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Looking ahead: future market

and business models


No-one can predict the future but it is important that companies take a clear view
on the ways in which their marketplace is likely to evolve and their company’s
place in the various different possible scenarios.

PwC’s energy transformation programme At its heart, this means addressing key • What are the implications for people
includes joint activities with companies questions such as: and operational change?
to support their future strategies and
map out the risks and opportunities • What will future market design look • What will existing and new competitors
involved. like? be doing?
• What are the implications for my • How best to continue to deliver
company’s purpose, role and shareholder value throughout the
positioning? transformation process?
• What are the business models that
I need to pursue?

Figure 2: The power sector has reached an inflection point where its future direction is much less predictable

Few disruptive elements Less predictable future

Demand
Arab oil
embargo
destruction

Market
reform and ‘Golden age’ of utility reinvention?
liberalisation

Flat and declining grid value?

Broad Emergence
industrialisation of new ‘Death spiral’ from disintermediation,
technologies technology disruption and customer
evolution?

Expansion of Fukushima
nuclear and gas nuclear
generation emergency

1970 1990 2010 2030

The road ahead Gaining momentum from energy transformation 11


Within the next decade we anticipate that In defining future business models,
step-change milestones will be reached companies need to first understand and
Future utility in at least some of the key disruptive challenge their company purpose and
business models technologies – grid parity of solar
distributed generation, lower cost and
positioning in the markets of the future.
We call this ‘blueprinting the future’ and
mass-scale storage solutions, vibrant it consists of several fundamental steps,
Companies need to determine the
and secure micro-grids, attractive starting with defining ‘where to play’ in
future direction of their own markets,
electric vehicle options and ubiquitous terms of business segments, markets,
how these markets are affected by
behind-the-meter devices. In this new products and, services (see figure 4).
technological advancement and what
technology-enabled, customer-engaged Core, adjacent and growth market
this means for their business strategies.
marketplace, companies need to define participation areas are assessed based
While the urgency of their responses
their desired purpose (see figure 3). on attractiveness, capability to compete
may vary by location and value chain
We foresee a distinction between energy and potential for profitable success.
presence, we believe companies can’t
suppliers, integrators, enablers and Next comes assessing ‘how to play’ in
afford to wait as the next decade
optimisers with different points of focus these selected areas, which defines the
is crucial.
along the value chain. go-to-market strategies to be adopted by
participants in pursuing their market
Incumbents and new entrants need to aspirations, e.g. new products, innovative
ask themselves how they intend to unbundled pricing.
position themselves as market
participants, i.e. the ‘role’ they will play We then focus on the most important
in market development, customer dimension of the blueprint, ‘how to win’.
engagement and business execution. This element defines the particular
Companies have distinct options on this tailored approach that is most appropriate
spectrum ranging from ‘passive and for a company to achieve competitive
market-following’ to ‘innovative and market success, e.g. partnering or channel
market-making’. Defining the future role expansion.
of the entity is fundamental to shaping
the business model to deliver on
aspirations.

Figure 3: Future role evolution

Emergent roles
Energy Supplier Integrator Enabler Optimiser

‘Asset-focused’ ‘System-focused’ ‘Value-focused’ ‘Insight-focused’

Primary segment Transmission/ Distribution/


focus Generation Customer
distribution customer
• ‘Have to do’ if asset • ‘Will do’ regardless • ‘Should’ migrate into • ‘Could’ evolve into as
heavy or short in of new area depending on role new business models
supply participation mature

Key focus areas • Ensuring assets are • Facilitating grid • Enhancing the • Enabling customers
optimised in the interconnection with value of the grid to better leverage
market to match other transmission to all stakeholders behind-the-meter
price signals developers technology
• Addressing how to
• Achieving the right • Extending the leverage technology • Broader engagement
balance of asset-based deployment of to enhance system with the customer by
and notional technologies or performance and providing value
transactions within equipment into customer engagement through advanced
risk parameters the distribution data analytics
network

