by Tom Flaherty, PwC Strategy&
Over the last 24 months the power sector received a jarring wake-up call-the technology revolution has begun without the utility industry as its prime mover.
The emergence of new infrastructure and prosumer-focused technologies and the move toward broad digital platforms creates an environment where incumbent utilities are now faced with adapting to market directions set by non-traditional entrants, suppliers and customers. This externally-driven evolution now places power utilities at the epicenter of industry transformation where they are impacted by multiple sources of disruption and subject to disintermediation at the network and customer levels.
A Future Energy Ecosystem- Products and Services Ecosystems
Incumbent utilities are challenged to craft the right strategies that enable them to effectively respond and to competitively thrive in a different market model than historically was in place. These challenges are compounded by a shift in customer attitude toward a willingness to entertain change and explore options to traditional service models and service providers. As the industry moves toward more potential change in the next decade than occurred in the last five decades, incumbents will need to determine how to turn disruption into advantage and change into opportunity.
Setting the Stage for Change
The utility industry has always been a slow adopter of new technology, lagging other industrial sectors that are more open to fast deployment. However, this reticence to ubiquitously deploy emerging technologies will need to diminish as costs and performance continue to advance. In the five years since 2010, the costs of solar modules have dropped by more than 50 percent and total installed costs by a slightly higher amount. Similarly, lithium-ion battery costs have been reduced by about 50 percent, although balance-of-system costs have not kept pace with these levels of decline.
In parallel, customers are more becoming more inquisitive and open to considering alternative energy providers, technologies, offerings and, pricing and billing arrangements. Much like changes in the model of the telecom industry in the 1990s, customers are placing more emphasis on several key offering, delivery and engagement attributes, such as choice, comfort, convenience, communication and collaboration. Customers are willing to be more actively engaged in energy sourcing, as well as consumption decision-making. And this empowerment is being displayed even in markets that are not restructured and competitive.
The new customer battleground is emerging as one defined around market awareness, product and service availability and information provision. This battleground will be broader than maintaining current customers and revenues-it will extend to positioning for future revenue sources and capturing this growth.
As the electric industry moves toward 2020, it is clearly entering an era where ‘technology push and customer pull’ are aligning and integrating. The rapid pace of technology evolution is challenging the power sector to embrace these changes in a broader manner than its historical propensity for slow piloting. The industry can count on a more rapid decline in technology-parity economics than have served as guideposts in the past. In many cases, the ability of original equipment manufacturers (OEMs) to drive the cost curve down, while enhancing the performance curve, exceeds conventional thinking within the power sector. And with the advent of more competition from unconventional entrants, the industry can expect that leapfrog technology availability will emerge in unpredictable ways.
This pace of change is accelerating to where achieving mass market acceptance and penetration, e.g., electricity, telecommunications, no longer takes multiple decades; rather it can be ubiquitously realized in a little over a decade, e.g., cell phones and internet). The ‘internet of everything’ has increased the awareness of the energy revolution and made alternative offering information instantaneously available. Customers are no longer content to solely look at their current provider as their source for energy information and are unwilling to wait for access to energy offerings that meet their preferences and expectations.
The power sector will need to come to grips with the reality that a longstanding, monopoly-based customer relationship is not an indicator of future customer retention. Nor can it be counted on that the traditional service offering boundaries established by regulators will preserve the ability of incumbents to maintain their natural market position without erosion. Utilities will need to radically alter their approach to participating in future markets and to interfacing with customers.
Energy Marketplace Transformation
The combination of technology and customer expectation evolution has the potential to dramatically reshape the market landscape of the future. Simple energy acquisition will not be a narrowly defined customer action, but will likely be just one part of a broader home services and personal energy management decision. This will be the essence of customer choice in the future-the option to participate in energy markets differently and in different energy and related markets.
