The traditional role of utilities is increasingly under attack, and nowhere is this more evident than in the UK market. The decline in recent years in the share price of many incumbent utilities is evidence of the pressure they are coming under as their business model is chipped away from all angles by a raft of new competitors.
The challenge comes both from large players in other parts of the energy industry pushing their way into what has historically been the utilities’ patch, and a fiercely competitive generation of small players carving out their own niches.
We are in the midst of a shake-out of the sector that will result in new leaders and a re-consolidation of the market around them. Decentralisation and disaggregation of roles mean that the constituent pieces that created a stable and predictable market structure have been thrown up in the air and no-one knows how they will land, or how they will fit back together.
To survive and prosper, incumbent utilities must grapple with a new set of strategic and commercial imperatives. Their success will be determined by the boldness, clarity and focus of their response. The utility as we know it is unlikely to exist in the future, at least not in relatively liberalised and open markets such as the UK. Incumbents cannot hope to hold back the tide of change in the face of so many factors that are beyond their control. Instead, they need to proactively find their niche in the new world.
Challenges to the status quo
The challenges presented by the transition to low-carbon sources and the solutions offered by new technology are fundamentally changing the structure of the energy sector.
Large non-utility players are increasingly encroaching into the utility’s territory. Oil and gas majors are looking to expand into the power sector in order to find a long-term position in a low-carbon system. Their many acquisitions of power-related businesses and growing power trading capabilities illustrate the seriousness of their interest.
In parallel, infrastructure investors are being forced to expand their field of operation, taking on different types of risk to maintain returns in a world of intermittency and zero marginal cost generation. Investments by the likes of InfraRed in storage developer Statera, and Octopus in aggregators Origami and Reactive Technologies as well as their own energy supply business, demonstrate their willingness to move into new parts of the sector where they feel they can add value.
The picture is further complicated by utilities that have not historically had a major presence in the UK deciding to strengthen their position and influence in the market. Vattenfall’s recent acquisition of iSupplyEnergy and Engie’s entry into the UK retail market are the latest escalations of this trend, with Statkraft and DONG also extending their positions and Exelon testing the market.
Of more immediate concern for traditional utilities is the gradual erosion of their market share by start-up suppliers. These new entrants – unencumbered by the historical baggage of the larger players – have been able to present themselves as a fresh-faced alternative. They have successfully nibbled away at niches in the utility customer base with targeted offerings, ranging from those that provide a no-frills, low-cost service such as Extra Energy, Economy Energy and AVRO, through to the tech-savvy, like Octopus Energy and So Energy. Some including Good Energy, Ecotricity and Ovo trumpet their green and ethical credentials, while others have a community focus or offer even more specialist services.
The result is that the UK’s large utilities are finding that their natural role is being squeezed while their legacy structures and systems look less like platforms for growth and more like barriers to change.
Finding your niche
The new generation of start-ups is leveraging technology to develop customer-focused business models that deliver energy more cheaply, or enhance the customer experience. Although the specific offers are numerous, they can largely be grouped into six types [see exhibit 1].
Commercial success relies on providing simplicity and clarity to the customer, finding ways to make their lives better and easier. Critically important to these models is the collection and analysis of data, which enables suppliers to improve their understanding of customers and refine their offers and service execution.
In the face of these challenges, utilities need to consider how they can use their system scope, operational capabilities and existing customer base to find their niche in this changing landscape.
Emerging business models offer a variety of possibilities for how to address the market and, as they all rely on a foundation of data and digital capability, there are natural connections between them. Gaining an understanding of customer energy usage through advising on energy efficiency can open the door to providing energy as a service or flexibility optimisation, while smart devices in the home can create an opt-in direct communications channel and exchange of data that enables efficiency and optimisation services.
The existence of these connections means that it is not necessary, or indeed advisable, to try to enter all these areas simultaneously. Focusing initially on one type of offering provides a better chance of building genuine competitive advantage and customer understanding that can act as a natural platform to move into other areas.
The shadow of a price cap that currently hangs over the industry should not take attention away from the urgency of the strategic change required. Instead, it should act as the impetus for bold steps. The sooner utilities identify where they want to play in the future, the better their chances of surviving and prospering in the changing energy system.