16 The road ahead Gaining momentum from energy transformation


To fully evaluate the above choices, Figure 4: ‘Blueprinting the future’
companies need to examine their current
core capabilities against the type and
level necessary to effectively compete and Determine our ‘purpose’
prosper in a more decentralised and and desired outcomes,
‘Where do we play’?
disaggregated marketplace. In particular, e.g. ‘end-to-end’ participation
incumbents and new entrants need to take or selected areas
stock of which capabilities are distinctive
and differentiable, e.g. asset management
or regulatory prowess, and which may Establish the ‘positioning’ How competitors
need to be developed or strengthened, we wish to achieve, choose to
‘How do we play’?
e.g. innovation or commerciality. e.g. ‘full offering portfolio or play impacts
highest value product these choices
The energy value chain of the future will
be more interconnected than ever before.
This value chain forms an integrated Define the ‘role’ we
ecosystem of unique elements that are would like to perform,
highly interrelated, notwithstanding the ‘How do we win’?
e.g. sole player or ‘partner
specific focus of these individual elements of partners’
(see figure 5). Incumbents will need to
focus on extending beyond independent
views of each value chain element into
a more integrated view of how these Future strategy
elements can interact with each other
in the future, e.g. how the benefits of
increased knowledge about system
performance can bridge the gap to
enhance the customer experience.
Non-traditional entrants will need to
determine how they interact between
incumbents and customers in a manner
that does not ‘island’ assets or ‘diminish’
customer relationships. Just as we are
Figure 5: A networked model
now entering the era of the ‘connected
customer’, we are also seeing the broader
emergence of the integrated grid. Actively manage
the grid

Distribution
Link supply Engage with
to load Transmission Retail customers

Focus on Bulk Become an active


Customer
baseload generation participant
New
market
paradigm
Customers become Distributed Offer new products
New entrants
producers generation and services

Customers become Demand Customers go


Micro-grids
active consumers response off grid

Storage

Storage used
to manage grid

The road ahead Gaining momentum from energy transformation 17


The range of future Some market participants – incumbents or In this traditional model, both tangible
new entrants – may be prevented from assets and franchise customers were
business models playing in all segments, while others may considered important to preserve the
seek to specialise in selected segments or benefits of physical integration, economies
Much comment has been directed at the integrate into broader market areas. of scale and access simplicity. As policies
business model of the future. We do not Whatever the case, the adopted business encouraging competition emerge, to take
believe there will be a single winning model(s) need(s) to be tailored to enable advantage of market options or regulatory
business model but rather that there will companies to succeed in three key ways – mandates, specific segments of the value
be a range of business models that will strategically, financially and competitively. chain became available for specialisation
deliver success in the new market and for new entry. Now, unbundling
environments. Just as we see a number opportunities are starting to extend deeper
of transformational market models, we Traditional core model into the value chain and enable more
see a range of business models that build specialist participation.
on existing models or fill new service or Alternative business models of the future
product needs. We outline eight business may be very different from the traditional
models which we believe will emerge model that dominated power and gas
individually or in combination (see figure delivery for decades. In the past, operating
6). These individual business models cover an integrated utility from generation
the full power sector value chain; each has through to customer supply was well
individual characteristics and several are understood because the utility controlled
based on integration and/or collaboration the entire value chain. However, this
with non-traditional partners. model has been supplanted in many
countries through market restructuring
and may be rendered further obsolete
through the convergence of distributed
technology and customer engagement.

Figure 6: Business model choices

Value chain Generation T&D Retail

More integrated Less integrated

Value-added
enabler
Product
innovator
Network
Pure play manager
merchant
Traditional ‘Virtual utility’
core business
‘Partner of
Gentailer partners’
Grid developer

Asset-based Service-based

18 The road ahead Gaining momentum from energy transformation


In the traditional model, making We have identified eight alternative
money was easy to understand – invest business models, which we describe below
and earn a return on invested capital. with respect to their scope, rationale, basis
In emerging business models, although for competition, and source of earnings
we consider that this feature may still (see figure 7). This should help utilities
apply in selected segments, we believe think through which business model
a greater emphasis will be placed on options might be right for them and the
obtaining higher margin from key decisions required to enable them to
prices/revenues rather than cost develop their new market position in
reduction to get higher earnings and sufficient time.
profit growth.

Depending on how a traditional utility


thinks the electricity industry may evolve
in its country/region and what market
models may emerge, it needs to evaluate
where to play across the value chain.
Should a traditional utility leverage
multiple business models? And if so,
which ones and how should they
transform their business to be successful? “Beyond the traditional model, we foresee
eight different future business models
that could emerge either individually
or in combination.”

Figure 7: Business model elements

Business models Business focus Business alignment Profitability basis

Traditional core business Assets – customers Generation – T&D – retail ROIC

Gentailer Assets – customers Generation – retail Competitive margin

Pure play merchant Assets Generation Competitive margin

Grid developer Assets Transmission Regulated ROIC

Network manager Assets Transmission – distribution Regulated ROIC

Product innovator Customers Retail Competitive margin

‘Partner of partners’ Customers Retail Competitive margin

Value-added enabler Customers Retail Competitive margin

‘Virtual’ utility Customers Distribution – retail Competitive margin

The road ahead Gaining momentum from energy transformation 19


Description This model has also developed in areas
A gentailer utility operates at both ends where traditional IPPs have moved into
of the value chain by owning generation retail energy sales as energy markets have
assets and selling retail energy to deregulated. NRG Energy and NextEra
customers in a competitive market. Energy are two examples of utilities
Gentailers pay a charge to transmission operating in this model in the United
and distribution system operators to States that developed or acquired retail
deliver this power and also buy and sell capabilities to complement their
1 energy on the futures and spot markets
to manage any forecast or real-time
generation positions.

