Innovation & Disruption In Utilities: Electrifying In A New Era
Innovation & Disruption in Utilities (incumbents in electricity retail market):
With changes in the utility sector ranging from regulations to the increased need for environmental awareness, incumbents have to overthink their role as pure commodity players. What steps need to be taken by utilities to remain profitable, and at the same time being part of the transformation towards a greener society?
In many parts of the world, the traditional retail utility business model is being challenged on multiple fronts. Unlike the past where the utility sector was dominated by monopolies, and electricity seen as undifferentiated commodity, adaptive change is required in times of the evolving environment.
Figure 1. PESTEL Analysis of Retail Electricity Market
On the political front, changes from liberalisation of regulated markets and decarbonisation policies have shifted the scene drastically in many countries such as Singapore. The full liberation of the electricity retail market by the Energy Market Authority (EMA) at the end of 2018 will allow all customers, which include 1.3M households and more than 200,000 small businesses, to choose retailers (EMA, 2017). As a result, customer segementation transforms with the changes of consumer profiles and the flexibity in their purchase behaviour. To better manage electricity consumption and provide consumers with more choices, EMA has piloted project OptiWatt which provides energy usage visibility to consumers, and moreover implemented Electrify, an price comparison website for electricy through which Singapore Power (SP) Group offers half-hourly wholesale electricity prices to customers (Tan, 2017), thereby making the field more competitive. With the implementation of new carbon tax in 2019 to reduce greenhouse gas emissions (Lam, 2017), there is a need for retailers to offer new solutions to their customers to tackle rising costs.
With an annual GDP growth rate of 3%, the global electricity market is expected to increase by 45% from 2015 to 2040 making the economic growth as the key determinant in energy demand (EIA, 2017). However, the growth differs by the type of country. The increased efficiency of appliances, the quality of building shells and a slow down of population growth in Organisation for Economic Co-operation and Development (OECD) countries lead to a projected annual growth by 1% only. In comparison, non-OECD countries are expected to grow by 1.9% annually, driven by rising living standards of household which incorporates more electronic appliances and commercial activities. This calls for the need of incumbent utilitiy providers in OECD countries to strategize for profitability while those in non-OECD countries will be facing higher expectations brought by economic development.
Socially, customers will become more price sensitive and have higher expectations towards services given their exposure to experiences from other industries. In particular, customers look for competitive pricing, personalisation, convenience and flexibilty in selecting their electricity providers (Accenture, 2017). As such, incumbents have to adapt their business models to meet these expectations to attract new and retain existing customers. The emergence of prosumers (pro-ducer, con-sumer), starting from more developed markets, brings additional challenges which utilities need to address (PWC, 2014). Beyond the lower amount of electricity purchased by the group , their complexity raises the serving cost. Moreover, with renewables energies driving the production and the volatility utilities are required to improve demand management initiatives to balance the load.
The proliferation of technologies including Internet of Things (IoT) sensors and smart meters bring opportunities of new service offerings for retailers to tap on. Alongside, the obtained data combined wiht big data analytics allow retailers to receive deeper insights of customer behaviour and transactions which can be used to improve customer services.
The advent of electric vehicles fuels the demand for electricity (Vaughan, 2017) and carves areas for utilities to play new roles, e.g. as bill facilitator, demand response manager or charging service provider (Trabish, 2016). In addition, blockchain serves as a potential large disrupter to incumbent retailers. With a significant reduction of overhead cost and a customer centric approach, e.g. real time payment, new companies such as Grid+ will bring stronger competition with the shift towards digital utility (Engerati, 2018).
The green evolution brings increasing environmental awareness which driving demand for green energy and energy efficient solutions. This is further supported by the trend of renewables being the fastest growing electricity source, with an annual projected increase of 2.8% from 2015 to 2040 (EIA, 2017). With opportunities such as 72% of consumers looking for services to manage energy consumption (Accenture, 2017), new opportunities are open for retailers. Another trend is seen with licences to operate as electricity retailer which opens the way for new non-traditional companies to enter into the electricity retail market.
