In his seminal book The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, Clayton Christensen introduced the concept of “disruptive innovation”, the impact of non-traditional business models (NTBMs) on traditional markets. At the heart of his argument, Christensen identified a trend whereby managers, adept at dealing with, sustaining or driving incremental technological change, failed when faced with disruptive innovations.
In recent years, energy markets around the world have been largely exempt from the disruptive waves that have overwhelmed many other industries. However, a raft of new innovations and increased market entry is generating a host of NTBMs in energy markets worldwide. The energy market has commenced its disruptive phase. In our recent Global Power & Utilities Survey, 97 per cent of executives interviewed stated that they expect a medium or high level of disruption in their home market by 2020.
A range of factors are driving the emergence of NTBMs in the energy market. These include:
New technologies. A number of companies are now offering a broad range of innovative energy products including solar, micro-CHP and energy storage. These products give customers greater autonomy from traditional energy suppliers and, combined with smart meters, allow for a range of bespoke tariff offerings.
Digital. Business customers can now take advantage of aggregated demand-side management services to lower their energy bills, while domestic consumers have a number of options available to them to control their hot water and heating remotely. New entrants are poised to take advantage of the data opportunities provided by the smart home
Localisation. Some companies are focusing on servicing embedded, community-owned micro-generation. A number of new suppliers are using established local brands to increase trust and engagement with a regional or local customer base.
Affordability. Many suppliers are focusing on combining operational excellence with low cost propositions, actively maintaining market leading positions on switching sites.
Nevertheless, NTBMs have the potential to bring significant benefits to the energy market. They could unlock value and provide greater system resilience through providing greater flexibility on both the demand and supply side. They could increase the public’s trust and engagement with the companies that serve them and they could further enhance competition through a greater focus on personalised products and services. Most importantly, NTBMs bring the possibility of generating new benefits, opportunities or market outcomes that we could barely imagine a few years ago.
So what can the energy market learn from the disruptive events of the past? First, many disruptive technologies started life on the fringes of the mainstream – the product too basic, or exposure insufficient, to be considered by an established customer base. As the disruptive firm increases its market share, it innovates to allow it to attract a greater proportion of the customer of more established firms. In response, incumbent firms abandon their lowest profit customers and focus on those generating a higher profit. This process continues, until the disruptive firm(s) have established themselves as the leading companies in the market.
This pattern can be seen today in the rise of the low cost independent suppliers. As they retain their position at the very top of the price comparison sites, independent suppliers have swiftly absorbed the lowest margin customers in the industry and continue to grow market share.
Second, the market rules and regulations must facilitate innovation. Unfortunately, in a recent consultation paper on the role and impact of NTBMs, Ofgem identified a broad range of regulatory challenges brought about by their rise. In particular, a majority of respondents highlighted that the regulatory framework was not flexible or agile enough to cope with the broader range of products and services that NTBMs offer.
In another recent position paper, Ofgem identified elements of the regulation framework and industry processes that act as barriers to NTBMs looking to operate in the market for flexibility. Furthermore, the Competition and Markets Authority in its provisional findings report identified features related to industry codes and governance that could be limiting innovation.
If the success and benefits of disruptive technologies and NTBMs are to be realised in energy markets, more needs to be done to prepare the market for the future.
Finally, incumbent firms today must prepare themselves for tomorrow’s competitors. While the direction of travel in the energy market is not known for certain, the rise of NTBMs give incumbent firms clear signals of the mainstream products and services of the future.
Here at PwC, we have identified three key capabilities that all energy supply firms should develop as they face what many believe to be the biggest shake-up since deregulation. These are: practices to better enable innovation; embracing digital and data throughout their organisations; and leading continually on cost efficiency and operational excellence.
The days of energy supply companies simply relying on their traditional heritage and expertise to compete are long gone. To be a winner and respond to the challenges of NTBMs, they must decide now how far they are willing and able to change.
Steve Jennings leads PwC’s Power & Utilities Sector Practice in the UK