The £218m Telecom Plus deal may be the first sign that business as usual will no longer be an option for the traditional energy utility at least not in a market driven energy sector like the United Kingdom and we have long argued that the energy-only retailer in the UK may not have a rosy future for a number of reasons.
Political Interference: The threat and likelihood of political interference in the UK Market as energy as a commodity will never will be an apolitical issue. The adversarial nature of party politics makes it unlikely that a sensible long term energy plan will be developed for the UK.
Volatile Wholesale Markets: Wholesale markets in the near to long term are far too volatile. A good example of this is when Telecom Plus started out buying its own power and gas directly on wholesale markets, but was eventually forced to sell its customer accounts to npower in 2006 after struggling to secure wholesale energy profitably.
Regulatory pressure: These have the potential of tightening profit margins for domestic supply.
Even Andrew Lindsay, chief executive of Telecom Plus, defends The Big Six utilities and reckons they are struggling to make ends meet. He recently announced that the utilities are being “hung out to dry as scapegoats.” He explains that they all generally offer the same or similar prices because they are all facing broadly the same costs – “the same regulatory burden and wholesale markets from which to buy.” He adds, “It’s hardly surprising that they appear to move in tandem and it’s totally disingenuous of the politicians - who loaded all these costs up onto them – to then say actually they are crooked.”
Environmentally-aware and Energy efficiency
Consumers are becoming more aware of their energy usage. This will of course decrease power consumption, affecting the power supplier’s bottom line. As of writing a number of zero energy concept homes have already been built, while a long way off being pervasive the methods and technologies employed will trickle down.
Embrace the change
But, how can utilities avoid these crippling obstacles? We think that an entity, which is not reliant on one commodity but is a cross channel retailer, is best placed to weather any of these storms.
We have had triple play in the telecoms sector and with this announcement we are seeing a fifth play. To open up these new revenue streams, utilities will have to take more risks. Today, utilities are faced with a very different reality.
There are many more participants, services, and values involved in the electricity market. In order to survive, utilities must evolve into increasingly complex organisms. For this reason, regulators should support utilities by being more flexible. Utilities must be given the opportunity to experiment and innovate.
Utilities must find ways in which to capture the value generated by innovations in energy-efficient products and services offered to consumers. In order to create this value, they need to develop winning capabilities beyond their traditional business.
Utilities will need to find new sources of revenues and profits in emerging energy-related businesses. These include building fabrics (for example, roof and wall insulation), central systems (including heat pumps and lighting), appliances and electronics (energy-efficient white goods), “smart” applications (home area networks and energy storage devices), advanced metering infrastructure, distributed generation (for instance, small-scale wind turbines, combined heat and power systems, and solar panels), and the delivery of power for charging electric vehicles, as well as financing, insurance, and consulting services.
What’s encouraging for utilities is that consumers will more than likely take advantage of these extra services from their regular power supplier as they know and with new customer interaction modes will grow to trust them. Also, utilities will probably have the infrastructure in order to accommodate for these additional services.
But first, the utility must embrace the change. Some are in denial and will probably need to close down eventually but others are currently making the necessary changes. For instance, NRG Energy, an operator of traditional power plants, is one of the first to expand into administering mini-generation structures that provide power to a single building, completely bypassing the utilities.
NRG Energy CEO David Crane explains how consumers are beginning to understand that they may not actually need to rely on the power industry, “The individual homeowner should be able to tie a machine to their natural gas line and tie that with solar on the roof, and suddenly they can say to the transmission-distribution company, ‘Disconnect that line.’”
NRG Energy constructs its solar projects for commercial and industrial buildings, but they are now considering the opportunity of offering leases for solar panel roof structures to businesses as well as homeowners.
Successful utilities will need to establish a position in what promises to be a crowded market, where the rate of change in technology, regulation, and consumer behaviour is largely uncertain. This is often achieved by forming partnerships with companies from other sectors, for example, Telecom Plus. In addition to selling energy, Telecom Plus, through its multi-utility brand, Utility Warehouse, also offers customers broadband and phone services.
Telecom describes itself as a customer-focused, customer acquisition and management business. They are unlike the Big Six who are vertically-integrated power generation businesses.
We can expect to see smaller utilities in the future that are more IT and service focused. They will offer a more diverse portfolio, greater dynamism, and risk. The utility of the future (not far off, mind you) will be smart and nimble, guiding consumers through the ever-changing and confusing world of energy democracy. Gone are the days of giant, capital-intensive, low-risk investments of yesteryear.
Better for the consumer?
There is an argument that more pure play energy players in the market will increase energy costs not decrease them, as each of these will need to invest in fixed costs such as billing, CRM and support systems amongst others adding new costs each time.
However with pure play retail companies coming into this market these costs are already part of the operating infrastructure. It will be an interesting world when Tesco, Walmart, Sainsburys and the like crunch the numbers and realise what such a sticky commodity could do for their business. Lets face it the idea of a supermarket selling anything other than groceries was deemed unthinkable only 20 years ago.
If a tipping point to to be reached for this market we need to create the conditions for these innovative and aggressive outfits to jump in and add their disruptive potential to the market.
This is the fifth play - it is our view that selling additional goods, where full market elasticity can be realized, to existing consumers makes more sense and puts that entity into a very powerful position to utilize the loss leader retail model with one of the most desirable and sticky commodities.