Duke Energy’s Plan To Take Over Your Kitchen — and Take Down Your Energy Use

Jim Rogers, Chairman, President and CEO of Duke Energy

Jim Rogers’ official titles are chairman, president and CEO of Duke Energy. But he says those titles boil down to two roles: general and scout. “As general, you set goals for people and you turn them loose,” he says. The scout part he holds closer to his chest. That’s the part where he gets to meet people, gets to listen to their ideas, and gets to think about all the potentials for his industry.

And he sees big, and surprising, potentials.

“I think of our company as a technology company disguised as a utility,” says Rogers. Energy has been at the front of innovation, he notes. In the early 20th century, electric utilities “were the Intel, Google, Microsoft, Facebook of that era,” enabling the development of technologies from refrigeration to X-rays to MRIs, from televisions and radios to computers and the Internet.

Duke Energy, based in Charlotte, N.C., supplies and delivers energy to approximately 4 million U.S. customers, representing 11 million people. Rogers sees the company’s job as being a “nimble pioneer” to help usher in new technologies, new public policies, and new ways of thinking about energy directions.

“Our mission is to modernize and decarbonize our fleet,” says Rogers. “We’ll retire and replace everything by 2050 and modernize our grid, since we’re an analog grid serving a digital world.” The company’s primary vision, though, is “to make our communities the most energy efficient in the world, and to redefine our business model in the process.”

Rogers spoke with Michael S. Hopkins, editor-in-chief of MIT Sloan Management Review, about why education is not sufficient to get people to do the right thing, when it’s good to give in to risk, and how Duke Energy plans to shift from being a “supplier of electricity” to an “optimizer of electricity use.”

You say that Duke Energy is “a technology company disguised as a utility.” What do you mean?

Well, we were the first company in our industry to name a chief technology officer. We’ve looked at over 700 different technologies and actually tested the products of 100. We’ve had maybe 10 pilots, and five strategic partnerships have grown out of that. We believe we’re in a unique place to partner with companies because we can help scale their technology.

Here’s an example of technology, and how we see its potential to redefine our business model: We don’t want to just be a company that uses large, central station generation to serve customers. So we introduced a program in North Carolina where we got permission to pay you, one of our customers, to put solar panels on your rooftop. We will install it, we will operate it, and we’ll roll the cost in the same way that we socialized the cost of connecting remote neighborhoods to the gird in the twentieth century.

Rather than viewing solar technologies as disruptive threats to our business, I’m incorporating them. So I’m not limited to just central station generation, or just in distributed generation. I’m in renewable solar, using this distributed model. By the way, I personally think that in the long run, solar will trump wind. Even though Duke has become the tenth largest producer of electricity from wind in three years, if I’m sitting here in 2050, I’m betting solar will have trumped it

How do you make choices about what to integrate as you change your business model, not knowing what the appetite for change is going to be?

You view the regulator as a proxy for the customer.

Does that work?

It works. We had to go to the regulator to get permission to do this “solar on roof tops” program. They gave us $50 million to build 10 megawatts, and we actually did it with $42 million.

But let’s think beyond that. I don’t think our business stops at the meter. I think it goes all the way to the device. I actually think the customer for our company will be the device, and the owner of the device will pay me.

Ok, you need to explain that.

Here’s the notion. I’m going to go from being just a supplier of electricity to an optimizer of use. I will drive productivity gains in generation, transmission and distribution, of course. But I also will also drive productivity gains in the use of electricity.

I am willing to spend money to install a sensing device in your home. Let’s just take the example of a household refrigerator and a dishwasher. With this device, you turn on your dishwasher and it doesn’t go on for 30 to 60 seconds because the refrigerator’s cycling down, and then the dishwasher goes on. When it stops, the sensor sends a signal and the refrigerator goes up.

We’ve been doing this and we’ve been able to reduce people’s usage on the peak 20% and they didn’t even know.

Everybody wins here.

Everybody wins.

Technology makes all those things increasingly able.

More than that, technology takes the behavior out of it. People hate to hear this, but in the 1990s, we thought we could educate people about energy efficiency and they would do the right thing. There’s this belief that education drives behavior and behavior will lead to more efficient use. So we spent zillions of dollars on education. And nobody really changed.

Of course, that’s an overstatement. There are some people who will do it, particularly if they share the values. Or, if you can motivate them — maybe find competitive angles.

But at the end of the day what’s needed is “back-of-mind technology.” If your electric bill is 1.9% of your disposable income — which it is on average nationwide — that’s trivial. How many people know what they pay per kilowatt/hour? How many people know how much electricity they used last month? When they throw a switch, they don’t think about it — unless the lights don’t come on. And then they go, “Damn utility!” Am I right?

That’s when your phone starts to ring.

Yes, that’s when we hear from customers today; when there’s a power outage or when they get their bill. But if we’re an optimizer of the grid, we’re doing things like installing sensing devices on your refrigerators and dishwashers. We’re writing software for your house for all the devices. Maybe when you walk into your study and it’s a certain time of day, the shades go up and the light comes in. Or the light at your desk comes on, but the overhead lights go down. That technology is here, but it hasn’t been fully implemented

In other words, you want to stop selling the electricity to run refrigerators, and instead you want to sell your customers cold food. You do all the work to figure out how to keep that food cold.

Yes. Totally back of mind for you. And along the way, I’m creating huge productivity gains in your usage.

Without me even knowing it.

Without you knowing it.

The other thing to keep in mind is that all this is good defense, not just good offense. Because remember, we’re going to be retiring or replacing every plant on our system. Retiring fully depreciated plants and building new plants. So the real price of electricity over the next decade or two is going to go up as we retire, replace or retrofit our plants.

