Three grand challenges for the energy market

In a febrile energy market with faltering consumer legitimacy, appetite for value-add solutions is meagre. Can market players come together to create the conditions for a higher value future as enablers of smart, zero-carbon living? Simon Ede and Tilmann Hensel-Roth, vice presidents of energy practice at Charles River Associates set out three must-have factors for market transformation.

After years of focus on cost-to-serve and switching as the yardstick for competition, we are at the end of cycle for regulation and market design.

Even without the current war-driven crisis, it seemed unlikely the current energy market model could persist because of the scale change needed. New markets, integrating household and business energy solutions – such as distributed energy production and storage, heat pumps, and mobility solutions amongst others – are emerging.

But these may themselves only comprise part of a wider  marketplace transformation and it is unclear whether today’s utilities can comfortably assume the consumer will look to them to play significant roles in the provision of those emerging goods and services. In recent research commissioned by Charles River Associates from Utility Week, less than 10% of respondents saw service provision from their energy provider as desirable.

“I think that the idea that suppliers will increasingly have to have the strength to help customers source funding for capital projects will be key in the future and a real source of competitive differentiation…But there is still very much a feeling that long term contracts are anti-competitive and not in the interests of the consumer.”

A senior industry source informs Utility Week’s review of its recent consumer research findings. Read the article, including key research insights, in full here.

The broader research findings highlight what many will have intuitively known. The public mood is febrile. It doesn’t have much sympathy for utilities, their investors, or regulators and policy makers. The recession and cost of living crisis are re-orienting consumer priorities onto affordability and away from sustainability, for now at least. This was indisputably clear in our research findings with 77% of respondents saying price stability is the most important thing their energy provider can offer. Meanwhile, just one fifth said that delivering net zero should be a priority for energy providers.

In such an environment, we think there are three grand challenges for customer-facing utilities as they consider how to build legitimacy to participate in a value-add solutions marketplace.

  • Firstly, utilities need to change the public perception they can add (at best) only limited value. This means building trust with consumers in their interactions and doubling down on basic hygiene factors like convenience and seamlessness. It also demands maintenance of high standards for transparency and integrity to re-gain and maintain long-term trust. As products and services sold by utilities becomes more complex, they will need to move from a sales and service model which has largely tried to minimise the amount of customer contact time to one in which the sales process could be long and complicated – think bundles of home energy, vehicle charging, solar panels, batteries and v2g as an example. Furthermore the after-sales customer relationship will need to be enduring and will require frequent interaction – think rental agreements and operations and maintenance contracts
  • Future business models must address needs across the wider range of socio-economic circumstances. As the market moves beyond tech-savvy early adopters and those with spare savings, utilities will need to find a way to communicate the value from new technology and find a way to facilitate its financing (directly or indirectly). Even if the current cost of living crisis subsides, our research as well as that of others have shown far less willingness to commit capital for net-zero purposes than the importance ascribed to addressing the challenge.
  • Part of rebuilding trust must also come from a collaborative effort to build a new regulatory deal. Defining competition around numbers of utilities and customer switching levels isn’t going to work in a market where households may be both buying and selling to utilities across a range of services. Relationships will be longer term, will involve commodity and non-commodity elements and competition may exist not just between utilities but with other firms for whom energy supply is only a small component of their offer.