Gentailer model differences between load and supply. Capabilities


This business model is a by-product of the On the generation side, a successful
Relevance for transformative design of the local market and not relevant gentailer has strong capabilities in demand
market scenarios to all markets. Advantages of the gentailer and market insights, project development,
model are that it provides a natural hedge project finance and asset management.
Green command and control Low for the business, i.e. a ‘sink’ for capacity When planning to add new capacity, a
when the generator is ‘long’ and a ‘source’ gentailer applies its strong market
Regional supergrid Medium for the retail business when it is ‘short’. knowledge to determine cost-competitive
A key risk to the gentailer model is that generation technology choices based on
Ultra distributed generation High retail consumers may gradually switch to fuel markets, operating constraints and
competitors or invest in behind-the-meter consumer preferences. On the retail side,
Local energy systems Low distributed energy resources, which could a successful gentailer has strong
potentially strand part of the gentailer’s capabilities in energy trading and hedging,
generation assets over time. origination and product development,
pricing, customer acquisition and customer
Market/model examples management. Strengths in these areas
The gentailer model is typically applicable enable a gentailer to cost-effectively
in markets where the generation and acquire and maintain customers while
retail portions of the value chain are delivering higher margin services.
competitive and the transmission and
distribution companies operate as a What utilities should do now
regulated monopoly. Australia, the UK Monitor and understand the way different
and New Zealand are countries that have customer segments use smart technology
successfully deployed this model. In New and assess how to harness these
Zealand, the five major generators are preferences into mobile and/or tariff
also the top five retailers. This type of solutions. Identify potential partners to
market development often has regulatory help develop behind-the-meter distributed
implications which are likely to influence energy resource business plans. Review
future development of this business make/buy decisions to support their asset
model. position and investment requirements
under alternative market scenarios to
determine what generation products to
offer in the future. Invest in understanding
customer segmentation and what that
means for switching rates and retaining
the most profitable customers.

Maximising competitive position against potential competitive threats

Gentailer actions Competitor threats addressed Future gentailer profitability drivers

• Develop a behind-the-meter • High penetration of customer • Offer, bundle, price, and cost-
distributed energy resource or third-party owned effectively deliver a wide range of
business, organically or through behind-the-meter distributed energy products (low cost, high
networks partnerships or energy resources renewables, local premise-based
acquisitions generation etc.) with selected
• Regulatory change enabling value-enhancing partners
• Increase customer engagement transmission and distribution
via new energy management operators to develop, own, and • Energy trading approaches to hedge
solution offerings and intelligent operate distributed energy business risk
tools resources
• Cost-effectively plan, develop,
• Develop alternative pricing • New entrants offering finance, construct, and operate the
packages and approaches that products/services that increase right asset mix
provide greater optionality or customer engagement in
risk/reward tariffs to customers managing their energy needs
through mobile tools or
social media

20 The road ahead Gaining momentum from energy transformation


Description Capabilities
A pure play merchant utility owns and Similar to a gentailer, a successful
operates generation assets and sells power pure play merchant utility has strong
into competitive wholesale markets at capabilities in demand and market
market clearing prices, or through insights, project development, project
negotiated bilateral contracts with other finance and asset management.
generators or large industrial consumers. Additionally, a successful player has
This entity occupies a very narrow portion strong market origination, trading,
2 of the value chain and competes within the
riskiest part of the business when markets
hedging and risk management
capabilities, including the ability to
Pure play merchant are volatile and positions are uncovered. execute a variety of complicated
model Assets are built and financed by investors purchase and sales agreements
on a speculative basis, pre-contracted in (e.g. using derivatives) that effectively
part or in full or acquired from another lock in the price of fuel and electricity
Relevance for transformative
generator. Pure play merchants have to eliminate as much market risk as
market scenarios
traditionally developed baseload or possible. As more low-carbon energy
peaking plants with mature generation enters a market, mitigating market risk
Green command and control Medium
technologies from gas, which also enables becomes more challenging because
participation in ancillary grid services market prices become more volatile,
Regional supergrid Medium
markets. However, wind merchant plants so a merchant’s strategy needs to be
have increased in popularity over the last flexible and adaptive.
Ultra distributed generation Medium
decade and solar merchant plants are
starting to emerge. What utilities should do now
Local energy systems Low
Implement world-class operational
Market/model examples procedures to minimise costs of
Merchant players prefer liquid markets operations, manage price and volume
with rising and/or high peak wholesale risk exposure. Develop robust investment
energy prices and high price volatility. plans to create a balanced generation
Examples include deregulated regions like portfolio, either across technologies or
Texas, California and New England in the markets. Investigate alternative products
US and countries in emerging markets like to offer from the generation portfolio to
Chile. Areas with low natural gas and coal mitigate against market change or merit
prices are typically not well suited for order structure.
merchant players because these low-cost
inputs often depress wholesale energy
prices and do not provide significant
‘spread’ for merchants to leverage.

