriate sales and marketing structure and spending. For example, using the generic case above, an optimization strategy would point to having a direct sales organization focused on the highlighted service territories and with direct experience in the targeted customer segments, perhaps having one team with a commercial focus on hotels/motels, hospitals and care facilities, and another team with an institutional focus on military, prisons and universities. For those territories and segments that were in the lighter colour, partnerships, demonstration projects or other activities would be suitable to build a base for future sales and marketing efforts.


The trends and drivers impacting the cogeneration and on-site power market are favourable and intensifying. However, companies in this market have work to do to meet the commercialization challenge.

Table 1. Utility evaluation – sample success factors
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The signs of this challenge are abundant. From a financial analyst’s perspective, concerns arise over the inability of companies to improve their operating margins over time (thus, profitability) and reliance on sales and marketing structures, such as OEM distribution partnerships, which may not be appropriate for long-term growth.

From a customer’s perspective, our surveys and market research is highlighting a possible mismatch between customer preferences and what is being offered. Customers desire a value proposition that meets their needs that are often defined in somewhat different terms from what is commonly used to sell cogeneration and on-site power. In turn, companies must resist the temptation to be all things to all customers.

To meet the commercialization challenge, companies need to take a fact-based, step-by-step approach to analysing their market space and customer base. On an ongoing and consistent basis, executive teams must ask themselves basic questions such as: How do we assess changes in our marketplace? What is the market potential for new products and services? What are the scenarios that we need to test? Who are our customers and how much are they worth to our company? Who are our competitors and what might be disruptive?

The Distributed Energy Market Index (DEMI) provides a framework and methodology for assessing these questions and others to meet the commercial challenge now and into the future.

Jamie Wimberly is the CEO of the Distributed Energy Financial Group (DEFG), a specialized consulting and financial services firm focused on the alternative energy market and based in Washington, DC, US.
e-mail: jwimberly@defgllc.com

Distributed energy broadly defined

At DEFG, we believe that the energy future depends on the success of the entire distributed energy sector. ‘Distributed energy’, as we broadly define it, encompasses many small-scale, dispersed technologies in six segments:

  • prime movers – microturbines, advanced engines
  • renewable energy – wind, solar, geothermal
  • alternative fuel and fuel cells – fuel cells, biofuels, hydrogen power
  • demand management, metering and control– demand response, advanced pricing, advanced metering infrastructure, energy monitoring and measurement, end-use energy efficiency
  • power quality and storage – advanced electronics, batteries, thermal storage, flywheels
  • enabling technologies – emissions control, superconductors, technology and machinery that support other segments, etc.

Market opportunity intensifies but remains challenging

The Distributed Energy Financial Group, in partnership with Market Strategies Inc. (MSI), recently completed the second annual DE market survey. About 550 stakeholders responded to the survey representing all facets of the industry, including utilities, vendors, regulators, developers, investors and other interested stakeholders.

As Figure A shows, over 75% of the respondents thought that revenue would grow in 2006. This year, slightly more respondents (45% vs 42% in 2005) believe that sector revenue will grow by over 5%. Investors (60%) and executives (52%) are aligned on growth potential. 42% of respondents rate the sector as a buy, and only 5% rate the sector as a sell.

Figure A. Industry growth expectations
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While DEFG has a very broad definition (see box on the left) of the distributed energy sector that includes integrated systems and controls to provide a full value proposition to customers, the market is much more focused on specific facets of the distributed energy sector, namely, renewable energy technologies and demand management. The survey, therefore, asked respondents what specific segments would be the most profitable from their perspective. Figure B shows the results.

Figure B. Most profitable DE segments
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In regard to business issues, the survey examined the business issues from the perspective of the customer – the criteria that the customer used to make an investment – and then from the vendor’s perspective – the top issues facing executives at companies that provide DE solutions.

Figure C. Investment criteria
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As Figure C shows, there is one obvious finding: energy prices matter a great deal and that leads directly to total expected rate of return. In the market, there is every expectation that we have entered into a new era of relatively high energy prices, including electricity prices as rate caps come off and a record wave of utility rate cases in progress or planned.

Survey respondents also indicated that vendors must continue to improve their technological advantage (23% of respondents) and reduce their cost of production (17% of respondents) in order to be successful in the future.

In addition to improving the technological performance and functionality of the offering, respondents highlighted the importance of the entire offering, which would include the presentation of the offering, the contracting process, implementation, and service and maintenance after the contract is signed. These are all components of the value proposition that technology vendors, eager to sign deals, have somewhat downplayed in the past.

When asked what the most important issues are for customers purchasing DE solutions, respondents clearly stated ‘economic advantage/payback’ and a ‘reduction in energy costs’ were the most important.