BCG - The Boston Consulting Group

Situation

An electric grid company in one of China’s highest-growth regions faced a predicament as a result of the financial crisis. In the past, electricity demand had grown consistently from year to year, making capacity and operational planning simple. But now demand growth had slowed dramatically. The company asked BCG to help it understand the composition of demand across different segments and the drivers of demand in each one, and to develop a forecasting model that the company could use to plan for electricity consumption in the coming year.

Approach

The BCG team used a three-pronged approach. The first was a top-down forecast based on high-level drivers of electricity consumption, such as GDP growth and seasonal changes in temperature. The second was based on historical trends adjusted for potential interruptions (such as the closure of a major factory or the development of a new industrial zone) that could cause demand to increase or decrease from previous levels. The third was a more detailed, bottom-up approach. First the team divided the market into major segments (such as residential, commercial, and industrial) and divided these into subsegments (such as steel producers versus apparel producers or high-income versus low-income residents). Then the team identified the principal drivers of electricity consumption for each segment, as well as quantifiable sources of potential change in those drivers of demand. Finally, the team integrated the data into a forecasting model.

Impact and value created

The client now has, for the first time, a clear view into the future demand for its product. And it has used the insights gained from the segmented forecast to design and tailor sales and marketing initiatives, as well as allocate capacity development resources, more appropriately for the various regions and customer segments it serves. The approach will eventually serve as a model for other entities within the client’s parent organization.

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