Maximising competitive position against potential competitive threats

Merchant actions Competitor threats addressed Future merchant profitability drivers

• Assess feasibility of expanding • High penetration of behind-the- • Identification of profitable regions


capacity of traditional fossil fuel meter distributed energy resources for future merchant potential and
plants with solar or energy and solutions like demand response key early investments (e.g. land)
storage to expand ability to play that reduce peak demand
using same grid interconnection • Ability to cost-effectively plan,
• Development of disruptive grid-level develop, finance, construct, and
• Explore options for developing solutions such as energy storage operate the right asset mix
distribution level or behind-the- that compete with merchant
meter projects (e.g. solar, charging generators • Strong analytics and energy trading
infrastructure). capabilities to hedge business risk
• Development of ultra-efficient
• Evaluate investment to enhance generation and excellence in
plant operational capabilities to operations
capture value of flexible thermal
capacity

The road ahead Gaining momentum from energy transformation 21


Grid developers must constantly assess In wholesale markets, they have very
the ability of their systems to adequately strong capabilities for managing electricity
meet current and future needs and plan demand and supply in real time and in
cost-effective system upgrades to meet ensuring reliability standards are fulfilled.
those needs, usually governed by Grid developers are also very good at
regulation which may incorporate engaging with key stakeholders, including
incentive mechanisms. Where these landowners, communities, local and state
transmission developers construct or officials, customers and equipment
3 maintain assets with an organised
regional transmission operator present,
suppliers to facilitate siting and permitting.
Newer grid developers typically have
Grid developer model close coordination with that operator strong relationships with investors and
is necessary to achieve grid coordination joint venture partners to enable access to
Relevance for transformative and support the regional market model. low-cost capital and to leverage creative
market scenarios financing and ownership arrangements.
Market/model examples As remote generation capacity increases
Green command and control High Grid developers are typically established and a larger proportion of connections
by regulation in areas with existing are made at distribution network levels,
Regional supergrid High infrastructure. Examples of this model the number of interfaces a grid developer
include transmission system operators needs to manage will increase and the
Ultra distributed generation Low (TSOs) in Europe and independent system obligations and responsibilities will
operators (ISOs) in the US. Additionally, become more complex to oversee.
Local energy systems Low new grid developers may be formed in
areas that lack sufficient transmission What utilities should do now
infrastructure between generation and Identify new locations (within their own
load centres. market or in new markets) for large-scale
Description renewable generation, flexible thermal
This utility acquires, develops/constructs, For example, a grid developer may be generation and associated transmission
owns and maintains transmission assets created to build and operate transmission build. Work with alternative owner classes,
that connect generators to distribution lines between remote generation assets e.g. financial sponsors, to shape market
system operators. In most cases, it operates like a hydropower facility or wind farm bidding processes where competitive
as a natural monopoly, although there and a distant urban area, or to provide transmission protocols will exist in the
may be multiple grid developers within a new transmission infrastructure where future. Review existing contracting and
single market. Some grid developers seek there are transmission constraints. procurement procedures to assess whether
to build new transmission lines to connect Examples of the newer grid developers in they are maximising value for money,
remote renewable generation to load the US include Electric Transmission Texas risk allocation and whether they reflect
centres, while others will also maintain (ETT) and Clean Line Energy Partners. regulatory settlements. Streamline grid
lines and infrastructure that have been in connection processes to improve resource
operation for years. If a grid developer Capabilities productivity and lower operating costs.
operates in a wholesale electricity market, A successful grid developer has a very Consider whether alliances with DSOs
it must manage the stability of the power strong operating track record and excellent may provide economics of scale and
system in real time and coordinate capabilities in designing, operating and increased scope for new investment.
electricity supply and demand to avoid maintaining high-voltage transmission
imbalances and supply interruptions. lines and supporting infrastructure.