As the notion of customer choice unfolds, elements of the current customer base will seek to procure both energy, energy-related and home products and services. These products and services can be broad and directly and tangentially-related to power and essentially create a self-contained ‘ecosystem’. This ecosystem can contain elements related to energy management, home experience, security, renewables, micro-generation, electric vehicles and telecom, and themselves be comprised of multiple product and service categories within broader categories. Figure 1 provides one view of this future ecosystem.
Partner of Partners- Expanding Market Relationships
As incumbent providers, utilities are well-positioned to leverage this broad energy ecosystem to develop targeted customer product and service offerings and unique value propositions. The challenge will be to identify which offerings will be the most attractive to customers and to commercialize them in a compelling manner.
To strengthen their positioning in the evolving energy ecosystem depicted above, companies could learn from other sectors and companies that have experienced similar disruption in the past, or are disruptors today. For example, the telecom and cable television industries have some commonality to the emerging customer marketplace. Both sectors underwent upheavals precipitated by policy, technology and competitive influences that led to shifts in market structure, offering breadth and customer engagement. In addition, new ‘platform’ industries are being created where open linkage and sharing of assets, services and information create ‘crowd-based’ market alternatives and new business models and methods for creating margin sources and levels.
Technological evolution means that the challenge of developing commercially compelling value propositions for a differentiated range of customers is now more complex. The traditional focus of delivering value from a few simple-but largely indistinguishable-elements is being replaced by broader and more sophisticated value propositions.
The challenge is to develop mass-market customer offerings that succeed in giving individual customers personalisation and individual choice, while also delivering attractive margins where scale may not always be available. In this environment, commercial attractiveness may be characterized by product bundling, pricing and payment options, channel accessibility and, customer empowerment, as well as by product and service need fulfilment and performance.
The need for successful commercialization is a table stake for incumbents to be effectively positioned in this future marketplace. However, utilities have had limited need to be commercial in their history and do not maintain real competencies in this area. A solution exists if utilities are open to developing broader relationships with existing providers in the market. Given the lack of commercialization capabilities within the utilities sector, leveraging relationships with established OEMs, marketers and distributors, research organizations, universities and, venture funds, may be a necessary market model to accelerate capabilities access for the industry to pursue (Figure 2).
As illustrated close-by, the utility industry can function as a ‘partner of partners’ to many of the types of entities described above. In this capacity, it is leveraging existing partner know-how, market channels and innovation engines that it does not possess. It is also reducing its risk profile and time-to-market. Similarly, the utility industry is attractive to many of these example entities as it represents a growing market segment, possesses strong relationships with customers and maintains attractive market access and customer knowledge today.
Regardless of the path chosen, the power sector will need to aggressively think about how to best position itself for success. This positioning will involve the adoption of multiple strategies where incumbents focus on capitalizing on historical reputation strengths, leveraging alternative market access models, building market-centered organizations and, developing new capabilities that enhance readiness and commercial success.
Market Positioning Strategies
As incumbent utilities become more comfortable with the shape of the future energy marketplace, they now have to make intelligent choices about ‘where and how’ to compete in this broadening space. They also need to position themselves to balance serving the still fundamental needs of their legacy business with the emerging demands of a nascent, but promising, market.
Thus, tailored strategies will need to be designed to enable incumbents to match the requirements of the market with the ‘right’ blend of intrinsic customer value creation potential available from utilities. These strategies will need to embrace the customer needs that exist today, needs that are known today yet unserved and needs that may be anticipated to emerge in the future, but are not recognized today. These needs will relate to products and services that exist, and to those that have not yet been conceived. Accordingly, utilities will need to be adroit in understanding the direction of the future market, as well as agile in designing the appropriate delivery model to satisfy customer requirements. While these future strategies will be market, customer segment and utility specific, they will encompass the elements listed below:
“- positioning in the future market
“- capabilities for market success
“- new product and service development
“- leveraging new market channels
“- winning through innovation
Positioning in the future market starts with building an informed view of the dimensions and boundaries of the multiple sub-segments comprising the new utility product and service portfolio. Incumbents will need to establish their ‘purpose’ for market participation, e.g., providing end-to-end needs fulfilment. They will also have the choice of developing strategies focused on expanding (growing), extending (broadening) and/or enhancing (improving) their current market position across the residential, commercial or industrial segments. Thus, utilities will need to first realistically define ‘where to play’ and shape the strategy for how they can create a differentiable advantage against other providers.
