As mentioned in a previous post, for nearly a century, the value chain for the utilities industry has followed a straightforward trajectory, from supply to distribution. Today, the traditional value chain and underlying business models are under threat. Costs—and the pressures to keep them low—are rising. New technologies are reducing energy demand. New and more agile competitors are in the value chain. And consumer expectations are shifting the burden from delivering electricity to delivering outcomes and engaging experiences.
Together, these trends are changing the industry’s economics—and also its purpose. In a world of new demands and expectations, the “obligation to serve” is being supplanted by a “commitment to optimize.” Business models can no longer focus on transporting and delivering peak energy. They must be reconfigured to optimize energy sources, distribution systems and demand response.
In this new reality, utilities need to rethink the role they play and the scope of services they deliver. We see three business models, or “power plays,” emerging that utilities may adopt moving forward to drive growth.
Low-carbon energy producer. This model calls for energy producers with regulated and deregulated portfolio assets to tap a much more diversified mix of energy sources. To accelerate the transition to a cleaner energy supply market, generators will no longer focus on running a single plant or fleet of power plants. They will run a broader portfolio of assets—from gas and pipeline to wind, solar and battery storage to capture incentives designed to foster migration to lower-carbon supplies. Transitioning to this model will require strong balance sheets, access to financing and deep capabilities in areas such as asset management, continuous process improvement and capital project management.
Distribution platform optimizer. This business model illustrates the industry’s shift to optimization, with greater focus on utilization, optimization, efficiency, and conservation. In this model, the distribution utility serves as an energy clearinghouse and adjusts its operating practices to meet demand most efficiently, with the most appropriate sources. Interconnect standards, intelligent networks, outcome-based performance metrics, new collaborations and digital capabilities will all play a part in bringing this model to life.
Energy solution integrator. Customers want innovative solutions to help them manage outcomes in their homes and businesses. Energy solution integrators will respond to that demand by providing customers with connected services and choices that enable greater control, convenience, and comfort. The key differentiator for these players will be “branded customer experiences” that combine a clear brand promise, a simple experience, and flawless execution. Digital capabilities, multichannel interaction models, customer analytics and real-time decision engines are key to this model.
Utilities will have difficulty meeting growth objectives if they continue to adhere to the current business models. Fortunately, there are opportunities to redefine the value chain with new models that can drive new levels of growth and profitability.