ACADEMIC CASE STUDY1

Managing the Network of Supply and Demand at AGL Energy

An Academic Learning Case Study written for the

Council of Supply Chain Management Professionals

Prepared by

Tim Coltman
Institute for Innovation in Business and Social Research,
University of Wollongong, NSW, Australia

Peter Reynolds
Center for Information Systems Research,
Massachusetts Institute of Technology (MIT), Cambridge, MA, USA

Frank Schlosser
Department of Information Systems and Services,
University of Bamberg, Germany

Alan Thorogood
Australian School of Business,
University of New South Wales, Australia

Copyright notice: This document is provided for personal use and will not be transmitted or
redistributed without written permission from the Council of Supply Chain Management
Professionals (CSCMP). You are not allowed to upload this document to any public server, online
service, network, or bulletin board without prior permission from CSCMP.

___________________

1
This version is modified by Dung Nguyen

1
Introduction

AGL Energy operates in one of the most fiercely competitive markets in the world. On the
supply side, real time energy production (coal, hydro, and wind) is traded in five-minute
intervals across states with prices ranging from $25 to over $10,000 per megawatt hour. On the
demand side, the business is volatile with high customer churn rates and new competitive
offers in a largely deregulated environment. Customers are also becoming increasingly energy
conscious and concerned about high electricity prices leading to the installation of new smart
meters into homes to provide greater visibility and control over electricity usage.

As Chief Information Officer at AGL, Owen Coppage is responsible for supporting the flow of
information across the energy supply chain. For Owen, accurate and timely customer
information is key to customer service and retention, to increased accuracy of demand
forecasting, and to drive growth in supply and minimize market risk.

AGL Energy has grown by acquisition to be one of the Australian market’s leading energy
providers. However, its systems have been developed separately to meet the needs of diverse
business units one generates and delivers power and the other looks after customers.
Information was entered and stored in different ways in many different customer and billing
platforms. The haphazard arrangement of data and fragmented infrastructure meant that the
information technology (IT) systems at AGL were buckling under the pressure to meet staff and
customer expectations.

Never one to back away from a challenge, Owen knew that something had to be done to
provide better information to predict demand, manage supply and hedge against unforeseen
weather and other natural events. How can data be used more effectively to match supply with
demand? What role should the IT function play in improving the supply chain and managing risk
at AGL?

“Understanding our customer base is important to us, customer service and retention is
critical. Being able to accurately forecast demand is critical. Our customer base enables us to
make investments decisions about electricity supply. We have to be able to manage that
volatility.” ~ Owen Coppage, CIO AGL

AGL Energy

AGL Energy is Australia’s leading integrated renewable energy company and Australia’s largest
private owner, operator, and developer of renewable generation assets. AGL’s heritage began
as The Australian Gas Light Company which was formed in Sydney in 1837. It supplied gas for
the first public lighting of a street lamp in Sydney in 1841 and was the second company to be
listed on the then Sydney Stock Exchange (AGL annual report 2011). In October 2006, the
Australian Gas Light Company demerged its energy business and AGL began trading on the
Australian Securities Exchange. Today, AGL Energy is one of Australia’s top 50 listed companies

2
with an underlying net profit of AUD$431.1 million (FY2011). The company is structured into
three strategic divisions: Retail Energy, Merchant Energy, and Upstream Gas. The upstream gas
business is far smaller than the others, with operating earnings before interest and tax (EBIT) of
AUD$13.6m (as compared to AUD$373m for retail and AUD$378m for merchant). The customer
base at AGL for natural gas, electricity, and energy-related products and services is over 3.5
million across New South Wales, Victoria, South Australia, and Queensland. AGL has around
2,000 employees and its market capitalization is approximately AUD$8bn (as of October 2012).
Figure 1 illustrates the company structure, with an expanded view of the operations
management function within merchant energy.

The Upstream Gas business is focused on acquiring long-term gas assets for supply to power
stations and customers. Upstream Gas is a capital intensive business and a critical hedge in the
volatile energy market with interests in a number of companies. However, the Upstream Gas
division does not currently contribute significantly to AGL’s revenue stream and the
organization’s profit, and it represents a longer term investment in future gas supplies.

The Merchant business runs power stations, sells power through contracts and spot markets,
and buys power through contracts and markets. This is a high risk activity where considerable
importance is placed on ways to manage the risk of procuring and delivering gas and ensuring
that the supply of electricity is available for large wholesale customers such as BHP Billiton,
Santos, Esso, Caltex, and Alcoa. The merchant business also manages AGL’s compliance with
mandatory renewable energy targets, and controls the dispatch of owned and contracted
electricity generation assets that complement a portfolio of electricity hedge contracts.