Maximising competitive position against potential competitive threats

Grid developer actions Competitor threats addressed Future grid developer


profitability drivers

• Develop close relationships with • High penetration of distributed • Access to low-cost capital
distribution system operators and energy resources in urban areas
regulators to support large-scale combined with strong distribution • Partnering with generation
generation growth plans system operators and micro-grids, developers to expand project access
reducing the need for transmission • Robust operations to cost effectively
• Convince investment partners support
to invest in large scale, low-cost manage transmission and
renewable project developments • Other grid developers obtaining infrastructure upgrades
that require new transmission first-mover advantages in new • Identification of profitable regions
to urban areas markets for future expansion
• Implement world-class • Regulatory imposed incentives • Innovative contracting with the
operational procedures to where risks cannot be managed by supply chain to manage risks
improve cost-effectiveness and the grid developer alone
develop new forms of contracts
with generators, load managers
and the supply chain that
incentivise strong performance
and cost management

22 The road ahead Gaining momentum from energy transformation


Description Capabilities
A network manager operates transmission Similar to grid developers, network
and distribution assets and provides access managers have strong capabilities in
to their networks to generators and retail designing, constructing, operating and
service providers. Similar to some maintaining transmission and distribution
incumbent grid developers, they typically lines and supporting infrastructure.
operate as natural monopolies. Network They also have strong capabilities for
managers also manage power stability in managing electricity demand and supply
4 the network in real time and coordinate
electricity supply and demand to avoid
in real time and integrating power from
different central and distributed
Network manager imbalances and supply interruptions. generation resources. These network
model A new role for network managers is managers also have deep skills in system
emerging in the area of an ISO-like operations data analytics that can
entity that will assume responsibilities enable insight into asset and network
Relevance for transformative
as a ‘distribution system operator’ and performance and optimisation. These
market scenarios
have specific, expanded responsibilities capabilities are provided through the
for network integration of incumbent deployment of ‘smart grid technologies’
Green command and control Low
systems and distributed energy resources. that utilise multiple sensors to monitor
As distributed generation increases, the and collect system performance data to
Regional supergrid Medium
opportunity for an entity to manage all enable enhanced analysis of power
interfaces between local energy systems flows, equipment failure risks and asset
Ultra distributed generation High
and traditional distribution grids deterioration.
increases.
Local energy systems Medium
What utilities should do now
Market/model examples Invest in the evolution of the network
The network manager models typically and the deployment of ‘smart grid
exist in regions where the generation and technologies’ throughout the system.
retail portions of the value chain are Move toward the next stage of ‘big data’
competitive and the transmission and management and the analytical evaluation
distribution companies operate as a of power quality, equipment failure, circuit
regulated monopoly. Australia, the UK risks and investment priorities. Anticipate
and New Zealand are countries that the deployment of distributed energy
have successfully deployed this model, resources, i.e. storage, micro-grids,
though with the expansion of distributed distributed generation, electric vehicles,
generation and micro-grids, we expect etc., and prepare for integration into the
this role to expand and become more network and management of all deployed
relevant in many global regions. resource impacts. In some markets,
instigate discussions with the regulator
to develop and implement appropriate
mechanisms to facilitate the new services.
Implement world-class operational
procedures to manage costs.

Maximising competitive position against potential competitive threats

Network manager actions Competitor threats addressed Future network manager


profitability drivers

• Work with regulators to approve • High penetration of behind-the • Access to low-cost capital
investments focused on -meter distributed energy resources
advancing system capabilities and micro-grids, reducing the need • Investment recovery mechanisms
(smart grid) for a network manager to deliver • Data analytics systems
power
• Harden the infrastructure through • Predictive failure software
targeted investment • Regulatory mandates that create an
independent entity that assumes • Distributed energy resource
• Advance reliability standards traditional DSO roles integration
and awareness
• Develop partnerships with
distributed generation developers
to install, operate and manage
network connections

The road ahead Gaining momentum from energy transformation 23


Description Capabilities
A product innovator is a company that A successful product innovator will be
offers electricity as well as behind-the- highly effective at customer acquisition
meter products to customers. This model and retention as well as cross-selling
focuses on expanding the role of the products. Keeping operating costs
energy retailer and changing the level of competitive will be essential to preserving
customer expectations. We expect behind- an acceptable margin. To this end, the
the-meter products to evolve into a mix product innovator needs competitive
5 of retail supply packages, e.g. the provision
of ‘green energy’ options, the development
contracts with energy suppliers and other
operational efficiencies, and contracts
Product innovator of service and pricing ‘packages’ that with technical asset providers for customer
model offer more flexibility to customers and support and management of faults. A key
the provision of behind-the-meter smart question is whether the product innovator
devices, e.g. power monitors, smart can succeed in offering a compelling set
Relevance for transformative
thermostats. The products offered of products at the right price. Companies
market scenarios
will empower the connected customer to participating in this space will need
manage its energy control and provide a exceptional skills in customer knowledge,
Green command and control Low
link to the network to advance insights product development, channel
into consumption patterns and impacts on management, pricing and product
Regional supergrid Low
network stability. We anticipate that many bundling. Product innovators will also
product innovators will seek to be active need robust customer data analytics and
Ultra distributed generation High
players in electric vehicle charging, the buying propensity insights to shape the
provision of premises-based infrastructure right offerings to the market.
Local energy systems High
and the management of roof-top solar
and fuel cell markets. What utilities should do now
Focus on knowing their customers’ needs,
Market/model examples their customers’ willingness to pay for
The product innovator model will be most solutions, and the value of their own
relevant in markets where the regulatory brand. Assess whether a new brand would
framework allows choice and the level of be more successful, perhaps through
customer acceptance of new technologies partnering with a product provider or
and products is high. A market with a creating a separate business unit (or
high penetration of distributed energy will corporate structure). Market research
be attractive for a product innovator who will provide views of what product
can help provide products that enable or expansions have been successful or failed
complement distributed energy. Examples in different markets in the past, and the
of product innovators that have moved potential products that could be offered in
beyond pure energy supply include Direct smart homes or through mobile devices.
Energy and TXU Energy in the US and We expect that companies will enter into
Powershop in New Zealand. discussions with providers from other
markets, e.g. Google Nest, to discuss how
to partner around customer product
development and provisioning, rather
than default to automatic competition.

