2018 has seen the demise of no less than six energy providers. The npower SSE merger, meanwhile has also run into headwinds as the economics of the tie-up were challenged by ‘market changes’ around the OFGEM imposed energy price cap.
Even with regulatory interventions aside, this is a dynamic period in the energy industry. The market is changing rapidly, and technology is playing a pivotal role in this evolution. The entire industry is in the throes of a metamorphosis, both operationally, economically and societally, and the ‘energy value chain’ is being reframed with actors new and old jostling for position in a future structure and dynamic that is still forming.
This is driving an existential crisis for the incumbent utilities, prompting self-reflection and repositioning for the major energy resource players and spurring new players to enter the fray. It also offers running room for low-cost, entrepreneurial start-ups to spring into the market and shake things up – eschewing the centralised asset-intensive approach of the incumbents for a more flexible and consumer-centric approach to energy supply.
The Promise of Digitisation
Digital transformation has become the watchword across all corners of the economy and none more so than in the energy supply arena. Although definitions can vary depending on application, the digitisation of products, services, and processes is reconfiguring the fundamentals of industry relationships, with customers showing a preference for new digital ways of resolving traditional problems. Digital is now an everyday priority for businesses up and down the supply chain.
There is, however, dire need for businesses to define what ‘digital’ means for them and to redefine the goals and outcomes that are to be achieved through the application of technology. Clarity on the expected outcomes is needed in order to tailor investments and manage capital deployment on rapidly monetizable solutions and those best equipped to navigate rapidly changing markets and regulatory environments.
In the energy arena, this era of digital transformation takes on greater significance when we look at the evolution of the entire energy system.
Evolution of the Energy System
The growth in decentralised, distributed energy resources such as solar, wind and the evolving storage technologies, coupled with smart digital systems to drive greater efficiency through demand-side management is staggering. Not to mention the potential impact of a blockchain enabled peer-to-peer energy market. When implemented correctly they have the potential to create opportunities for value capture across the entire value chain by breaking down inter-sectoral boundaries, increasing flexibility and enabling integration across the entire system. There is immense potential in AI / Machine learning to bring impactful system optimisation and insight identification, making for more efficient, more sustainable operations. Heady stuff…
However, the truth is that there is still a long way to go in the energy / power arena with regards to digital uptake. Change tends to happen slowly in this industry and uncertainty around policy won’t speed up the industrial or cultural evolution that is needed for the future.
Digital disruption is manifest everywhere and the real monetizable impact – where digital technologies have restructured century-old operating models seemingly overnight – has been in industries where there are significant consumer demands and value to deliver information faster and cheaper. That combined with utilisation of large data sets to deliver an increasingly improved experience and the network effect of outsourcing parts of the process to the consumers themselves (e.g. air passengers checking themselves in and choosing their own seats) has enabled the cost of supply and distribution to be reduced massively by businesses. Retail, Publishing, Financial Services, and travel and leisure are examples of sectors that have experienced significant disruption, however, are all predominantly in the consumer domain.
The Consumer Conundrum for Energy Businesses
Much of the application of this technology is consumer-centric, requiring energy companies to focus on harnessing the power of big data and smart appliances to drive revenues through a reinvented, high-engagement experience for consumers. The tremendous promise of smart meters – sadly still to be seen – and the amazing potential of ‘Hive’ and other such applications will enable this, but energy consumers are way behind the curve and as a result, much of the consumer-centric potential remains untapped at a time where many other industries are already in the advanced stages of digital transformation. The reality is, the energy sector takes a long-term view, and presently there is little margin in retail or indeed generation. The digital mindset is somewhat anathema to long-cycle, capital intensive (and high-hazard) industries such as energy. All of which means that outside of regulatory sticks being wielded, there is little incentive for the major energy players to truly drive the change required. Indeed, most utility businesses seem happy to continue taking profits from a more traditional business model, having bought cheap at the turn of the century and profiting through written off assets.
‘Consumer’ is the operative word here. Those able to respond quickly and scale new technology are forcing the competition to play catchup. While some industries see relatively fast returns on investment in digital technologies through gains in supply chain efficiency, restructuring of product pipelines, reinvigorating product lifecycles and enhancing customer experience, the unique characteristics of the energy supply chain make digital adoption a radically different proposition. Moreover, it suffers from an intrinsic challenge: it is not interesting to consumers. Yet. It is a necessity, not a luxury, and while a fundamental need its inherent value is only demonstrated through its failure. In addition, power provided by one supplier is indistinguishable to that of the next, significantly diminishing the value and interest in the provider themselves. A difficult proposition to manage and market.