The conglomeration of these factors challenged the market power of incumbent utilities within the last years, thereby bringing a greater need for them to take proactive steps towards a customer centric approach that requires a fundamental change of operating models and the inclusion of digital and eco trends.
Taking the Next Steps
With the increasingly competitive landscape and threats, incumbents will need to move fast and adopt new strategies to maintain market share in the short run and thrive them in the long run. This can be achieved through the following possible recommendations as shown in Figure 2.
Figure 2. Recommendations
Customer centric experience
The rise of competition and higher expectations from customers place the need for utilities to focus on customer service. While customer recommendations about upgrading or downgrading electricity plans may lead to a decrease in revenues per customer, the customer’s loyalty with the incumbent can be strengthened, and thereby facilitate a higher profitability in long term. Moreover, a seamless customer journey should be delivered through all touchpoints via dissolution of internal silos and the provision of a digital omni-channel experience, thereby reducing customer pain points and exceeding their expectations through anticipation. data analytics, can help to improve operational prccesses and help to understand the customers behaviour supporting the decision-making process.
Demand response management
The arrival of smart meters and IoT sensors have made it possible for demand response schemes to take place. Coupled with environmental awareness, demand response management will provide consumers with advise to reduce electricity consumption at appropriate times helping them to save money. For utilities, this helps to manage the load, leading to better service and lower costs that may be invested to manage fluctuations in demand.
With the rising environmental awareness and implementation of decarbonisation policies such as carbon tax, it is inevitable for incumbents to venture into green energy. While some companies may have the capital and capabilities to enter renewables directly such as via offering solar panel rentals, other incumbents may not be able to do. Nonetheless, there are other avenues to play in this area. For instance, in countries with limited land area for solar panels, they may explore targeting and being first mover in the float solar market in countires where the market is currently largely uncontested. As a first step, incumbents will need to partner with a floating solar platform provider in the subsequent reservoir pilot tenders. The alliance will allow incumbents to enter the market without the need to develop hardware capabilities, while allowing the alliance partner to gain better revenue streams. Targeting reservoirs will also significantly reduce the amount of resources invested to gain space for the solar, unlike the rooftop solar industry where buy-in from multiple commercial building owners is required. Incumbents in turn will be able to provide new pricing plans for clean or hybrid energy to target environmentally friendly customers.
Close relationship with regulators
For incumbents who aim to be forerunners in new initiatives such as demand response where new regulators are required, a proactive stance of moulding relationship with regulators will place them in good stead. By being the first mover to reach to regulators, they can impart information to explain the benefits of new initiatives and accompanying required regulators to benefit the society. With many new initiatives requiring multiple players, a coalition can in turn be formed to represent their voices to the local regulators. Through this, the suitable policies can in turn be shaped which bring benefits to both the incumbents and society.
Given the nascent nature of blockchain, incumbents may wish to explore the possibilities of using blockchain while accounting for regulations. If there are strong reasons and use cases for blockchain to disrupt the market, incumbents should take pre-emptive steps to either venture into the opportunity or improve their current offerings leading to higher barriers for new entries.
With higher customer expectations and the increasing interest in ermergent market of Connected Home in which 66% of consumers would be interested in (Accenture 2017), Connected Home serves as a new offering bundled with long-term electricity contract. This provides multiple value proposition for customers satisfaction and loyalty.
First, the connected home will provide convenience through the changing lifestyle. Second, the implementation of mobile application gives the customer the chance to monitor energy usage through the Internet of Things (IoT) with ease and gather insights for behaviour changes. Third, by allowing customers to chose between plans in the bundled service, customers receive the price flexibility they require. These will attract new customers while effectively binding them in long term contracts. A deep-dive in the Connected Home segment will be explored in the next section.
