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 destruction embargo 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 positioning in the markets of the future. distributed generation, lower cost and 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 Generation Transmission/ Distribution/ Customer focus 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’ and desired outcomes, prosper in a more decentralised and ‘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, ‘How do we win’? highly interrelated, notwithstanding the 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 generation positions. to manage any forecast or real-time 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 hedging and risk management riskiest part of the business when markets 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 Relevance for transformative lock in the price of fuel and electricity generator. Pure play merchants have market scenarios to eliminate as much market risk as traditionally developed baseload or possible. As more low-carbon energy peaking plants with mature generation Green command and control Medium enters a market, mitigating market risk technologies from gas, which also enables becomes more challenging because participation in ancillary grid services Regional supergrid Medium market prices become more volatile, markets. However, wind merchant plants so a merchant’s strategy needs to be have increased in popularity over the last Ultra distributed generation Medium flexible and adaptive. decade and solar merchant plants are starting to emerge. Local energy systems Low What utilities should do now 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 suppliers to facilitate siting and permitting. regional transmission operator present, 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 in real time and integrating power from electricity supply and demand to avoid 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 Relevance for transformative enable insight into asset and network as a ‘distribution system operator’ and market scenarios performance and optimisation. These have specific, expanded responsibilities capabilities are provided through the for network integration of incumbent Green command and control Low deployment of ‘smart grid technologies’ systems and distributed energy resources. that utilise multiple sensors to monitor As distributed generation increases, the Regional supergrid Medium and collect system performance data to opportunity for an entity to manage all enable enhanced analysis of power interfaces between local energy systems Ultra distributed generation High flows, equipment failure risks and asset 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 actionsCompetitor 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 contracts with energy suppliers and other of ‘green energy’ options, the development 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 Relevance for transformative can succeed in offering a compelling set thermostats. The products offered market scenarios of products at the right price. Companies will empower the connected customer to participating in this space will need manage its energy control and provide a Green command and control Low exceptional skills in customer knowledge, link to the network to advance insights product development, channel into consumption patterns and impacts on Regional supergrid Low management, pricing and product network stability. We anticipate that many bundling. Product innovators will also product innovators will seek to be active Ultra distributed generation High need robust customer data analytics and players in electric vehicle charging, the buying propensity insights to shape the provision of premises-based infrastructure Local energy systems High right offerings to the market. 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 actionsCompetitor 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 power retailer. These companies will also services, from life-cycle EV battery change- 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 Relevance for transformative simple, low upfront cost approach, solely by the utility but are more likely to market scenarios enabling these utilities to not only install gain customer acceptance when they but also continue to own certain assets, can be bundled through an expanded Green command and control Low for example installing and then servicing relationship with high quality branded a solar system, or installing and providers, like Vivint, OPower, Honeywell, Regional supergrid Low continuing to manage energy 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 Local energy systems High go to market, overcoming customers’ 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’ actionsCompetitor 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 leverage system and customer data to uniform desire to always be ‘hands-on’ in 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 actionsCompetitor 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 (back-up power) may be offered as its traditional service territory. In this 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 actionsCompetitor 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