Maximising competitive position against potential competitive threats

Product innovator actions Competitor threats addressed Future product innovator


profitability drivers

• Develop a compelling product • Multiple new entrants offering a • Keep customer acquisition costs low
suite including everything from range of new energy products to and operating costs overall low
the commodity to the home customers (e.g. attractive energy supply contracts
device or own energy supply)
• Incumbents and new entrants
• Develop opportunities for innovating on specific customer • Diversify the product portfolio
superior products that integrate offers beyond commodity products to
with other needs, such as home preserve margin
or building security or • Regulatory change enabling retail
automation energy sales • Establish partnerships to enhance
product range
• Invest in data analytics tools to • Bundling of offerings to enhance
develop excellence in customer product attractiveness • Focus on retention of profitable
acquisition and retention and high-volume customers and
• New tariffs offering risk/reward minimise switching
• Enhance brand reputation to opportunities for customers
support product expansion

24 The road ahead Gaining momentum from energy transformation


Description Capabilities
Incumbent utilities will need to assess A successful ‘partner of partners’ will be
whether they have the requisite experience highly effective not only at customer
and portfolio breadth to address future acquisition, but also provide superb service
customer needs for products and services. delivery. A distinguishing characteristic of
A ‘partner of partners’ utility is a company these companies will be their ability to
that offers not only standard power and innovate in a manner that customers
gas products and associated services, but would not expect from their traditional
6 also a range of other energy-related
services, from life-cycle EV battery change-
power retailer. These companies will also
possess deep customer insights and a
‘Partner of partners’ out, to home-related convenience services commitment to satisfy customers across
model like new service set-up coordination, to all touchpoints. A ‘partner of partners’
management of net metering-driven grid may find that many customers want a
sell-back. These services can be provided simple, low upfront cost approach,
Relevance for transformative
solely by the utility but are more likely to enabling these utilities to not only install
market scenarios
gain customer acceptance when they but also continue to own certain assets,
can be bundled through an expanded for example installing and then servicing
Green command and control Low
relationship with high quality branded a solar system, or installing and
providers, like Vivint, OPower, Honeywell, continuing to manage energy
Regional supergrid Low
GE, Tesla or Solar City. management equipment. One challenge
Ultra distributed generation High will be for companies to determine the
Market/model examples most appropriate brand with which to
The ‘partner of partners’ model is most go to market, overcoming customers’
Local energy systems High
relevant in markets where there is a high perceptions of the constraints on services
proliferation of energy technology and that can be successfully offered by a
choice and customers are seeking ways to utility company.
simplify their lifestyle while lowering
upfront costs. A market with a high What utilities should do now
penetration of distributed energy is Evaluate brand strength to understand
attractive for a ‘partner of partners’ who constraints and the need for innovative
can help provide simple and innovative partnerships. Invest in data analytics
service-based solutions. One example of a products to understand customer needs
‘partner of partners’ model is NRG Energy and demand elasticities. Identify potential
in the US, with its eVgo and Sunora partners with complementary technology
offerings. Few utilities have embraced or customer management products and
this model as it involves non-traditional services and engage in introductory
partnership arrangements. conversations. Understand the impact of
new products and services on customer
switching, margins and long-term
growth objectives.

