The widespread adoption of distributed generation is forcing utilities to transform themselves by designing new business models. Many utilities have come to realise that without taking active steps towards transformation, their businesses will come to a screeching halt.
Tipping point is around the corner
The electric power industry is in the early days of the transformation, driven by distributed energy resources – in particular rooftop solar photovoltaics. Many are predicting that the tipping point will arrive in 2020.
In fact, some foresee a major challenge for traditional generation when distributed energy resources are combined with affordable storage technologies. The current one-way power flow will become multi-directional, with many consumers also becoming producers of power. This is already becoming a reality in Spain and the UK where independent power producers are encouraging off-grid generation within communities. [Read Spanish Communities Are Challenging the Traditional Energy Model and Ovo Energy Helps Customers Go Off-Grid.]
Changing the value chain
Over time, distributed energy, combined with the impact of energy efficiency initiatives, will change the sector’s value chain. The current integrated one-way model, comprising generation, marketing and trading, transport, distribution and retail, will become multi-directional, with both conventional and new entrants as well as “prosumers” — consumers who are also producers — acting as generators. This distributed energy resources adoption will impact how electricity is produced and consumed, transforming utilities’ business models and how they create value for customers and shareholders.
Flexibility is the key to surviving or even thriving in this new era. Utilities must be ready to move quickly to gain a competitive advantage.
A new business model in 5 Steps
In its report, From Defense to Offense, Ernst & Young says utilities should transform their business models by building upon the following five imperatives:
1. Position the utility to compete. Design a transformation roadmap to offer new products and services that compete against new entrants.
2. Transform the grid. Provides two-way communication between customer locations and the utility.
3. Manage the transition. Seek full cost recovery of legacy assets to recover investments made and costs incurred in a pre-distributed energy resources world.
4. Focus on the customer. Increase customer knowledge and your range of offerings.
5. Innovate and accelerate. Adopt a business model that can adapt to changing conditions.
Utilities need to move from fighting this transformation to leading it. Utilities should switch from defense to offense, explains the report. There is no one-size-fits-all solution, but there are a variety of strategies that utilities can follow in dealing with the changes associated with distributed energy.