Deep Diving into Connected Home
Utilities’ Current Play
The blurring of boundaries between service providers along with unsettled market opens opportunities for utilities as integrated service provider. With more regulators across different countries mandating fast switching between utilities to promote competition, utilities are under pressure to provide better value to consumers beyond pure commodity. Moreover, the rising environmental awareness and carbon tax further increase the demand for energy management solutions and green energy. With smart meters roll-outs which allow for detailed energy consumption data falling under utilities’ area of responsibilities (Powerley, 2017), utilities are well-positioned as entry point into households. This is further strengthened by consumers’ preference where 65% indicate interest in Connected Home offered by utilities, which is 1.5 times more than retailers or communications companies (Accenture, 2017). As an ecosystem actor, the relationship with other actors is illustrated in Figure 3.
Figure 3. Relationships
Looking Forward: Addressing Challenges and Strategizing
Holistic recommendations how to adopt boundary strategies (Santos and Eisenhardt, 2009) target the sequential stages of claim, demarcate and control (Figure 4) with focus on technology and organisational challenges.
Figure 4. Recommendations
Culture of Open Innovation
Considering the traditional siloed way of working which make an organisation-wide culture change difficult and lengthy, an independent innovation team can be introduced to drive change and to explore new space and to determine the best way forward beyond current activities. Without the burden of day-to-day operations, the team can use external influences to create ideas for the utilities’ best needs, experiment with those and bring innovation to the market (Chesbrough 2003). Moreover, the team should have the ability to propose and rapidly build new capabilities such as appropriate salesforce and technology support. This gives utilities a greater agility to adapt to changes prior to the emergence of dominant design while solidifying control in this market.
Learning from Analogs and Antilogs
In the process of shaping the corporate identity, utilities must understand the success factors and failures from other industries and geographical areas. For instance, British Gas in UK tapped on regulatory requirement for smart meters which allows for interval measurements to introduce new time-of-use tariffs and Connected Home concurrently whereby consumers can adjust heaters remotely (British Gas, 2018). The combination, flexible charging model and device management, provides stronger value proposition for consumers. As such, by accounting for market dynamics, internal capabilities and learning from other cases, each utility can carve their most suitable strategy to shape their identity and develop appropriate capabilities.
In the current era of experimentation, utilities can start pilots of Connected Home initiatives for the development of new houses via the adoption of a distributed experimentation strategy (Ferraro et al., 2015). This serves as a test bed to observe, obtain feedback and evolve the offering satisfactorily, without running the risk of releasing too widely too soon (Douthwaite, 2006). Moreover, succeeding pilots will raise awareness to others on utilities’ play in Connected Home while encouraging early majority consumers to start adopting through success of early adopters (Rogers, 2003). For participating partners, this can be used as a platform for further technology advancements.
Given the importance of a seamless user experience with the constraint of limited technology capabilities which is essential to manage all areas of Connected Home, it is critical to identify and work with strategic alliances to supplement utilities’ capabilities and bring the full value, as analysed in Figure 3. Through targeting weak ties (Granovetter, 1973), utilities can bridge the gap of current disconnected clusters of networks and act as connector for the clusters, thereby providing strategic positioning to provide Connected Home as a bundled and integrated service to consumers.
To increase market coverage, utilities should look at cross selling complementary services tied to their competitive capabilities. These include energy audits and recommendation of utility plans customised for household usage, such as flexible tariff structures which might replace existing revenue streams with lower consumption. 80% of digital users are likely to adopt more efficient energy management systems (Accenture, 2015) as a consequence of the increasing green awareness forcing utilities to adopt alternative solutions from other providers. Being the first mover introducing these offerings will allow utilities to discover new revenue streams in favour of less profitable areas while positioning themselves in the highly competitive market.
The importance of data analystics, forces utilities to carve and control their ownership of data and reconfigure its value chain. By being one of the first Connected Home service aggregators, utilities will be in a better position to establish rules of data ownership and suppress competing models which allows them to become the most valuable information providers. The insights can be used internally, such as refining demand planning models, as well as externally, to gain customer insights for business strategies, thereby strengthening the utilities’ position.
Electrifying in the New Era
Being aware of the challenges and opportunities that lay ahead, incumbents in electricity retail can take steps to proactively defend their fortress and continue being forerunners. While path will likely be filled with uncertainty and discomfort from diverging ways of working, incumbents will need to be open to changes and move towards electrifying in the new era.