At the same time, one thing consumers do seem to care about is the price. According to the Ofgem Consumer Engagement Survey, over 90% of UK energy customers cited price as the main motivation for switching providers. But having already been through market liberalisation and unbundling, energy companies have few options left to capture value from large consumer/retail-focussed digital investments other than to pass costs onto the consumer, itself a strategy fraught with reputational and political risk. Overlay the incoming price-cap and it looks all the less enticing for the asset-heavy incumbents, as borne out by the wobbles in the creation of the npower/SSE entity.
The uptake of the ‘smart home’ has been slower than many forecast, in part due to the lack of appetite from all parties to carry the cost. The housing stock in the UK is largely old and difficult to retrofit, and new build still doesn’t require such systems to be applied at build (unlike say Holland) and therefore exacerbates the problem. There is no money in retail for the large structured utilities and certainly a very little appetite for any investment. IT systems (expensive and often overpaid for) and digital platforms have been the undoing of retail – badly specified, badly coded and badly maintained. As a result, some major players (e.g. EdF, RWE, SSE) are shaping up to exit retail altogether and leave the retail piece of the puzzle to businesses more, (if not necessarily better) prepared to take it on like Shell, OVO or Good Energy.
A limit on available capital to invest into retail has meant Energy companies have necessarily taken a short-term view to the potential returns from introducing the digitisation of energy into consumers’ homes. The much-maligned smart meters are a good example of this.
Born Digital Businesses Are Able to Make A Long-Term Play
However, where Energy companies see the direct extraction of consumer data as more trouble than it’s worth, companies like Google see opportunity. Products like their smart thermostat ‘Nest’ may currently only appeal to early adopters, but to think of Nest as just a fancy thermostat is short-sighted. The Nest offers Google a way into the heart of the smart home. A chance to have their product at the centre of the home with dozens of devices connected to it through the IoT, providing meta data on demand dynamics that would be phenomenally powerful. The future commercial possibilities for attaining this strategic position may be extensive, but while technology companies like Google can afford to place long-term bets on consumer shifts, energy companies have far more pressing investment needs in infrastructure and power delivery.
These market developments serve to highlight the need for energy companies to go back to basics and focus on core strengths. Optimal deployment of capital and technology, efficient asset management and the management of merchant risk in technical and commercially complex environments. In doing so, digital strategies with clear pay-back can be (and indeed have been) developed around their core strengths, breaking down boundaries between segments, increasing flexibility, and enabling efficient operation through asset operation, predictive maintenance and integration across entire systems and portfolios. This will allow them to serve a smaller number of high value large (I&C) customers and stakeholders who will play a far more strategic role in balancing and ultimately financing a dynamic, flexible market.
The customer and retail operations can be left to specialists who can deploy expertise in mass marketing to customers, high volume customer management, and the investment and development of the IT systems and billing platforms that have proven the undoing of some.
Such a strategy of consumer ‘decoupling’ and rethinking digital strategy in terms of innovative go-to-market strategies that provide growth in new ways may grow in importance. Energy companies would no longer need to own the end-to-end supply chain.
Energy Businesses Are in Transition
As companies feel their way into the transition, wait for successful strategies to emerge and re-evaluate portfolio of core assets, joint ventures, partnerships, and mergers will remain important tools to weather the current storm of technological and regulatory uncertainty; and in many ways, this trend is already underway. The merger between npower and SSE retail merger, assuming It goes ahead, will result in the scrapping of SSE’s failed digital platform and the adoption of npower’s platform, the establishment of which is its own cautionary tale.
The market has essentially failed the energy industry and failed to create the value proposition for consumers that was heralded. What we have now, post-privatisation, is a mess 25 years on. As often said regulation begets regulation. Regulators like OFGEM are perhaps the biggest enemy of a radical rethink and the lack of clarity in policy only exacerbates the inertia brought by such uncertainty.
Until the energy transition yields broader availability of renewable energy infrastructure and electric vehicle usage is achieved, consumer engagement levels are likely to remain frustratingly low. Change is not going to be overnight and, contrary to other industries, there is no sign it will be driven from the consumer end.
The Future of Digital in Energy
Whilst the customer will always be “king”, he or she doesn’t appear to care enough at this time about energy to warrant the investment needed from main suppliers to make them interested. And with energy being such a political hot potato, there is no sign of a coherent energy policy any time soon.