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How new business models are crucial to boosting energy businesses

New Model Army: how new business models are crucial to boosting energy businesses

Ahead of The Business Booster, the leading innovation event in sustainable energy, Elena Bou, InnoEnergy Innovation Director, explains how, when it comes to the next wave of energy innovation, the brightest minds are looking to new business models to help them reap the richest rewards.

In its 2015 whitepaper, Designing the New Utility Business Models, IDC Energy Insights found that new business models topped the list of priorities for European utilities executives – beating such omnipresent concerns as reducing costs or unlocking operational efficiencies. 

This might surprise some. The amount of attention given to new technology in recent years could lead one to think that technological development would have found its way to the top of executives’ minds. But it’s the army of pioneering new business models that will make the biggest difference to the bottom line. After all, these are the innovations that relate most directly to challenges around changing energy usage and that take new technology from development to progress.

Why innovate?

What makes a business model new? In short, it’s a new way of thinking about what a business does, how it does it, and how revenues are created.

Typically, innovation has three main drivers. The first is when it is embedded in a firm’s DNA – although this is rather rare in the relatively conservative energy industry. After all, existing models have enabled energy businesses to build huge infrastructure projects while continuing to produce a profit. As they say, “if it ain’t broke, don’t fix it.”

Second, some companies innovate to grow. Francesco Starace, CEO of multinational utilities brand Enel thinks his firm is a prime example of this approach. The utility works with a number of start-ups to bring innovation, without feeling that these new entrants pose a particular risk to its core business. The company proactively looks for opportunities to cooperate with the aim of bringing new value to customers, value which can drive its next wave of growth.

But by far the most common reason for innovation is crisis. Firms can be forced to change to keep pace with market shifts. Outside of energy, Nintendo is a classic example. The iconic videogame firm began life in the nineteenth century as a manufacturer of playing cards but when the public lost interest and sales began to slump, it wasted no time in seeking out a new market – ensuring its survival and making billions in the process.

Why now? 

Perhaps paradoxically, technology has in many ways increased the operational pressure on traditional energy businesses, turning previously safe assumptions on their head. 

Disruptive technologies such as distributed generation, low-cost energy storage at scale, electric vehicles (EVs) and smart metering devices are changing how we think about energy. No longer is it a matter of producing as much as possible to stay ahead of demand, it’s now important to consider how and when we use energy to make the most of peaks in generation and fill in the gaps when supplies are low.

This has led to two crucial changes in the structure of the sector. For one, the future of the energy industry is one where intelligent buildings connect to EVs and small-scale generation links to the grid. 

Up until now, people have been passive consumers of energy, flipping a switch to turn the lights on without a second thought. But with the shift towards demand response, consumers will start to take a more active role, not just consuming energy, but managing and even producing it too.  

Such wholesale change means energy firms can’t afford to rest on their laurels. They need to remain at the forefront of new technologies, connecting the grid and keeping consumers contented in the process. Because if they don’t, someone else will. That’s why two-thirds of European utility executives surveyed in 2015 cited non-utility companies as the most serious threats to their business models.

Of course, there’s no ‘one size fits all’ model of the future. Instead, we’ll see what I like to call the New Model Army – a whole battalion of business models, split according to which of the above market changes they’re responding to. These tend to fall into one of two groups: customer-centric models and models that address interconnectivity.

Power to the people

Customer-centric models fall into three broad categories. The first of these is all about empowering customers. North American firm Direct Energy is one of a new wave of companies giving customers more flexibility. 

The firm provides a range of plans, from fixed-rate contracts to bills tied to the gas markets. And that’s before you consider its partnership with Nest to offer ‘behind the meter’ products and services – helping customers to build a smart home and control just how much energy they use and when they use it.

Of course, not all consumers want the hassle of taking control. So, a second option for utilities is to offer value-added energy management. Utilities know the consumer like no other player in the value chain. This knowledge is priceless since it enables them to continue selling energy and then to play a proactive role managing energy use on customers’ behalf. 

The third option for customer-centric suppliers is to offer a bundle of products and services. Often this means partnering with another firm in a related space to create additional value for customers by offering them more convenient and cost-effective ways to manage their lives. And this is already happening in four major ways:

  • Electricity and EV charging, as seen by Alliander in conjunction with Allego and Motion
  • Electricity and home energy services, as demonstrated by RWE’s SmartHome offering, which includes boilers and air conditioning system services
  • Electricity and finance, wherein products like solar panels come together with financial instruments designed to manage investments 
  • Electricity and other services such as security, broadband or insurance. A prime example is ESB, which has partnered with Vodafone to offer mobile phone deals

Joining the dots

Other models address interconnectivity. One way is to take a leaf out of Uber’s book and build a supply network that can be turned on and off as and when it’s required. This is exactly what DONG Energy is doing with its virtual power plants. DONG operates a distributed network of generation sources, providing consumers with security of supply and the chance to profit from any excess power generated. 

Alternatively, in environments where the implementation of distributed generation is high, we can adopt a “network manager” approach wherein suppliers manage all interfaces between local energy systems and traditional distribution grids, coordinating the needs of various market actors. This approach requires a solid set of data management and analytics skills along with access to the smart grid. 

Then there are community energy models, wherein the entire community is involved in generation and distribution. This model is coming into play in Germany, where a number of bioenergy and eco-energy communities are beginning to have an impact. 

Choppy waters

So we can see the huge range of options for energy firms looking to carve out a space in the future. But pivoting a business is like trying to turn a large ship. It takes time and it’s not always smooth sailing. 

Firms looking to move to a new model will need to make a number of changes. For one, there’s organisational issues and companies should consider whether they want to follow in the footsteps of EON and RWE by separating businesses that adhere to different models. 

Then there’s talent. If a business is missing key competencies, it’ll need to fill that gap quickly or else the model will be unable to support itself. This could come in the form of new hires or through partnerships with disruptive newcomers. Such a move is intimidating to many CEOs but the alternative – being on the receiving end of their disruption – is much worse. Instead, this should be seen as an opportunity to work with and learn from start-ups to prosper together.

A changing business can and should run a pilot test when it makes its move. But there will still be huge risks. And there is little in the way of a safety net. There may be grants for technological development and subsidies for energy generation but no such support exists for business model innovation. And once a breakthrough is achieved, it isn’t protected. You can’t patent a business model. If you could, there would have been no new fast food restaurants after McDonald’s.

Nonetheless, the risks are worth it. The sector can’t afford to stand still and watch the march of technological progress pass it by. Instead it must deploy its New Model Army to deliver new revenue streams, decrease OPEX and drive commercialisation. 

 

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