Maximising competitive position against potential competitive threats

‘Partner of partners’ actions Competitor threats addressed Future ‘partner of partners’


profitability drivers

• Develop a compelling suite of • Increasing choice and complexity in • Keep cost of service low,
services and identify the right the market in terms of technologies e.g. cross-selling multiple products
solution provider partners and providers to a single customer

• Create a range of relationships • Multiple new entrants offering • Keep customer satisfaction high by
with solution partners range of new energy and associated establishing clear customer service
services to customers standards, pinpointing and quickly
• Expand the range of channels to addressing customer pain points,
market that can be leveraged • Incumbents and new entrants and offering a wide range of
innovating on service delivery innovative yet convenient services
• Develop bundles of offerings models
targeted at the connected
customer • Regulatory change enabling retail
energy sales
• Enhance brand value

The road ahead Gaining momentum from energy transformation 25


Description Others, such as Google Nest, are playing
A value-added enabler leverages its in a similar vein with the objective of
fundamental capacities for information providing customers a ‘set and forget’
management to expand the role that a experience, leveraging their massive data
utility can provide on behalf of its centres to provide real-time and predictive
customers. While many customers seek to energy consumption data. This space is
gain more control over energy consumption relatively wide open to utilities,
or more choice with respect to energy particularly if they understand how to
7 supply, these customers do not share a
uniform desire to always be ‘hands-on’ in
leverage system and customer data to
provide premise and action-based insights
Value-added enabler making decisions regarding their energy and solutions. Utilities may also benefit
model use patterns. Many customers are ‘inert’, from constraints on third party data usage
i.e. they do not easily adapt to the under data privacy laws, enabling them to
existence of choice or accept the role of offer solutions or to become a partner of
Relevance for transformative
‘high touch’ in energy management. This is choice for solution providers.
market scenarios
where an incumbent can play a new and
valuable role that is difficult for other Capabilities
Green command and control Low
providers to fulfil. Utilities collect and Managing large amounts of data in a
manage massive amounts of data from manner where insights can be rapidly
Regional supergrid Medium
two primary sources – system operations gleaned to guide customer energy
and customer load. These data provide decisions and behaviours will be
Ultra distributed generation High
insights into energy usage patterns that fundamental to success in this business
are valuable to the customer and from model. In addition, skills in customer
Local energy systems High
sources that a customer cannot access. education and decision guidance will be
Thus, the utility has the ability to become key to delivery of value to the customer.
a value-added energy manager for Beyond these analytical and interface
customers given the ‘customer knowledge’ capabilities, utilities will need to provide
it possesses and the customers’ lack of a customer experience where value is
desire to perform these same activities readily demonstrated so that customers
themselves. feel comfortable sourcing their energy
decision-making to a utility rather than
Market/model examples a non-traditional entrant. Utilities will
Most utilities have performed value-added need to demonstrate to customers that
roles that are knowledge-based in the past, they can keep personal data secure and
specifically around energy efficiency risks of data leakage are remote.
programmes or energy management in
industrial processes. The level of What utilities should do now
knowledge-based energy management Utilities looking to become a value-added
anticipated in this model, however, enabler need to harness the data that
dramatically extends the scope and scale they already possess and determine how
of these activities into the mass market to extract value from this information.
to a much deeper level. These companies will need to invest in
additional information technology capacity
Manufacturers such as Honeywell and to support, leverage and protect this data.
Mitsubishi are focused on addressing Customer acceptance of the utility in a
certain control elements, like power non-traditional role will require both a
monitors and smart thermostats. campaign to expand customer awareness
and appropriate dialogue with regulators
to establish the parameters of the
value-added services to be provided.
Maximising competitive position against potential competitive threats

Value-added enabler actions Competitor threats addressed Future value-added enabler


profitability drivers

• Build-out ‘big data’ platforms • Low-priced/free behind-the-meter • Robust data analytics systems
devices
• Educate customers on energy • Pricing mechanisms for performance
management options • Regulatory change preventing
utilisation of customer data • Decision tools for customer adoption
• Design innovative methods
for sharing customer benefit • Leverage of third-party brand • High quality data security
for market entry management systems and protocols
• Deploy data synthesis methods
and tools

