Utility Business Model Transformation Requires a Holistic View

Without a holistic view of the industry, the utility will fail to develop an effective business model to meet the new challenges of the power industry.
Published: Tue 25 Feb 2014

The traditional utility business model is outdated. The significant successes it brought the utility in the past are now dwindling as a number of factors are fast becoming redundant. These include one-way flow of power and data, falling costs associated with escalated consumption, undifferentiated and passive consumers, unlimited access to cheap carbon fuels for generation, and regulatory protection from threats to the core businesses. IBM predicts that some of these factors have already shifted or will do so within the next decade.

To succeed in today's environment, it is essential for utilities to adopt new business models. They also need to consider a change in business architecture, protocols, as well as rights and pricing terms to facilitate developing products and services which are enabled by new technologies.

During the process of reassessing the current business model, utilities should take into account and accommodate for key transformations such as governmental policy shifts, emergence of new technologies and changing consumer needs. These are expanded upon as follows:

Governmental policy shifts

Governments around the world are aiming to meet goals related to climate change, energy security, and economic and job growth. Because of these goals, efficiency, conservation and renewable generation are gaining a great deal of attention. At the same time, most industry revenue models are still based on a careful balance of the fixed nature of capital expenditures and variable cost recovery.

The emergence of new technologies

The introduction of smart grid and distributed generation and storage technologies will add complexity to the network, transmitting power and data in multiple directions. These technologies will also see the introduction of new participants and business models – some of which will provide strong competition for existing revenue streams.

New market entrants like Google, with its recent entry in to smart home appliances, poses a major threat to the utility’s traditional business model. We cover this significant industry move in our article The Google Smart Home Play.

Data intensive industries threaten the very core of the utility’s business as they choose to invest in renewable energy and become energy generators themselves. Becoming a utility allows Google to exercise more control over their energy costs long term-a very clever business move. We cover this business strategy in our article Google Sees Green.

Changing consumer demands

Consumers are demanding more from their relationships with their energy providers as they seek more control over their energy usage. They want to save energy, save money and reduce their environmental impact. Added to this, consumers expect a more sophisticated level of communication. The consumer is no longer passive-they are calling for more interaction and more information-all delivered in an efficient and convenient manner. Without effective customer engagement, the utility can expect to lose the customers to other more progressive utilities or the consumer will simply generate and consume power off line. Alain Bollack, Director of Global Power and Utilities Centre, Ernst & Young, discusses the importance of customer engagement in a recent webcast with Engerati: Creating a Customer-Centric Utility to Drive Value and Profit.

So while most utilities understand the need for transformation, it is essential that these changes are made with a number of factors in mind. Therefore, a holistic view of the industry and its changes should be adopted during the transformation process.

Further Reading:

IBM-Switching Perspectives: Creating New Business Models for a Changing World of Energy