Second-mover disadvantage: can waiting to deploy AMI increase your risk?
Inuit term for a wolf-like alpha dog. Although now defunct, their perspective was interesting: unless you’re at the head of the pack, your viewpoint could be very limited.
Many vendors have commented over the years that utilities are among the most conservative buyers and often shy away from technology’s bleeding edge. Utilities, they say, often have unwavering requirements that push limits of functionality and reliability, and continue to force suppliers into never-ending pilot programs to test and re-test proven performance.
But when it comes to deploying Advanced Metering Infrastructure (AMI), taking this wait-and-see approach may now be increasingly risky for utilities. This could become even more apparent if some “Amaroq-like” utilities begin to integrate additional features and capabilities into new metering and communications designs.
Most advanced designs are adequate enough to meet basic requirements for most utilities. However, many utilities have unique requirements – e.g., special pricing options, regulatory mandates – that vendors might relegate to “future options,” if only the current feature-set dictates the direction of product design.
Vendors are frequently driven by large orders – not wish-lists specifications of small pilots. And this could lead to what we call “the Second-Mover Disadvantage.” The potential “disadvantage” could hinder second-mover utilities. Although these “followers” may be able to buy the technology that meets their minimum requirements for a reasonable price, they may have to assume the risk of deferred, or even unavailable, supplies.
The Rolling Stones put it another way in their 1969 hit, “You Can’t Always Get What You Want” -
“You can’t always get what you want, But if you try sometimes, you might find You get what you need.”
Long lead-times
As of this writing, at least seven utilities with 1 million or more electric customers – including Southern California Edison, Con Edison and DTE Energy – have either issued RFPs or RFIs, are in the midst of serious pilots or field demonstrations, or are strongly considering deploying AMI. All told, these utilities have more than 39 million electric and gas customers, including 28 million-plus electric customers.
If those utilities place overlapping orders on just one-third (12 million-plus) of their total electric and gas meters, it could create a logjam that makes it tough for vendors – and the industry as whole – to meet demand. That could create a seller’s market where first-movers reap the benefits while others wait for production orders to ease.
Under this scenario, “follower” utilities could face a new risk: vendors’ near-term ability to meet growing demand for AMI systems and elements – a factor that has decreased product availability and increased lead times in other technology-related industries. For example, take mini-computers, which were in great demand in the 1970s. The prime provider, Digital Equipment Corp., could not produce their leading line – the PDP-8 – quickly enough to meet demand. As orders queued, some aggressive users placed advanced orders spanning months and, in some cases, years.
Lead time often reached 12 months, creating a secondary market for order “queue buying” and brokering among key system buyers. Vendors of systems that used a PDP-8 could get one, but often only if they paid a premium to a company that placed an early order.
While this phenomenon may no longer be as prevalent, and brokering of delivery slots may not come to bear in the AMI business, the growing demand for intelligent meters may create a long-lead time for many critical components.
And it isn’t just manufacturing resources that could be strained. Facing a barrage of orders, the industry could face various potential shortfalls in various areas including:
With pressure from regulatory bodies and interest related to “Smart Grid” and “Utility of the Future” initiatives, the industry has reached a critical point – one that could tip the scales in favor of vendors. In that type of seller’s market, the utilities that follow the leaders may face a second-mover disadvantage.
“If we received orders for two 5-million meter deployments, we could be out of commission for 18 months,” stated a vendor executive, who asked to remain anonymous. “You can only ramp up so fast.”
Meeting monthly production schedules would become increasingly challenging. “When we talk about a five-year deployment, we’re talking about installing 50,000 meters a month,” Don Cortez, CenterPoint Energy’s vice president of distribution support, noted in the March 2007 issue of the AMRA newsletter. That, in itself, requires an automated process, and the utility is carefully studying its smaller pilot to fine-tune procedures.
Component suppliers could face vastly increased demand
Of further concern is the prospect that component suppliers may also have trouble meeting current/emerging AMI market demand. For example, the remote disconnect/reconnect switch - previously installed on a targeted basis by a few utilities - is suddenly finding favor with large-scale deployments. Principal manufacturers such as BLP and Gruner have not historically seen levels of demand approaching the potential millions of units that meter manufacturers may soon be expecting.
As production levels are rapidly increased to accommodate these emerging levels of orders, what will be the eventual impact to product quality and delivery schedules? Furthermore, what quality assurance processes will purchasing utilities need to put into place to better manage these potential risks and regulatory expectations for cost-recovery?
In sum, utilities should evaluate all potential benefits and risks when considering AMI – including the advantages of deploying now rather than later. Watching from the AMI sidelines may no longer be the safe bet for all utilities. For those utilities not ready to make the AMI investment in the near-term, it would be prudent to monitor industry results and supplier delivery capabilities. This would suggest, for instance, that the next wave of utility buyers would seek greater levels of due diligence and quality assurance to manage potential risks associated with the “second-mover disadvantage.”
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