• Develop data security protocols


• Enter into partnerships with
data managers to improve
competitive position

26 The road ahead Gaining momentum from energy transformation


Description Capabilities
A virtual utility can aggregate the A successful virtual utility will be highly
generation from various distributed efficient at energy sourcing, managing
systems and act as the intermediary or interfacing with local distribution
between and with energy markets. networks, real-time balancing of demand
A virtual utility can also act as an and supply, and providing intelligent
integrator of non-traditional services tools for managing customer engagement.
provided to customers by third parties, Sustainability and increased reliability
8 e.g. distributed energy resources outside
its traditional service territory. In this
(back-up power) may be offered as
additional products, beyond the traditional
Virtual utility model model, the utility does not own assets reliable and affordable grid power.
but merely provides integration services To develop the additional capabilities,
Relevance for transformative on behalf of the supplier, provider or the virtual utility will need to build
market scenarios performer. A primary focus of companies partnerships with developers, system
in this space is to optimise the sourcing of integrators, energy service/energy savings
Green command and control Low energy, with respect to costs, sustainability companies (ESCOs), software/technology
and customer needs, and to manage the vendors and online energy marketplaces.
Regional supergrid Low distribution system. The virtual utility can
also undertake demand-side management What utilities should do now
Ultra distributed generation High functions for commercial and industrial Companies wishing to become virtual
loads and smart residential appliances, utilities should develop an aggregation
Local energy systems High to help balance demand and supply, either service offering to small, distributed
in the wholesale market or contracting generators, merchant generators and load
with the TSO or DSOs. reducers. Build capabilities to monitor
development of innovative technologies
Market/model examples and potential partners to leverage to
Markets with high penetration of expand solution offerings for the
generation connected at distribution level wholesale market and for balancing
(Germany, US states of Hawaii and services. Additionally, they should
California) or a regulatory setting that determine pricing structures that provide
offers a high degree of freedom for appropriate incentives for the energy
customer choice (US states of New York or providers and a sufficient margin for their
Texas, the UK and Australia) are ideal for own operations. In some markets, utilities
the virtual utility model. Island systems should instigate discussions with the
and remote systems are also ideal markets regulator to develop and implement
for this business model. Utilities may appropriate mechanisms to facilitate the
combine distributed generation with their new services.
own generation, providing a route to
market for independent generators and
expanding their own asset portfolios.

Maximising competitive position against potential competitive threats

Virtual utility actions Competitor threats addressed Future virtual utility profitability
drivers

• Participate in distributed • High penetration of non-utility- • Offer structure and pricing of a wide
generation and storage projects owned distributed generation range of energy products (low cost,
and storage systems high renewables, local generation etc.)
• Develop partnerships with
technology-based providers • Regulatory change enabling • Ability to trade energy (sourcing and
retail energy sales consumption)
• Increase customer engagement
via intelligent tools • New entrants offering • Partnering with key players across
products/services that increase the energy value chain
• Define future roles for customer engagement in
incumbents in concert with managing their energy needs
regulators

The road ahead Gaining momentum from energy transformation 27


Where do we go Regardless of the business model chosen, Similarly, utilities are a natural
utilities need to understand how they can collaborator with regulators in the
from here? leverage their current business position shaping of responsive policies to
and the external market to enhance their accomplish public interest objectives,
Utilities may choose from a range of paths future competitive positioning. While not including how to enable customers to
to move forward from where they are always obvious, companies have several achieve greater control and choice.
today. But frankly, business model clarity levers that can be used to advance their Utilities are also attractive partners to
may be difficult to achieve as a lot of readiness for the future and position new entrants that wish to offer high-value
uncertainty exists on how future markets themselves for success (see figure 8). products but do not wish to support them
may develop and mature. And multiple in the manner customers are used
models may need to be deployed to meet Incumbent companies may not be as to from their utility.
diverse market needs or specific regulatory nimble or focused as some new entrants.
structures in various countries, or even But they have a number of potential Utilities will need to determine ‘where’ it
jurisdictions. Companies will need to be advantages with regard to data, policy, makes sense for them to participate in
agile in designing their future business relationships, pricing, partnering and the future energy market and ‘how’ they
model and recognise that an imperfect regulatory decisions. These can help can best position themselves for success.
view of the future will likely lead to an leverage the successful development of No single business model will be the
unfinished product that evolves through their future business models. At the same panacea for utilities. Rather, they will
time. time, it’s important for companies to have to be adaptive to the development
recognise that future markets are likely of the marketplace and the evolution of
to create networks of participants in the connected customer. Just as utilities
new partnerships and collaborations are unsure of market direction, customers
that become a norm of the go-to-market are equally uncertain of what really
models. matters to them in energy decision-
making. These gaps between foresight
Companies can take advantage of these and expectations provide the ‘open seas’
levers to strengthen their starting point where utilities can forge new business
for defining their future roles and for models that fundamentally reshape the
subsequent market participation. historical relationship with customers and
For example, utilities already hold large position incumbents for a broader and
quantities of data that have not been more value-creating future.
effectively utilised, giving them the
opportunity to add value through better
utilisation and communication of this
data.

Figure 8: Future business model levers

Data Pricing
Data Ownership of grid and customer Shifts in traditional cost-
information can provide a recognition models can provide
knowledge platform that greater certainty to cost recovery
Regulatory Policy enhances the value proposition. and additional flexibility to rate
design.
Policy
Mandates and legislation can Partnering
Key levers shape the playing field and Enhanced creative and delivery
enhance the incumbent’s ability capabilities can extend the
to compete. incumbent’s existing platforms
Partnering Relationships and market reach.
Relationships
The natural interfaces of the Regulatory
Pricing incumbent with customers, Decisions can provide both
suppliers, stakeholders and offensive (exploit) and defensive
other providers create a (preserve) mechanisms to
natural platform. enhance market competitiveness.

28 The road ahead Gaining momentum from energy transformation

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