Retail Business sells natural gas, electricity, and energy-related products and services to more
than 3.5 million customers. High rates of customer churn (approximately 26%) are
commonplace in certain regions of the national electricity market, creating strong pressures for
innovation and continuous improvement. The retail business at AGL has launched a number of

3
new services including: an online service “AGL Energy Online” which allows customers to set up
and manage their account in a similar way to internet banking; smart meters, which have
provided new opportunities for energy consumption analysis; and capabilities built to support
solar energy, which is anticipated to become more attractive as technology improves.

The vertical integration strategy shown in Figure 1 is critical to AGL to ensure that risks are not
disproportionally allocated. For example, if a downstream retailer lacks upstream capacity then
it becomes vulnerable and subject to wholesale price variability. Wholesale supply prices can
range from $25 to over $10,000 a megawatt hour at different times of the year. Alternatively,
when the focus is only on supply, the firm will lack the necessary earnings profile to raise equity
in the market or to support investment in additional capacity with low interest loans (based on
Standard & Poor’s debt rating).

Energy Industry Supply Chain

The energy industry supply chain begins with the exploration and extraction of resources and
ends with the transport, residential, commercial, and industrial consumption. Resources such
as oil, gas, coal, uranium, solar, water, and wind are upstream. For electricity, a power station
transforms these resources into high voltage electricity. Gas production is a simpler process and
moves almost immediately from the gas field into the distribution network. Inside each town is
a grid of cables and pipes to distribute the power. Retailers sell the power to consumers and
raise bills to collect payments. At AGL the firm relies heavily upon the ability to retain its
customer base. The customer base provides the platform to make upstream investments in gas
and electricity generation. From a strategy perspective, the primary goals at AGL Energy are to
grow the customer base, achieve higher profit margins, and deliver superior customer service
levels. The division of strategic goals between upstream and downstream business operations is
shown in Figure 2.

4
Supply Chain Volatility

Uncertainty is a constant feature of the energy industry supply chain. Uncertainty arises at AGL
in many forms and operational performance never benefits from uncertainty. For example, the
merchant business is dependent upon the capability to validly forecast short- and long-term
demand. Profit maximization is dependent upon an ability to eliminate energy excess or
shortfall. In other words, it is dependent on the ability to align supply with the forecasted
demand. Electricity excess refers to capacity or contracts that the company owns or holds but is
not required by the market at any point in time. The capability to minimize excess capacity is
critical because electricity cannot be easily stored once it is in the grid. On the other hand,
electricity shortfall can result in a situation in which an energy company has to buy additional
electricity from the short term wholesale market at uncertain and volatile spot and contract
prices. Significant volatility in wholesale prices due to severe weather conditions, or a
breakdown in energy production or transmission can easily blow away any profits for a month.

In a service supply chain, managers are continuously required to make a trade-off between
avoiding excess capacity on the one hand, and circumventing any shortfall in production that
will require expensive wholesale contracts, on the other hand. To align supply and demand,
AGL collects huge amounts of data and undertakes advanced analysis to generate the insight
required for high quality decision making. For example, resource exploration and extraction
activities utilize highly sophisticated systems to minimize situations where excess capacity is
generated. This is achieved by forecasting energy demand based on weather and other
historical data on a daily and half-hourly basis. Mid- and long-term forecasts are also
undertaken to allow for a well-balanced match between supply and demand at all times.

In retail, uncertainty is centered on the customer. Customers have become increasingly energy
conscious and feel strongly that they need to do something about rising energy bills. Traditional
customer segmentation based on current energy use and demographics that have been the
mainstay in the energy industry will likely provide limited understanding about what the
customer of the future might look like. For example, the advent of electric vehicles could
dramatically impact the retail business as the homes of the future become charging or battery
storage points. Smart meters will offer enormous opportunities to manage demand. These
meters use IT networks to send consumption data every 15 minutes rather than the traditional
reading every three months. The increase in data will be significant, placing pressure on the
analysis skills within the business units.

Data and Information to Support the Supply Chain

Energy companies rely heavily upon data and IT to support business activity throughout the
supply chain. For example, in both upstream operations and downstream retail, the business
units are heavily reliant upon access to data (e.g., energy consumption through meters,
weather forecasts). Equally important is the possession of capabilities to analyze data in an
efficient and effective manner. Figure 3 shows the real-time trading room at AGL that displays
electricity flows and prices across Australia.

5
Not surprisingly, IT is a key enabler within AGL, providing the data foundation for a variety of
value-added services. However, the IT systems have grown in a haphazard way as the company
acquired new companies and their customers. At any one time, there were 12 to 15 different
customer billing platforms, the distribution business was not well connected and costs were
increasing. Service delivery and engagement by the IT department (a separate business within
AGL) was suffering.

