Embracing Market Disruption A Must For Long Term Success

Was RWE’s US$3.8 billion loss in 2013 testament of an industry moving too slowly in the face of market change?
Published: Wed 08 Apr 2015

Solar, energy storage, regulation and consumer will are disrupting existing utility business models and many incumbents may be sleep walking towards failure. A series of mega trends will converge in the not too distant future creating a seismic shift in the balance of power within the energy sector.

The greentech industry is pushing storage and solar to new levels of affordability and energy density. The automotive industry is going electric, putting millions of batteries at the grid edge. Political will, driven by populist politicians, continues to push the climate change and energy independence agenda.

Examining the renewables revolution

The loss of US$3.8 billion reported two years ago by German utility RWE, which serves over 20 million electricity customers, was a big deal. It was the company’s first loss since the founding of the German Republic. Add to this Vattenfall, the second largest generator in Germany, reported losses of US$2.3 billion in the same year.

These massive losses were caused by a major shift to renewable energy due, in large part, to the 2000 German Energy Sources Act which accelerated the adoption of renewable energy across Germany. A further accelerator following the Fukushima disaster in 2014 set a more aggressive timetable for nuclear decommissioning. Germany is targeting a sustained 65% renewable penetration by 2040. [Engerati-Germany’s Offshore Wind On The Increase and Germany’s Business Opportunities in the Power Sector.]

These massive losses also caused a ripple in the financial markets where utility shares have long been the ‘steady eddy’ of many an investment portfolio. Causing many an investor to rethink their exposure to the energy sector.

None of this should have come as a surprise to the utility sector who have been at the legislative table and more aware than most of advances in renewable technology.

So what caught the industry napping? A combination of institutional lethargy, lack of preparation for the speed of arrival of the new energies and an underestimation of customer will to participate. The latter is a particular achilles heel for the sector with its traditionally abysmal customer relationships. [Engerati-It’s A Utility Jim, But Not As You Know It …]

Partnership innovation and the new energy consumer

While many customers have bought their own panels, not everyone can afford to pay a lump sum upfront. Innovative companies like SolarCity have moved in quickly to close this gap offering leases as well as loans to help more customers enter the rooftop solar space.

As many utilities watch from a distance, there are those tapping into the opportunities that rooftop solar has to offer. A good example is US utility Tucson Electric Power (TEP) which has proposed its own utility-owned distributed generation programme that would install solar panels on the roofs of customers. In return for the use of their rooftop, customers would lock in a fixed monthly power rate for the projected useful life of the project, which is about 25 years.

The business model makes sense. A typical customer spending US$90 to US$100 a month could lock in a US$99 per month power bill for 25 years unless they increase their usage by more than 15%. The Residential Solar Program will be on offer this Spring. A competitive bidding process was used by the utility to employ local contractors for the work-a win-win situation all-around.

Storage takes energy independence to another level

Unreliable power sources, escalating electricity tariffs coupled with a lower cost of ownership are further creating a perfect storm for self-generation. This is not only an individual trend but household names like Ikea, Wal-Mart, Google and Facebook are pursuing aggressive energy independance agendas.

Tapping into this pent-up demand, Tesla a manufacturer of electric vehicles, has just announced that it will be developing a lithium-ion battery technology for home energy storage. This is the same battery that powers Tesla’s electric vehicles. This is a classic double sided business model familiar to the technology sector and increased production capacity and demand will only serve to push down unit costs of storage. Tesla is already supplying home energy storage batteries to its sister company, SolarCity. [Engerati- Tesla’s Gigafactory to Lower Battery Energy Storage Costs.]

Tesla can expect to face plenty of competition for their batteries from names like Bosch and Honda. Honda has unveiled a demonstration smart home which features a rechargeable home battery, along with an electric vehicle, solar panels and geothermal heat pump, and is driven by an energy management system.

All of this will do two things: It will increase access to self generation and herald the entry of many new players. You can easily imagine you next car including an energy and mobility plan.

Being smart about the smart home

Interest in connected-home products and services, such as energy management and other monitoring and control solutions, is accelerating. Big names in the technology industry such as Google, Samsung and Apple are investing large sums of money in this technology and see this as another service hook for the connected customer.

Google purchased Nest’s smart thermostats for a handsome sum of US$3.2 billion and Samsung Electronics acquired home automation company Smart Things for US$200 million. These companies are rapidly changing the competitive landscape, creating both risk and opportunity for the energy sector.

Anticipating customer expectations, ‘big box’ retailers such as Ikea and Home Depot are also tapping into the energy market. Ikea, after successfully selling solar panels in the UK for one year, will be expanding its solar sales to eight more countries. Home Depot sells the Wink Connected Home Hub which helps consumers to connect all their smart home devices. Convenience at its best.

All of this is laying the ground for the utility sector to lose their relationship with the energy customers and hand it over wholesale to nimbler, more adaptive and cash rich competitors.

Turning threats into opportunities

These trends towards self-generation, storage, home energy management and the smart home still present powerful opportunities for the utility sector.

“The existing relationship between the power consumer and the utility is long-standing, which provides a window of opportunity for utilities to transform their business to meet the needs of the new energy economy”, says Perry Stoneman Corporate Vice President and Global Head of Sectors and Utilities at Capgemini.”

Our webinar, From Utility to Energy Services Company-Fighting Back with New Ideas, to be presented by a team of experts from Capgemini and the Advanced Energy Centre at the MaRS Discovery District, demonstrates how current technology and market changes are breaking utility models, not years from now but today and how utilities are working with disruptive technologies and models to change the game.