So it’s in my interest to reduce your usage and to get ahead of the price rises.

In essence, you’re creating margin for yourself that I don’t even feel like I have to sacrifice to give you.

Exactly. And here’s a really important business proposition. Today, our value proposition is kind of hazy. But if I’m able to reduce your usage 20% or 30%, then all of a sudden my relationship with you is different. And, more importantly, you will have a clear perception of the value proposition.

So, in a way, an old, mature industry where the perception of the value proposition is going away, can suddenly have a new value proposition as we reinvent the business.

The challenges of changing your business model and rethinking the devices in my home require, I presume, real partnerships with the people who make devices.

It requires two things. Of course, it requires partnerships with people that make devices. But it really requires inspiring and educating your own people to be open to different ways to do things. Because one of the biggest impediments to change and adopting new technologies is your own people.

Why would that be hard?

Because we’re a mature industry and we’ve institutionalized the way we’ve always done things. And, we get punished more for lack of reliability than for higher prices. And so, if a new technology or approach has any risk…

. . . you want to keep risk out of the equation.

Keep it out. People are very risk-averse. But by definition, if you’re a pioneer, you’re taking on some risk. And so the question is, “How much risk can you take, or are you willing to take?” If your people say, “No, I’m taking no risk,” you have to find a way to open them up. Maybe you can do that by saying that part of being really sustainable over the long term is taking some risk on these technologies in the short term, as long as it’s not going to bring us to our knees. It’s like anything: you’ve got to do it in a way that’s not a bet-the-company type of decision.

So we’re building relationships with vendors, and working with technology development, and spending a tremendous amount of effort to get our own people to be open to different ways of operating the system.

The challenge of sustainability is that there are problems that need to be fixed by the entire community, which makes it difficult for any one company to make investments if competitors aren’t. How do you weigh the return you may get?

We know we’re going to retire every plant by 2050, so we have some sense of urgency. We want to smooth this out over time so our customers don’t have huge rate spikes. The real price of electricity has been flat for 50 years, and, like I said, I see the real price rising in the future.

And when I say we need to be a “nimble pioneer,” I mean that we recognize that someone has to lead. Our industry has historically waited for new technology to come to it rather than helping to develop the technology.

But we’re in a unique position to help scale technology. We’ve experimented with different technologies at our company, which makes us a lot smarter. We will be better informed by being a pioneer than not.

If you could remove any part of the uncertainty about the future from the grand equation — regulatory uncertainly, innovation questions, whether customers are willing to pay for different kinds of benefits — what would you take out?

That’s a very interesting question. The thing is, I live for stroke-of-the-pen risk. Public policy. Part of my mission in life is actually to implement public policy, and I do my very best to build coalitions. We were a member of U.S. Cap with NGOs and major companies in our industry, all working together. I was a chairman of Edison Electric Institute, our industry association, and I was able to build a consensus to change our position to support cap-and-trade legislation. I think you have to have your finger on the pulse of public policy. I also think, and I believe this strongly, that you need to shape it. I think you can shape it.

Imagine you’re talking to a fellow CEO who’s not quite a true believer in the same way that you are. And he says, “That’s all well and good, Jim, but I’m not sure that all this would benefit my company in any significant way. I can’t measure it. When I talk to my CFO, he’s not that interested because he can’t talk to Wall Street about it persuasively.” What would you say?

I’d say, well, you can’t put a dollar on the relationships that you build with regulators or politicians until push comes to shove on some issue down the road. I can’t tell you now what that’s worth to me. I can’t promise it’s going to be worth $10 or $10 billion. My approach to regulators and politicians is, if my policy doesn’t make sense, don’t buy it. But if it’s a close call, I just want the benefit of the doubt. That’s all I want in life, the benefit of the doubt.

And, see, it’s those competitive “edges” that you get. A little edge here in terms of collaboration. The edge in terms of policymaking. The edge that comes when an entrepreneur comes to you first because he knows you’ll be more receptive.

But management’s supposed to be data-driven and evidence-based these days.

First of all, it’s bullshit to think it’s all facts. The really tough decisions in life are, in the end, about feel, sense, and what your gut is telling you. The numbers tell you a set of things, but the numbers themselves don’t necessarily connect to the vision. They tell you about this specific project, but they might not tell you about the five projects that come after, or the sense that it might take us to a different place, or the fact that you really want your people to open up to something different. Numbers have great limitations.

And you know, if everything was fact-based, we probably wouldn’t have electricity today. I use the great example of a little boy standing in front of a wall. He says to his father, “I’d like to climb over the wall, but I don’t think I can do it.” The father takes the boy’s hat off, throws it over the wall, and says, “Go get your hat.”

In a sense, it’s about throwing your hat over the wall and then going to get it. It’s about imagination. I mean, Edison had no clue. He couldn’t envision what could be enabled by electricity. We sit here with our new mission and we can’t yet envision what we will enable. I think I can see electric vehicles, I think I can see further electrification of our society. Beyond that it’s difficult for me to see.

But if you step out a little bit, it gives you the confidence to step out a little further. And the more confident you get in stepping out, the further out you’ll go. That’s where innovation happens.

You know, one of the biggest problems I have in my company is that I’m out giving speeches or I go to conferences early and listen to people, and I take back ideas. I define my job as being both a general and a scout, and I love the scout part best. And about four out of every five ideas I bring back is rejected by the organization. They tell me either they don’t see it, it doesn’t make sense or what have you. Of course, I’m glad to have a filter. But there’s going to be that one good idea that’s going to lead to three good ideas, that’s going to lead to five more good ideas. And all of a sudden, our ability to create value for our investors and for our customers will be fundamentally changed.