“AGL had grown by acquisition, it had acquired customer bases and it hadn’t really integrated
any of those customer bases and its IT systems had grown almost in that haphazard way as it
acquired customers.” ~ Owen Coppage, Chief Information Officer

Move to a Single Billing System

In 2007, a major $200m IT transformation program, called Project Phoenix, was initiated to
migrate the retail and merchant business arms to a single billing platform. Expected benefits
included: a reduction in the high number of system outages, reduction in the number of back
office personnel, a consistent organization-wide database for all customer-related data, and
delivery of a single-instance billing platform. This transformation program was necessary to
meet AGL’s strategic goals of expanding the range of services to customers. In developing an
enterprise-wide data platform, AGL also recognized the need to develop a core capability
around governance and control of data. Phoenix was based on SAP software and operated on a
Microsoft platform. The basic technology services architecture is shown in Figure 4.

6
Further Consolidation of the Retail and Merchant Platform

A second major IT project worth $100m, called Spectrum, soon followed the Phoenix program.
This project was based on SAP technology. A primary function of the Spectrum program was to
deliver a platform that could collect, analyze, and use large data sets coming in from both retail
and merchant. Consolidation of fragmented IT systems is critical to better position AGL for the
challenges of an uncertain future. Leveraging a well-integrated IT platform makes good
business sense.

“For the first time now we have two separate business units on the same platform.”
~ Ken Hodgson, Group General Manager Retail Business

Leveraging the Data–Role for Data Analytics

AGL has always been a data and information business. Data is used to manage customers and
all decisions within the business are based on data. Data and information are constantly
gathered to take a position on fuel contracts and to test propositions. Smart meters represent
an enormous explosion in the amount of data that will be available to AGL. For example, a
smart meter gets read every 30 minutes instead of one per quarter, resulting in around 17,000
reads per annum as opposed to just four in the past. Hence, data is competitive gold for AGL,
but the company recognizes the need for appropriate governance controls to ensure data
integrity, supported by a data-driven culture throughout the supply chain.

“We have really given a lot of energy in recent times to smart meter analytics.”
~ Anthony Fowler, Group General Manager Merchant Energy
“We’re a data and information business. It all comes back to data.”
~ Glenn Page, Head of Service Management

7
Strategic Importance of Data and Analytics

As a business AGL competes in a commodity market. A commodity is considered to be a non-

differentiated product offering that holds few, if any, intangible components, and is sold
primarily on the basis of price. The core components of a commodity are well known, mostly
stable, and widely shared amongst competing firms. However, AGL is confident that there are
factors other than price that will enable it to differentiate itself in the market. According to the
Chief Technology Officer:

“A lot of that differentiation will be driven by data and the ability to manage and use the data
that is coming in from new channels such as smart meters.”
~ Marc Anderle, Chief Technology Officer

Recent developments in smart metering infrastructure and the large amounts of data
generated enables energy companies to provide individualized data to customers in an
appropriate way. The capability to help customers better control electricity and gas
consumption will be key to the future competitiveness of AGL. Data is expected to play a key
role in this area, leading to significant investments into data analytics capabilities and
corresponding IT systems.

Developing a data analytic capability will be challenging because, historically, the business has
not been terribly successful at making sense out of the vast amount of data that comes into the
company’s data warehouse systems.

“At this point we are good at capturing and measuring the data but we really don’t have a clear
strategy at this point for how we will use the data to differentiate ourselves. I don’t think
anyone has got it right in the industry.”
~ Marc Anderle, Chief Technology Officer

Building a data analytics capability is the one point of focus that AGL is trying to build. There will
be first mover advantages for those companies that can use “Big Data” to co-create value with
customers and improve industry performance. At the same time, Owen is aware that
investment in analytics can be a huge sunk cost unless employees are willing to incorporate the
data into what they do and think critically about the decisions that are being made on the basis
of data.

The changes in the competitive environment together with new opportunities (e.g., smart
meters), and developing the capability to make sense out of the vast amounts of data are
critical challenges for the AGL supply chain. The extent to which AGL Energy is successful will
influence customer satisfaction, which, in turn, will influence profitability.

8
If you were in Owen’s position, how would you go about delivering the tools needed to
manage a network of supply and demand?

Questions:

1) Why is it difficult to align supply and demand at AGL Energy?

2) What data challenges are facing the upstream (merchant) and downstream (retail) parts
of the business? In your answer, consider the core data required to manage the supply
chain (e.g., customers, usage, generation, prices) and the advantages and disadvantages
of data consolidation (merchant and retail) onto a single IT system/platform.
3) Why might it be difficult to move supply chain work practices to a data analytics
strategy?