Capabilities for market success will extend beyond those outcomes that have traditionally been the hallmark of successful utilities, such as operational excellence, financial discipline, regulatory relationships and, customer satisfaction. New capabilities will need to be developed and nurtured related to competing in a different type of market and shaping ‘how to play’. These capabilities will include skills related to market scanning, customer savvy, opportunity origination, creative pricing, partnering prowess and, technology deployment. Incumbents have the advantage of understanding existing markets, although under different structural fundamentals. Now they will have to define the capabilities that will enhance the ‘role’ of the incumbent in this new market.
New product and service development will be a table stake for future growth with the connected customer. The sector will need to create a product and service development engine that continuously churns out inventive offerings that anticipate the needs of customers and are packaged, priced and promoted attractively. The utility industry will need to leverage existing and newly established relationships with a range of out-of-industry partners, such as technology and consumer companies, to enhance their ‘positioning’ and ‘how to win’. These partnering arrangements will expand the capacity for development and accelerate the availability of attractive offerings that enthuse customers and enrich the nature of the incumbent – customer relationship.
Leveraging new market channels will be a fundamentally new experience for incumbents. Historical channels were simple to define and master, i.e., utilize the power of the franchise to offer product enhancements, e.g., payment programs, as part of traditional regulated service. The broader portfolio of potential products and services will require more inventiveness. New channels, such as network partnering, social media, mobile applications, targeted placement and, mass market canvassing will become staples of the utility’s go-to-market strategy. Thus, utilities will need to design strategies that both repurpose traditional market distribution channels and create opportunities to extend the ‘reach’ of the business in unconventional ways.
Business Model Shifts
Winning through innovation comes from recognizing the value of creative thinking and deeply embedding this capability throughout the utility. Innovation has not been a hallmark of the utility sector and has largely been limited to traditional research and development, largely around generation technology and carbon. To meet the needs of the future, utilities will need to focus on creating a culture of innovation that sustains itself through continuous accomplishment and market-ready idea generation. More importantly, incumbents will need to focus on idea conversion that eresults in the commercialization of new technologies and the proliferation of new products and services that fulfil the promise of an energy revolution.
The ‘go-to-market’ customer strategies that are developed and adopted by the utility industry will need to move well beyond those regulatory-based ones that the industry relied on in the past. However, utilities will need to determine where to align their new products and services within the current regulatory model, i.e., as part of the traditional core regulated business offering or as a competitively tariffed offering that can be placed in either the regulated or non-regulated segments. Thus, incumbents will need to develop and leverage a level of regulatory entrepreneurship that enables them to navigate a different market than previously existed.
With this need to define the structural placement of new products and services, utilities will need to enhance their knowledge of the available business models to support their market participation. In a products and services-based world, the utility industry will need to recognize that it is moving from an investment and return model of profit, to a sales and margin model. These are very different models and carry unique risk profiles from one another, and therefore specific strategies for success.
Industry pundits consistently call attention to the need for utilities to embrace a different business model in the future. However, the notion of a single new business model does not reflect the requirements of the future market (Figure 3). The utility industry will need to become agile at living within multiple business models as the current traditional model is not being wholly displaced; rather it is being complemented by new positioning and pricing models that reflect the future shape of the market, realities of competition and the preferences of customers.
Successful companies will frame their ‘go-to-market’ strategies based on market foresight rather than simple backward-facing insight. They will be adept at converting market knowledge and intuition into strategies that signal a differentiable customer experience, as well as produce enhanced revenue streams and an expanded customer relationship.
Tom Flaherty is a principal with consulting firm PwC Strategy&. He advises executives in the electric and gas sectors and is based in Dallas.