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November 17, 2015
Business model choices for utilities in an era of disruption
By: Wytse Kaastra

A groundswell of change and disruption is rapidly rising in energy markets. The decisive shift from large centrally driven monolithic supply to distributed and diffuse bi-directional energy systems is gathering pace. Utility businesses that could once rely on predictable market conditions are now facing unprecedented upheaval. In response, they are having to make some key strategic choices about the future markets they want to play in and what they’ll need to develop or acquire in order to compete in the areas they chose.

In a new energy system geared toward renewable energy and decentralized production, with large, central power plants no longer generating the returns they did, utilities need to find new sources of revenue. In the retail market, that means focusing on one of four key areas of opportunity. All are digitally-enabled, but each presents a distinctive path to a more prosperous future.

Utilities may decide to focus on a digital commodity provider play to simplify their operations, creating customer propositions that deliver the lowest prices possible, with the maximum of transparency and as efficiently as possible. EnergieDirect.nl and Budget Energie are two examples of this approach in the Netherlands.

Others are moving into lifestyle services “beyond the meter” to create deeper relationships with the consumer. Starting with energy management services, these utilities are looking to create a platform on which others can also build new applications and services that will drive greater customer loyalty and lock-in. One example is the Toon energy-monitoring device introduced by Eneco in The Netherlands. This provides householders with real-time information about their energy consumption and offers the ability to benchmark consumption against their historical use, as well as against neighbours’ use. Toon also uses gamification to promote lower energy use. Utilities may choose to build their own capabilities in this space, or acquire new businesses with novel and creative approaches. Some new entrants, for example, are creating innovative new routes into the home. One of these is using heat from an unlikely source—cloud computing—to warm people’s homes. By placing servers in the home for free, Nerdalize (a start-up acquired by Eneco), enables the heat generated to provide warmth and, at the same time, save on the normal cooling requirements’ that large, centrally installed server farms typically require.

Helping others to take advantage of decentralized generation is another possible route to new sources of revenue. Companies like Flextricity in the United Kingdom are aggregating different sources of energy generation using demand response to make use of spare capacity across a range of generation sources. Finally, some are using their expertise to enable access to trading platforms that companies can use to take advantage of spot prices and optimise their electricity consumption in line with price changes.

These are just some examples of the business model innovation that leading utilities are pursuing. They are by no means all the possible avenues that are—and will continue to—open as the market undergoes fundamental transformation. But the option to take no action is disappearing. All utilities should act now to ensure their future survival.

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